Senate Undercuts Consumer Protection Rules Against Mandatory Arbitration

For years, consumers have used class action lawsuits to fight back against large corporations, banks, and predatory lenders who break the law. But the U.S. Senate recently passed a bill restoring the mandatory arbitration clauses in most consumer contracts, creating obstacles for consumer protection efforts and cutting off access to the courts.

Arbitration: Corporate Lawyers’ Best Friend

The Federal Arbitration Act of 1925 made it possible for people to enter contracts to resolve disputes privately instead of using the courts. These arbitration provisions were originally designed to resolve disputes faster, and for less money.

However, over time the cost of formal arbitration has gone up, and the legal options available to injured consumers have improved. Class action lawsuits and mass torts allow hundreds, even thousands of people to share the costs of proving corporate misconduct. Historically, class actions have been used to effectively fight against everything from defective vehicles to deceptive marketing.

To avoid these lawsuits, companies, banks, and credit card companies have taken to including mandatory arbitration clauses in the fine print of their contracts. Corporate lawyers can use these clauses to break up class actions and mass tort lawsuits, requiring each injured consumer to pay the costs of arbitration separately.

The Federal Consumer Protection Bureau Fights Back Against Arbitration

After the financial crisis of 2008, Congress called for tighter regulation of banks, credit companies, and the financial industry. It directed the newly created Consumer Financial Protection Bureau to study arbitration and its effects under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

When the CFPB released its study in 2015, the results showed that mandatory arbitration was hurting consumers, blocking them from suing or obtaining relief at all. Republican lawmakers arguing against the regulation said arbitration worked “wonderfully” for consumers and that payouts in arbitration are generally larger and quicker than class-action lawsuits. However, CFPB study showed that once a company enforced a mandatory arbitration provision to get a court case dismissed, few people went through the added trouble and expense to arbitrate at all. Even when they did, over the course of two years, only 78 arbitration claims resulted in judgments for consumers, and those totaled a mere $400,000 in relief.

To protect consumers and restore their access to the court system, on July 10, 2017, the CFPB issued a rule preventing financial institutions and lenders (including banks, credit unions, and credit card companies) from using contractual arbitration clauses to block class action litigation.

Congress Strikes Down CFPB Arbitration Rule

As a regulatory agency, according to the Congressional Review Act, the CFPB’s actions can be undone if Congress overturns the rule within 60 legislative days. The House of Representatives took action right away, passing a resolution in July, but the Senate had been slower to act.

This was partially because of resistance within the Republican party itself. Senator Lindsey Graham of South Carolina had sponsored his own legislation to protect military members from mandatory arbitration clauses, so he refused to back the bill. Others were hesitant to vote in favor of banks while the financial crisis was still fresh in constituents’ memories.

However, on October 23, 2017, Department of Treasury Secretary Steven Mnuchin came out against the arbitration ban. It is unusual for different agencies within a given presidential administration to publicly oppose one another. However, the CFPB is still operated by Richard Cordray, an Obama appointee, whose term runs until later this year. The Treasury department cast the arbitration ban as valuing lawyers over consumers and provided moderate Republicans the cover they needed to vote to strike it down.

The vote came the very next day: a 50-to-50 tie with Vice President Mike Pence tipping the vote against the agency. In a statement quoted by the New York Times, Cordray said:

“Tonight’s vote is a giant setback for every consumer in this country. ... As a result, companies like Wells Fargo and Equifax remain free to break the law without fear of legal blowback from their customers.

Once President Trump signs the bill into law, financial institutions and credit card companies will once again be able to force arbitration on their consumers and cut them off from meaningful relief.

Dani K. Liblang is a consumer protection attorney at The Liblang Law Firm, PC, in Birmingham, Michigan. If you are facing a mandatory arbitration clause, contact The Liblang Law Firm, PC, for a consultation.