As the Consumer Financial Protection Bureau closes in on a rule to ban contract terms that prevent class actions, a coalition including powerful labor unions and the NAACP is pushing for a tougher crackdown on arbitration clauses.
In a letter sent to the CFPB Wednesday, more than 160 organizations applauded the agency for weighing a proposal to prevent companies from using arbitration clauses to block consumers from bringing class actions. But the groups, including the AFL-CIO and Service Employees International Union, urged the bureau to take the proposal a step further and also prohibit forced arbitration in individual cases.
The organizations blamed forced arbitration for shutting consumers out of the courts and “giving lenders an effective license to steal,” citing a study on arbitration agreements released by the bureau last year. The letter was delivered on the five-year anniversary of the landmark AT&T Mobility v. Concepcion decision, in which the U.S. Supreme Court ruled that businesses with class action waivers can force consumers to bring claims only in individual arbitrations.
The bureau is expected to formally propose the rule in Albuquerque next week during a field hearing on arbitration.
“Few practices are as fundamentally contrary to the public interest as the increasingly widespread use of these ‘ripoff clauses’ that impose forced arbitration in most consumer financial contracts, including credit cards, student loans, debt settlement, credit repair, auto financing, and payday loans,” the groups said in the letter, released Thursday by Americans for Financial Reform.
“These clauses force consumers into a secretive, unfair system set up by corporations to protect and hide harmful and unlawful corporate behavior. Not only does forced arbitration eliminate the right to jury trial in a civil action, limit discovery, restrict or prohibit publicity, and make meaningful appeal impossible; these clauses also often prohibit consumers from banding together in a class action to hold the company responsible.”
The bureau announced in October that it was considering a rule to ban arbitration clauses, which it said were often buried in contracts. According to the bureau’s study, more than 75 percent of consumers surveyed in the credit card market were unsure whether their contract included an arbitration clause. Fewer than 7 percent of those covered by the clauses realized that the arbitration agreements restricted their ability to go to court.
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said Richard Cordray, director of the CFPB, in a prepared statement.
The bureau noted that the ban would not extend to individual disputes, although the proposal would require companies to make disclosures about arbitration claims and awards.
But Andrew Pincus, a partner at Mayer Brown, said the bureau’s rule would effectively extend to individual disputes, as companies would abandon the clauses to avoid paying for both the arbitration process and litigation in the courts.
“There’s not any real world difference between what these groups seem to be urging and what the bureau seems to be considering,” Pincus said. “The bureau is basically saying to companies, ‘Here’s your choice: You can have the judicial system alone for everything, or you can have the judicial system for class actions and pay these voluntary, incremental costs for arbitration.’ Why would any company pay twice? They won’t.”Reprinted with permission from the April 28, 2016 edition of The National Law Journal © 2016 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.