February 19, 2016

CFPB Director Richard Cordray on the Rise of Forced Arbitration

Richard Cordray

by Nanya Springer

As part of its Access to Justice series, ACS on Thursday hosted Director of the Consumer Financial Protection Bureau Richard Cordray for a discussion of how forced arbitration and other anti-consumer measures are harming average Americans. Cordray, the agency’s first director, has overseen the birth and growth of the CFPB, which sprung directly from the financial crisis of 2007-2008. During the ensuing years, the cumulative wealth of middle-income Americans fell drastically, and many families saw their net worth cut in half.  The CFPB, he noted, was forged to ensure “consumer financial markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.”

A burgeoning threat to consumers is mandatory arbitration agreements. Cordray explained that originally, arbitration was used primarily “in commercial disputes between businesses that bargained with each other to create tailored contracts; it was rarely used in disagreements between businesses and consumers.” Over the last two decades, however, “banks started including arbitration clauses in their consumer contracts, requiring any disputes or disagreements to be resolved through private arbitration.” He noted that the attorneys who advised these banks specifically pointed out that arbitration clauses can be used to block class action lawsuits.

To investigate the impact of increasingly common arbitration clauses, the CFPB undertook the most extensive study of consumer finance arbitration ever conducted, finding that tens of millions of consumers are subject to at least one mandatory arbitration clause—and most don’t even know it. Most importantly, the CFPB found that “arbitration clauses restrict consumers’ relief in disputes with financial service providers because companies are using them to block class proceedings in any forum – whether court or arbitration.”

While a consumer’s losses in an individual dispute may be small, Cordray said that class action suits and settlements constitute a “mechanism to bring about much-needed changes in business practices.” This deterrent effect ensures better behavior by corporations and saves billions of dollars for consumers as a whole. The CFPB study found consumers obtained $2.7 billion in class action settlements between 2008 and 2012, an amount that pales in comparison to the prospective savings consumers will enjoy as companies correct their errant behavior.

Cordray also laid out the CFPB’s proposals for limiting the harmful consequences of forced arbitration which include prohibiting the use of arbitration clauses to block class action lawsuits, gathering data on initial claims and awards in consumer financial arbitration disputes, and publishing such data for public consumption.

To read Richard Cordray’s full remarks at the Access to Justice event, click here. For more on how arbitration hurts the middle class and working poor, read the new ACS Issue Brief, Arbitration as Wealth Transfer, by Deepak Gupta and Lina Khan.