The Senate must hold Wall Street accountable by passing the Bureau of Consumer Financial Protection (CFPB), an essential part of the reform package. Its purpose is to protect Americans from unfair, deceptive, and abusive financial products. As part of that mission, the bill provides the CFPB and the Securities and Exchange Commission (SEC) with the power to limit the use of forced arbitration clauses in consumer and investment contracts. Amendments to strip these sections must be opposed.
The approach in the Senate bill is modest and narrowly targeted.
- Section 921 would provide the SEC with the authority to limit forced arbitration in investment contacts. Forced arbitration within the securities context has been found to be grossly unfair to investors.[1] The SEC needs the discretion to address the issue and section 921 merely provides that the SEC “may” issue rules to “impose conditions or limitations” on the use of forced arbitration; it would be under no obligation to do so.
- Section 1028 would allow the CFPB to limit forced arbitration in financial service contracts, but only after it studies the issue and makes recommendations. Also, Section 1028 merely provides that the Bureau “may” issue rules to “impose conditions or limitations” on the use of forced arbitration; it would be under no obligation to do so.
Wall Street has faced increased public scrutiny over forced arbitration in recent months.
- Some of the largest banks in America, including JP Morgan Chase, Bank of America, Capital One, and HBSC, owning 86% of the credit card market, recently settled a lawsuit alleging they conspired to insert forced arbitration clauses in their contracts as a means of escaping accountability.
- These banks settled the lawsuit by agreeing to remove forced arbitration clauses from their contracts and to lift their class action ban for the next 3½ years.[i] However, these settlements are limited in that: (1) they expire: (2) pertain to specific banks; and (3) do not address the overall problem that banks can use the system of forced arbitration to escape accountability.
- Three days after the Minnesota Attorney General accused the National Arbitration Forum, the largest forced arbitration company in the country, of working against the interest of consumers by hiding its extensive ties to the debt collection industry, it agreed to stop accepting all future consumer arbitrations. [ii] However, the settlement is not binding on the other forced arbitration companies currently operating to hurt consumers.
Forced arbitration allows Wall Street to violate the new rules without accountability.
- Forced arbitration clauses are hidden in the fine print of most financial services contracts and strip the consumer of the right to hold corporations accountable; instead, these clauses result in the funneling of all claims into a secret and biased system controlled by Wall Street. These clauses are presented on a take-it-or-leave-it basis, an individual has no choice unless s/he forgoes the product altogether – not a realistic choice when it comes to a bank account or credit card.
- Forced arbitration clauses eliminate incentives for Wall Street to treat Americans fairly because they know they can never be held publicly accountable for their actions.
Forced arbitration threatens the goals of transparency, fairness, and accountability.
- Secret Proceedings. Consumer arbitration is a private, unregulated system. When claims are heard in arbitration there is no public record kept of the proceedings or outcomes, no requirement that the law be applied, no mandatory uniform standards for arbitrators, and no way for the public to learn about a company’s bad practices.
- Arbitrator Bias. Typically, Wall Street firms select the arbitrator and determine the rules of procedure. Likewise arbitrators depend on the repeat business of Wall Street, referring to these Wall Street firms that use their services as their “clients,” thus ensuring that these “clients” are kept happy by continuously rendering them favorable decisions. In such a biased system, consumers are denied the opportunity to have their claims heard by a neutral party.
- Elimination of Statutory Rights. Rights are meaningless if unenforceable and under the present system of forced arbitration, long fought for and well-established statutory rights are undermined and often negated by a biased arbitrator. In the consumer context, the following statutory rights are often not enforced by the arbitrator: the Truth in Lending Act, portions of the Magnuson-Moss Warranty Act, the Fair Debt Collection Practices Act, the civil provisions of the Racketeer Influenced and Corrupt Organizations Act, the Home Owners Equity Protection Act, the Consumer Leasing Act, the Credit Repair Organizations Act, and the Fair Credit Reporting Act.
A Federal Solution is the Only Solution.
- The Federal Arbitration Act (FAA) trumps state consumer protection laws; states have been left powerless to protect their own citizens through state law because of the breadth and reach of the FAA.
- The problem of forced consumer arbitration must be addressed by Congress and/or federal agencies because current law dictates that all state regulations limiting forced arbitration are preempted by the FAA. Accordingly, it is critical that the new Bureau of Consumer Financial Protection be empowered to investigate and restrict the practice where necessary.
[1] David Serchuk, When Arbitration Fails, Forbes, 05.15.09, available at http://www.forbes.com/2009/05/14/arbitration-finra-disputes-intelligent-investing-resolution_print.html
[i] Banks that settled include JP Morgan Chase, Bank of America, Capital One, and HBSC.
[ii] For the Complaint go to (http://capwiz.com/nacanet/attachments/MN_Complaint_Against_NAF.pdf). Articles on the case can be found at, Robert Berner, Business Week, “Minnesota Sues a Credit Arbitrator, Citing Bias” (July 14, 2009).