Consumer Law

Will Consumer Financial Protection Bureau adopt rules to rein in mandatory arbitration clauses?

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It seems likely that the Consumer Financial Protection Bureau will develop a rule to end the use of mandatory arbitration clauses by financial services companies such, as banks and credit card companies, according to a business and consumer columnist for the Los Angeles Times.

The CFPB is reviewing the use of arbitration clauses, and columnist David Lazarus puts stock in a speech last week by bureau head Richard Cordray to the American Constitution Society, the liberal foil to the Federalist Society.

“By inserting an arbitration clause into their contracts, companies can sidestep the legal system, avoid big refunds and continue to pursue profitable practices that may violate the law and harm consumers,” Cordray told the gathering.

“Companies should not be able to place themselves above the law and evade public accountability simply by inserting the magic word ‘arbitration’ in a document and dictating the favorable consequences,” Cordray said. “Consumers should be able to join together to assert and vindicate their established rights.”

Writes Lazarus, the columnist: “If you’ve got a credit card, you’ve been forced to kiss away your constitutional right to sue the card issuer. But it’s looking increasingly likely that this is about to change.”

Cordray’s comments to the ACS gathering followed a flurry of activity by opponents and proponents of mandatory arbitration clauses during the past year. Last fall, the New York Times published a three-part series criticizing the use of arbitration for circumventing the legal system and shutting down claims of predatory lending, wage theft and discrimination among other problems. Then, in a follow-up story, it chronicled attacks on the CFPB’s proposal to adopt a rule that would end some aspects of arbitration.

In October, the CFPB announced a first step toward possibly adopting new rules, publishing an outline of proposals being considered, to be followed by forming a small-business review panel to accept feedback from stakeholders, USA Today reported at the time.

The proposals would require, for example:

• That arbitration clauses state that they don’t apply when cases are filed seeking class action lawsuits, unless class certification is denied or a judge dismisses the claims.

• That companies using arbitration clauses submit records to the CFPB of the claims by consumers and awards issued, which might be published.

The American Bankers Association, the Financial Services Roundtable and the Consumer Bankers Association wrote to Cordray in July, saying the elimination of arbitration could “result in increased costs to consumers for financial products and services.”

But while the CFPB has authority over certain financial services, it does not have the power to adopt rules governing arbitration by other businesses, such as telephone companies, pay-TV providers, car rental companies and others, Lazarus pointed out in his column. Because of recent Supreme Court decisions upholding mandatory arbitration, it would “take an act of Congress,” which he says is not likely to happen with a Republican majority.

Updated Feb. 29 to correct typographical error in headline.

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