A subcommittee of the House Financial Services Committee is holding a hearing today entitled “Examining the CFPB’s Proposed Rulemaking on Arbitration: Is it in the Public Interest and for the Protection of Consumers?”
The subcommittee is posing the question to a badly skewed set of witnesses. Two of them are representatives of industry groups (the U.S. Chamber of Commerce and the Consumer Bankers Association), while a third has a persistent record of taking the corporate side in these debates. Only one represents a public interest perspective. It is hard to avoid the conclusion that the aim of the majority members of the subcommittee is to undermine the Consumer Bureau’s ability to protect consumers, not to seriously examine the effects of forced arbitration.
That extra word “forced” – missing from the hearing title – is key. Under the terms of the CFPB’s proposal, consumers and companies would remain perfectly free to resolve disputes through arbitration, but it would be a voluntary act on both sides. What the CFPB is seeking to regulate is involuntary arbitration, dictated and controlled by banks and financial companies through take it-or-leave-it contracts with consumers. More specifically, its proposal would bar companies from compelling consumers to sign away the right to join forces to challenge a practice that injures many people at once. Instead, each victim of wrongdoing would have to plead her individual case before an arbitration firm chosen and paid by (and dependent on the continued patronage of) the company she is complaining against.
The Consumer Bureau has seriously examined the question the subcommittee is raising. Before issuing its proposal, the Bureau completed a 728-page study of forced arbitration in the consumer finance marketplace. The study showed that forced arbitration has utterly failed to produce any of the consumer benefits, such as lower prices or increased access to credit, claimed by its industry champions.
In 2010 and 2011, only 9% of consumers bringing affirmative claims obtained relief through arbitration, recovering an average of 12 cents per dollar claimed. By contrast, 93% of companies bringing such complaints gained relief, recovering an average of 98 cents per dollar claimed.
The main effect on consumer complaints has been to keep them from being heard in any forum. That’s because, as the CFPB’s research demonstrated, the great majority of consumers, once they realize that arbitration is the only route open to them, decide not to pursue their cases at all.
Unsurprisingly, consumers and organizations that actually represent them have been overwhelmingly supportive of the CFPB’s decision to issue such a proposal.
“Forced arbitration is an idea cooked up by big companies to serve big companies,” says Ashley Marshall, a consumer and a student at North Carolina Agricultural and Technical State University. “They claim it’s good for consumers, but they can’t get any actual consumers to say so. That should tell you everything you need to know.”
“Forced arbitration is a one-sided, secretive, privatized system of injustice designed to help big corporations get the better of workers and consumers,” says Attica Scott, a political activist who is running for a seat in the Kentucky state legislature. “The CFPB is using its statutory authority to restore our right to band together against acts of corporate fraud and illegality. Members of the Kentucky delegation should support the Bureau’s efforts and listen to real consumers, not industry groups that claim to speak for them.”
In a joint letter to the CFPB just last month, 164 organizations pointed out that financial fraud is often engineered to generate big rewards for companies by cheating consumers of small sums of money many times over, so that the damage in any one case is not sufficient to justify the cost of legal action. “Class actions provide a practical way for consumers who have suffered the same kind of abuse from the same corporate wrongdoer to join together in attempting to hold the financial institution accountable,” the letter argued. “This kind of action is critically important, not only for enabling those already victimized to obtain justice, but also for deterring bad behavior and preventing harm to other victims.”
AFR is meanwhile submitting this statement for the record to the Subcommittee on Financial Institutions and Consumer Credit