For decades banks and service providers have been able to prevail on the lie that Americans who sign standard form fine print contracts containing an arbitration clause willingly choose to abandon their rights to a jury trial in favor of arbitration. So 96% of all credit card debts are subject to these contract terms stripping people of their rights, and these terms are in most student loan, payday loan, and other contracts. These clauses mean that if the company breaks the law and cheats you by adding incorrect fees or charging illegally high interest rates, you can’t bring a lawsuit in court. Instead you must take your case to a private arbitrator, a secretive system with no right to appeal.
There has been a proliferation of forced arbitration clauses in these contracts since the late 1990s. They have gutted key consumer protection laws, but doing something about the problem has triggered a constant battle between consumer advocates and banking lobbyists. Even with common-sense legislation such as protections for military families against predatory lending, the banking lobbyists do everything they can to ensure lenders can force arbitration onto their consumers. To address this ongoing abuse, the Dodd-Frank Act tasked the Consumer Financial Protection Bureau (CFPB) to research arbitration clauses in consumer financial products and service contracts to find appropriate limits on the use of arbitration clauses.
The CFPB released a report in March based on their three-year study and it is the most thorough and extensive empirical research on arbitration clauses to date. A team of lawyers and researchers collected data from 850 consumer-finance agreements, 1,800 consumer finance arbitration disputes and 3,400 federal court lawsuits in addition to 42,000 credit card cases filed in selected small claims court.
The report presents its analysis of the data in over 700 pages, but there are three main takeaways from all of the numbers: arbitration clauses make it extremely difficult for consumers to find meaningful relief even when lenders break the law; hardly any consumers realize the rights they lose to the fine print contracts; and banning banks from using arbitration clauses will not result in higher costs or lack of available credit for consumers.
The extensive research produced meaningful numbers around the human cost of forced arbitration, and yet the findings were unsurprising to consumer advocates.
In light of this overwhelming factual data, did the banking lobbyists admit that forced arbitration is a lousy deal for consumers? No. They know their clients stand to make a lot of money if they can exempt themselves from private enforcement of consumer protection laws. It’s a lot easier to engage in predatory lending, offer bait-and-switch deals and overcharge people if your consumers don’t have a meaningful way to sue you.
So banking lobbyists went to their allies in Congress, and two of the Members they helped elect went to work for them. Congressmen Steve Womack (AR-3) and Tom Graves (GA-14) wrote an amendment to an appropriations bill that ignores all the evidence in the report. Unsurprisingly, they both have received consistent financial support for years from banking lobbyists. Adopted by voice vote within a matter of minutes, the amendment revoked CFPB’s authority to create regulations for arbitration clauses until an entirely new study is conducted.
CFPB would be barred from restoring American consumers’ essential right to bring their disputes to court until they essentially repeat the study they just did. The amendment requires the CFPB to include public feedback during the research process, yet this is exactly the inclusive process they used in the first study. They published their preliminary results, held stakeholder meetings and heard feedback from all perspectives, including industry groups. The amendment then demands the CFPB conduct research on six “new” questions. Four of the six, however, were already key focal points in CFPB’s previous study. The other remaining two questions start with the premise that it’s a bad idea to let consumers enforce consumer protection laws.
In fact, Congressman Womack has the “For Sale” sign up for a lot of corporations who don’t want to follow laws. John Oliver recently did a terrific piece explaining how each year, for several years, Womack has added an amendment to the agriculture appropriations bill to block the enforcement of regulations that would protect chicken farmers from abuse from the factory farm industry.
Womack seems to be the kind of guy with an unerring love for the over dog.
Here’s what the Congressmen want:
An analysis of accessibility, cost, fairness and efficiency of litigation vs arbitration, despite the fact that CFPB already reviewed more than 1,800 consumer finance arbitration disputes. The Bureau’s main finding is that forced arbitration clauses suppress cases. While literally millions of consumers have gotten relief from dishonest lenders in the court system, only a few hundred consumers each year go through the arbitration system. The CFPB studied the exact question Rep. Womack wants CFPB to study again, it’s just he and his campaign donors don’t like what the evidence showed.
They also want to know whether arbitration or litigation encourages companies to resolve disputes before their customers file formal claims. The existing study, however, already thoroughly analyzed this issue, and found that both in litigation and arbitration approximately 25% of the cases were settled. But because so few cases go to arbitration, even if all cases in arbitration settled, it would mean just a speck of the consumers with disputes are finding relief.
Then, they ask CFPB to determine whether arbitration hurts consumers because consumers lack information and to determine what steps could be done to inform consumers about arbitration and make arbitration more accessible to them. The premise is that consumers aren’t avoiding arbitration because it’s a rigged deal for corporations, but just because consumers haven’t been “educated” about how the payday lenders and others are actually trying to help them out. In fact, the CFPB report presented indisputable evidence from looking at 1,837 arbitration cases that once consumers get to arbitration the scale of “justice” is tilted in favor of companies in terms of expertise, representation and the procedures in forced arbitration.
The Congressmen also asked for the extent to which private class action provides benefits in light of CFPB’s enforcement and examination authority. The idea is that consumers don’t need the right to go to court to protect themselves, because government agencies already solve all their problems. (The hypocrisy is pretty thick here: Republican Congressmen who spend a lot of time trying to defund the CFPB and abolish regulations are now telling the public to put their trust in government enforcement.) Perhaps they have forgotten that the CFPB looked at 740 enforcement actions in 20 states and 410 cases and in 88% there was no overlapping class action complaint.
Finally, the CFPB is asked to report on the impact on cost and availability of credit to consumers and small businesses of prohibiting or limiting pre-dispute arbitration. However, the CFPB findings have already looked at monthly data of interest and fees assed on credit card accounts by companies that had been forced to drop their arbitration clauses for several years – because of a class action settlement in an antitrust case that had alleged that the largest banks in America had conspired to adopt identical forced arbitration clauses at the same time – and found no statistically significant evidence of an increase in prices, nor evidence that such companies reduced their provision of credit to consumers relative to companies that did not change their arbitration clauses.
There’s no question the amendment was a stall tactic from banks in an effort to avoid legal accountability when they violate the law and cheat consumers. When a congressionally mandated three-year comprehensive study with reams of data and public feedback isn’t enough to move regulations in the right direction for consumers you know whose interests are actually being protected: the banks and payday lenders. It’s just like the tobacco companies arguing for years that there wasn’t enough evidence about the impact of cigarettes on human health to justify taking any kind of action.
As a result, a few small but powerful voices are banking on Congress to help them drown out evidence and ignore hard data.
This piece was co-written by Camille McDorman.