Yesterday, at a field hearing in New Mexico, the Consumer Financial Protection Bureau proposed a watershed new rule to stop banks and lenders from using fine print to prevent consumers from banding together in court.
Though most of us don’t even know it, we’ve all signed away our away our rights through forced arbitration clauses, which require consumers to bring any claims in a private, corporate justice system that is completely secret. The CFPB’s proposed rule would do two significant things to level the playing field: prohibit clauses that ban group lawsuits and require companies to disclose what happens in arbitration.
To underscore what’s at stake, let’s recognize forced arbitration for what it really is: a mechanism that quietly transfers giant amounts of wealth from the poor to the rich. As Lina Khan and I explained in our recent ACS issue brief, Arbitration as Wealth Transfer, “the least appreciated effect of arbitration clauses is that companies use this fine print as a license to steal from American consumers.” That should be a cause for widespread alarm.
Between 2008 and 2012, the CFPB found, 422 consumer financial class-action settlements garnered more than $2 billion in cash relief for consumers and more than $600 million in in-kind relief. And those numbers don’t capture the additional benefits of industry-changing injunctions and deterrence of future bad practices.
By contrast, what do consumers get from arbitration? It should be no surprise that few consumers with low-value claims successfully advocate for themselves when forced to seek individual relief. But you might be surprised at how few. Of the hundreds of millions of consumers that interact with banks, credit cards, student loans, payday loans, debt collectors, and other companies regulated by the Bureau, how many do you think have won affirmative relief on small-dollar claims in arbitration? Well, the CFPB’s study found that in 2010 and 2011, for the nation’s leading arbitral forum, the number was just four. Not four million, not 400,000, not even 400. Just four.
As I explained in my testimony at yesterday’s hearing, the biggest problem with forced arbitration is that it does not do what its proponents claim it does. It doesn’t channel claims into an alternative system that’s better, faster, or cheaper at resolving disputes. Instead, small-dollar consumer claims simply disappear.
The industry, thus far, has provided no real response to the fact that consumers haven’t actually used arbitration to successfully vindicate small claims. The best they can offer is a grab bag of criticisms of the class-action system, claiming that few consumers file suits in court and that the timeline for class-action suits is longer.
But existing data show why these criticisms are wrong, and why we shouldn’t allow companies to write “a kind of legal lockout” into their contracts, as CFPB Director Rich Cordray put it at yesterday’s hearing. The best evidence we have of this, as I explained in my testimony yesterday, is the CFPB’s study examining outcomes in multidistrict litigation against 23 banks for illegally charging consumers excessive overdraft fees. The 18 settlements reached through the litigation provided over 28 million consumers with $1 billion in cash relief—much of which was directly deposited into bank accounts. By contrast, the customers of the five banks with enforceable arbitration clauses got nothing. This case study—as close to a controlled experiment as we have—tells us everything we need to know: The arbitration clause was the only variable that determined whether consumers got relief.
Arbitration’s proponents have long argued that these clauses merely give businesses and their customers access to what a U.S. Chamber of Commerce blog post called “a consumer friendly system that is fast, convenient, and inexpensive.” For whom? If only a handful of consumers gain relief through the system, what does it matter how fast it is?
The fight over the proposed rule is only just beginning. In advance of the release last week, a coalition of 164 advocacy groups—representing consumers, students, labor, small businesses, and more—sent a letter to the Bureau supporting a prohibition on class action bans. Democratic presidential candidate Hillary Clinton weighed in too, expressing “strong support” for the CFPB proposal, which she said “takes aim at yet another unfair practice on Wall Street.”
But supporters of the proposed rule must be prepared for a strong attack from their opponents. The U.S. Chamber of Commerce is preparing a well-financed public campaign against the agency and crafting potential court challenges. Taking their cue from corporate interests, several members of Congress are now seeking to eliminate the CFPB’s authority—established by the Dodd-Frank Wall Street Reform Act—to address these clauses.
And business interests have tried to take control of the public narrative, cannily framing the rule as a loss for consumers and a boon to trial lawyers. The misleadingly named “Protect America’s Consumers”—a dark money group with ties to conservative causes—has released a series of video ads attacking the CFPB and its director, and urging Americans to pressure their senators to reform the CFPB.
The 90-day public comment period for the rule is an important opportunity. To counter the Chamber and its allies’ misleading rhetoric and obstructionist tactics, we need to plainly state the real reason that the banks are up in arms: They’re losing their get-out-of-jail-free card.