Consumer groups, unions praise rule limiting companies’ use of forced arbitration

WASHINGTON (PAI) — The union-backed National Consumers League and its allies are praising the federal Consumer Financial Protection Bureau’s new rule which aims to prevent banks from forcing consumers into accepting mandatory arbitration of disputes, rather than letting consumers band together in class action lawsuits.

The rule, announced by CFPB Director Richard Cordray on July 10, culminates more than a year of hearings and evaluation of the issue. And it reopens the way for consumer class actions against the financial institutions.

Forced arbitration and the class action ban is usually embedded in the small type of contracts consumers sign for credit cards and other financial transactions.

Hundreds of companies have also inserted forced arbitration clauses into employment contracts with individual workers, and have tried to do so with unions, too. The National Labor Relations Board has been tossing the clauses out by the dozens. NLRB rules they break labor law by depriving workers of class actions as an avenue to protect themselves as a group.

“A cherished tenet of our justice system is that no one, no matter how big or how powerful, should escape accountability if they break the law,” Cordray explained. “But right now, many contracts for consumer financial products like bank accounts and credit cards come with a mandatory arbitration clause that makes it virtually impossible for people to sue the company as a group if things go wrong.” CFPB tossed the mandatory arbitration clauses out.

“Forced arbitration is a tactic employed by corporate America to deprive consumers of their day in court when companies engage in misconduct,” National Consumers League Executive Director Sally Greenberg said,  in support of the CFPB’s rule.

“These ‘rip-off clauses’ are always buried in the fine print of contracts and have the effect of curtailing consumers’ legal rights and forcing them into closed arbitration sessions bought and paid for by company interests. Since the arbitrators rely on industry for business, arbitrators too often side against harmed consumers and in favor of their corporate clients—in fact, 93 percent of the time.

“Under the new rules, companies will not have free rein to use these odious clauses, which NCL believes gives a green light for toxic corporate behavior. The CFPB’s rule will help restore the rights of consumers to join class-action lawsuits and bring transparency to the opaque process of arbitration.” She called it “an important step forward in the fight to empower consumers in the financial marketplace.”

The NCL and 280 other groups – including the AFL-CIO, AFSCME, the Teachers, the Service Employees and Jobs With Justice—filed comments for the ban on forced arbitration.

Cordray explained that while the arbitration mandates may be neutral on paper, they aren’t in practice. Instead, “companies use these clauses to bar groups of consumers from joining together to seek justice by vindicating their legal rights.” Such class action lawsuits “have long been recognized as a means to secure relief under federal and state law.”

Forced arbitration bans them, leaving consumers “either to give up or to go it alone – usually over relatively small amounts that may not be worth pursuing on one’s own,” he added. “Including these clauses in contracts allows companies to sidestep the judicial system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm large numbers of consumers.”

“Our research showed these little-known clauses are bad for consumers. They may not be aware that they have been deceived or discriminated against or even when their contractual rights have been violated,” he added. The class action suits netted 34 million consumers about $1 billion in cash over the last five years, CFPB discovered. But arbitrators sided with consumers only 78 times in 1,000 cases in the last two years, awarding $360,000 total.

“Therefore, by blocking group lawsuits, companies are able to avoid paying out significant amounts of money in private litigation when they wrong consumers,” while continuing “profitable practices” that bilk them.

Banks and other financiers can still insert arbitration clauses into contracts, CFPB says, but those clauses have to “state explicitly that they cannot be used to stop consumers from banding together to pursue relief as a group” by class action suits. That “will give companies more incentive to comply with the law,” Cordray added.