CFPB Forced Arbitration Rule Protects Consumers

CFPB forced arbitration ruleUpdate: October 24, 2017: The CFPB forced arbitration rule was struck down, with Vice President Mike Pence breaking the 50-50 tie in the Senate.

Update: July 25, 2017: The CFPB rule protecting consumers from predatory fine print is now fighting to survive. Under the Congressional Review Act, Congress blocked the regulatory measure this afternoon, on a near party line vote with 231 in favor of repeal and 190 opposed (one Republican opposed). Colorado’s own Rep. Scott Tipton co-sponsored the resolution to end the rule and Rep. Ken Buck called the regulation “overbearing” while advocating for its repeal. The two Republican congressmen, along with Colorado Reps. Doug Lamborn and Mike Coffman, voted yes. Colorado Reps. Diana DeGette, Jared Polis, and Ed Perlmutter opposed. 

While some may try to convince Coloradans forced arbitration clauses are in their best interest, it’s important to remember the power the CFPB rule gives consumers – power once reserved for big banks and Wall Street. Without the rule, that’s where the power will remain. But with it, the CFPB rule will hold bad actors accountable and send a strong signal to other firms to not follow suitThe Bell Policy Center stands with the CFPB rule and will continue to follow this issue closely. 

The Consumer Financial Protection Bureau announced a new rule on Monday which restores consumers’ rights to band together in class-action lawsuits to challenge financial fraud and restricts the use of forced arbitration. Developed through five years of careful study and input from the public, this rule will not only allow consumers to pursue justice through the courts, but also serve as a deterrent to companies from violating the law.

The ability to join class action lawsuits makes it possible for consumers to challenge widespread misconduct by financial firms which otherwise would be too expensive to pursue in individual arbitration claims. For example, Wells Fargo used language prohibiting class action lawsuits contained in its forced arbitration clauses to block customers for suing together over the bank’s use of fraudulent account. This helped the bank hide its misconduct for years.

Related: Predatory Payday Lending in Colorado

Under the rule, companies can still include arbitration clauses in their contracts, but they cannot use them to stop consumers from being part of a group action. In addition, the rule makes the arbitration process more transparent by requiring companies to report data on claims and outcomes of the arbitration.

During the public comment period, the rule received strong support from over 280 consumer, civil rights, and labor organizations including the Bell Policy Center. Plus, over 100,000 individual consumers and the Military Coalition representing 5.5 million service members supported it.

The rule will go into effect 60 days following its publication in the federal register. However, we will need to continue our vigorous and vocal support for it because some in Congress, including Senator Tom Cotton, R-Ark., are already looking to see what can be done to roll it back.

Here is a link to a video explaining the rule produced by the CFPB and an NPR report which explains the rule including comments from CFPB Director Cordray.

The rule is based on a three-year study conducted by the CFPB which was released in 2015 and found:

  • Forced arbitration clauses appear in all kinds of contracts and affect millions of Americans.  For example, 99 percent of payday loans, 92 percent of prepaid cards and 85 percent of private student loans studied had these clauses.
  • In 2010 and 2011, only 9 percent of consumers who brought claims under forced arbitration obtained relief, recovering an average of 12 cents per dollar claimed.
  • During the same period, 93 percent of companies obtained relief in forced arbitration, recovering an average of 98 cents per dollar claimed.
  • Only 25 consumers with claims of less than $1,000 pursued arbitration each year. By contrast, class action lawsuits returned $2.2 billion in cash relief to 34 million Americans from 2008 to 2012, after paying off attorneys’ fees and court costs.
  • No evidence was found that forced arbitration clauses lead to lower prices for consumers, it just means higher profit margins for banks and other financial firms.

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