Mandatory arbitration. Just seeing those words can make your eyes glaze over, but what you might not realize is – that’s kind of the point. This tiny phrase, buried in the fine print of hundreds of millions of contracts, is having real consequences on millions of Americans. But the companies who use it have been counting on the fact that it’s just too boring for you to notice.
Today, the independent Consumer Financial Protection Bureau (CFPB) is announcing new steps to stand up for consumers and push back – by proposing to require arbitration agreements for consumer financial products to allow consumers to file group claims in court. These clauses – which may show up in the fine print of contracts you sign when you do things like get a new credit card, open a bank account, or take out a student loan – require disputes to be resolved by privately appointed individuals only. That typically blocks consumers from banding together as a group to bring claims to court.
In Dodd-Frank, Congress required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets. They gave CFPB the power to issue rules to protect the public from abuse of these clauses, if necessary. The CFPB went on to conduct what is believed to be the most comprehensive study of mandatory arbitration clauses in American history. What they found wasn’t pretty – which is why they’re now proposing to prohibit financial services companies from using arbitration agreements to block class action lawsuits.
That’s a really big deal. Here’s why:
If you interact with the financial system and your financial institution takes advantage of you, there’s a good chance you’ll get to learn all about how mandatory arbitration clauses short-circuit your ability to defend yourself. They’re buried in hundreds of millions of financial contracts – from bank accounts to credit cards. The CFPB study found that about half of outstanding credit card loans are subject to mandatory arbitration clauses (but even that understates the problem, as four large card issuers are under a temporary ban on these clauses that’s set to end). Banks with 44 percent of insured deposits include them in their checking account contracts. They’re also nearly universal across the subset of prepaid cards, payday loans, private student loans, and mobile wireless contracts CFPB studied. So, if you get bilked by a financial institution, you’ll likely run into them.
Often, these mandatory clauses are buried so far down in the fine print, that you wouldn't even notice them. And in that, you're not alone. More than 75 percent of consumers surveyed by CFPB in the credit card market did not know whether they were subject to an arbitration clause in their contract.
It also prevents other bad behavior. Because mandatory arbitration clauses stop consumers from banding together for a class action lawsuit, the harms to an individual consumer may be too small to make it practical to pursue litigation, even where the overall harm to consumers is significant. Consider a hypothetical situation where 5 million people have $500 taken from them unfairly in illegal bank fees: that’s a $2.5 billion problem. But for an individual consumer, the time, effort, and fees needed to get that $500 back could be worth many times that amount. In a telling sign, CFPB survey results have reported that only around 2 percent of consumers would consult an attorney to pursue an individual lawsuit as a means of resolving a small-dollar dispute. That’s a big reason why class action lawsuits are needed, but mandatory arbitration cuts that tool off at the knees.
Actions like today’s are why the President fought so hard to create the CFPB through Wall Street reform. And there are major, tangible signs it’s working—with stronger protections in mortgage markets, student loans, and credit cards. Tens of millions more Americans would be protected by today’s proposal. And CFPB has recovered nearly $11 billion for more than 25 million consumers through enforcement actions.
Given how many millions of Americans are being protected by the CFPB rules already in place and the importance of the work ahead, it’s appalling that Republicans are trying to repeal CFPB in its entirety. In this year’s House Republican Budget plan, they proposed getting rid of the CFPB. That’s completely unacceptable.
So, today, let’s also remember how important it is to have a watchdog tipping the scale back toward the consumer and let’s commit to fighting for this rule and this watchdog to be around for good.