Unbeknownst to many consumers, nearly all contracts for financial products and services contain a mandatory or voluntary pre-dispute arbitration clause.[1] This contract provision shifts disputes between consumers and financial companies from the courts into binding arbitration[2], ostensibly eliminating costly and frivolous lawsuits while providing a faster way to settle disputes. However, consumer advocates contend that mandatory arbitration clauses deprive customers of their legal rights,[3] because the damages from arbitration are generally significantly lower than those from litigation,[4] and consumers cannot appeal barring egregious misconduct.[5] Furthermore, customers with small claims can no longer join a class action suit, potentially causing them to forgo arbitration altogether.[6]
To address these issues, the Consumer Financial Protection Bureau (“CFPB”)[7] proposed a new rule targeting mandatory arbitration clauses.[8] The proposed rule barred certain financial companies from blocking consumers who wish to join a class action suit; the arbitration agreement must include language explicitly allowing class action suits.[9] The rule also stipulated that records from arbitration agreements would be submitted to the CFPB, thus providing the CFPB with an ongoing monitoring mechanism of the arbitration process.[10]
The rationale behind the CFPB’s proposed regulation was an empirical study carried out by the bureau and later presented to Congress.[11] The study found that the vast majority of people who signed arbitration clauses rarely bothered to enter into arbitration.[12] The study also found that class actions were far more effective in providing relief to consumers and in compelling companies to change harmful or manipulative practices.[13] Class actions, according to the CFPB, would prevent companies from bypassing the legal system, resulting in a fairer and more equitable environment for the average consumer.[14]
Predictably, Wall Street reacted unfavorably to the proposed regulation.[15] Industry advocates argued that class actions are mostly frivolous, drag on for an unreasonable amount of time, and rarely end up benefiting the consumer.[16] Instead, Wall Street argued that the new regulation would benefit naught but one of the most despised creatures of the modern day American economy—the attorney.[17] Nonetheless, the final Arbitration Agreement rule was implemented in July of 2017.[18] Congress, however, declined to cooperate with the CFPB and used a legislative tool known as the Congressional Review Act[19] to overturn the newly enacted regulation.[20] While the House voted in July by a wide margin, the Senate was split on partisan lines, with a tiebreaker vote to overturn cast by Vice President Pence.[21]
In an interesting wrinkle, the Office of the Comptroller of the Currency, an independent branch of the Treasury Department, published a study skewering the Arbitration Agreement rule a few days prior to the Senate vote.[22] The study claimed that the methodology used in the original CFPB study was flawed, and that the CFPB had failed to properly consider if prohibiting mandatory arbitration clauses would advance the public good and protect consumers.[23] Instead, the study claimed the Arbitration Agreement rule would result in extraordinary costs to financial companies, as the rule would open the gates to thousands of new class action suits. According to the Treasury Department, the only people who would benefit from the rule would be plaintiffs’ attorneys, as consumers rarely end up benefiting from class actions.[24] In an unusually public and personal manifestation of this interagency spat, the two agency heads authored competing opinion pieces to set out their respective positions.[25] Richard Cordray, the director of the CFPB, accused Keith Noreika, acting Comptroller of the Currency, of attempting to undermine the rule, and of relying on a “so-called analysis that is simply embarrassing.”[26]
While the Arbitration Agreement rule may be dead, supporters of mandatory arbitration should bear in mind that Congress may enact new legislation if they perceive financial companies to be effectively avoiding legal oversight. An increase in the number of corporate scandals, like those seen recently at Wells Fargo[27] and Equifax,[28] may compel Congress to change its mind as liability from those scandals may be limited by mandatory arbitration clauses that prohibit class actions.
[1] Consumer Financial Protection Bureau, Arbitration Study Report to Congress, pursuant to Dodd–Frank Wall Street Reform and Consumer Protection Act § 1028(a) (2015), http://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf.
[2] Arbitration is a form of Alternative Dispute Resolution, where a neutral third-party adjudicates disputes. Unlike other forms of Alternative Dispute Resolution such as mediation, the arbitrator’s decision is generally binding on both parties.
[3] See Jean Murray, Mandatory Arbitration Clauses in Business Agreements, The Balance (Oct. 19, 2016), https://www.thebalance.com/mandatory-arbitration-clauses-in-business-agreements-397425.
[4] Id.
[5] Egregious misconduct can be a biased or incompetent arbitrator, failure to follow basic evidentiary standards, or any other clear violation of the basic fairness and adjudicatory standards which are expected to be followed by every arbitrator. See supra note 1.
[6] See supra note 3.
[7] The CFPB is a regulatory agency created by the Dodd-Frank and Consumer Protection Act, with the goal of protecting financial consumers from harmful or fraudulent practices. Consumer Financial Protection Bureau, Creating The Consumer Financial Bureau, https://www.consumerfinance.gov/about-us/the-bureau/creatingthebureau/ (last visited Oct. 27, 2017).
[8] 80 Fed. Reg. 32,829 (May 24, 2016) (to be codified at 12 CFR 1040).
[9] Id.
[10] Id.
[11] See supra note 1.
[12] Consumer Financial Protection Board, CFPB Proposes Prohibiting Mandatory Arbitration Clauses that Deny Groups of Consumers their Day in Court (2016), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-proposes-prohibiting-mandatory-arbitration-clauses-deny-groups-consumers-their-day-court/.
[13] Id.
[14] Id.
[15] Editorial, Richard Cordray’s Bad Numbers, Wall Street J. (Oct. 22, 2017), https://www.wsj.com/articles/richard-cordrays-bad-numbers-1508702924.
[16] Id.
[17] In the words of Jaret Seiberg, an analyst with Cowen and Co.’s Washington Research Group, “…with all the love in the world to our lawyer friends, lawyers have an even worse perception problem than bankers.” Renae Merle, Treasury Department Sides with Wall Street, Against Federal Consumer Watchdog Agency on Arbitration Rule, Wash. Post: Wonkblog (Oct. 23, 2017), https://www.washingtonpost.com/news/wonk/wp/2017/10/23/treasury-department-sides-with-wall-street-opposes-elimination-of-mandatory-arbitration-clauses/?utm_term=.208853ab8f33.
[18] 12 C.F.R. § 1040 (2017).
[19] This act enables Congress to overturn newly implemented regulations with a simple majority. See 5 U.S.C. § 801 (2012).
[20] Andrew Ackerman and Yuka Hayashi, Congress Makes It Harder to Sue the Financial Industry, Wall Street J. (Oct. 24, 2017), https://www.wsj.com/articles/congress-votes-to-overturn-cfpb-arbitration-rule-1508897968.
[21] Id.
[22] Press Release, United States Dep’t of Treasury, Treasury Releases Report Examining The CFPB’s Arbitration Rule (2017), https://www.treasury.gov/press-center/press-releases/Pages/sm0186.aspx.
[23] Press Release, United States Dep’t of Treasury, Limiting Consumer Choice, Expanding Costly Litigation: Analysis Of The CFPB Arbitration Rule (2017), https://www.treasury.gov/press-center/press-releases/Documents/10-23-17%20Analysis%20of%20CFPB%20arbitration%20rule.pdf.
[24] Id.
[25] Keith Noreika, Opinion, Senate Should Vacate the Harmful Consumer Banking Arbitration Rule, The Hill (Oct. 13, 2017), http://thehill.com/opinion/finance/355274-cfpb-rule-increases-consumer-costs-and-makes-banks-less-safe.
[26] Richard Cordray, Opinion, The Truth about the Arbitration Rule is it protects American consumers, The Hill (Oct. 16, 2017), http://thehill.com/opinion/finance/355562-the-truth-about-the-arbitration-rule-is-it-protects-american-consumers.
[27] Wells Fargo employees, attempting to meet unrealistic managerial expectations, were found to be opening phony bank accounts without the consent or knowledge of their customers. See Dan Freed, Wells Fargo uncovers more fake accounts in drawn-out scandal, Reuters (Aug. 31, 2017), https://www.reuters.com/article/us-wells-fargo-accounts/wells-fargo-uncovers-more-fake-accounts-in-drawn-out-scandal-idUSKCN1BB1QF
[28] Equifax, a major credit reporting company, suffered a data breach that put the personal information of nearly 100 million Americans at risk. See AnnaMaria Andriotis, We’ve Been Breached’: Inside the Equifax Hack, Wall Street J. (Oct. 24, 2017), https://www.wsj.com/articles/weve-been-breached-inside-the-equifax-hack-1505693318.
