CFPB Study Slams Forced Arbitration

The Consumer Financial Protection Bureau issued its long-awaited study of forced arbitration today, and the study paints a grim picture of justice denied. The arbitration clause tucked into standard form contracts deprives consumers and borrowers of the right to go to court to challenge fraud, breach of contract, abusive collection practices and a host of other ills. Not only do forced arbitration clauses lock consumers out of court, the clauses usually include a ban on class actions, which are the only affordable way consumers can sue financial institutions.

The banking industry has repeatedly said that arbitration lowers the cost of justice of consumers, because it is cheaper and faster than going to court. That is simply not true; and this study debunks that industry claim once and for all.

The CFPB report analyzed nearly 850 consumer loans and other financial contracts. The study included credit cards, student loans, checking account agreements, auto loans and other banking transactions. The agency also examined over 1,800 consumer arbitration disputes filed between 2010 and 2012. That review lead it to find that the finance industry is overstating consumer benefits — not only as to price but as to outcome.

Consumers fare poorly in the arbitration forum. The CFPB surveyed data on a sample of about 600 consumer arbitrations per year against a comparable sample of federal lawsuits between 2010-2012 and found that consumers get the short straw time after time. In the aggregate, the relative recovery for consumers is minimal, compared to the banks. Miniscule, actually, when one looks at the arbitration data compared to consumer recovery in the courts.

There is a reason the banks push so hard for forced arbitration. Pre-printed arbitration clauses effectively lock consumers out of court. Students, car buyers, credit card customers, checking account holders, and other consumers, cannot sue the banks collectively for deception and fraud.

This is the second report from the CFPB on the subject. The first, issued in December 2013, was also critical of forced arbitration. The banking industry wasted no time in rallying its lobby to fight back with a whole wardrobe of ways to cover up the truth about unfair arbitration. Expect some blowback this time as well. Richard Hunt, CEO of the Consumer Bankers Association, has already released a statement saying how much he looks forward to “working with the CFPB to improve consumers’ understanding of the arbitration process and how it can benefit them.” Like the Emperor in the fairy tale, he hasn’t gotten the message that the clothes are off. The rules of arbitration usually require participants to pledge a vow of secrecy. Thanks to the CFPB’s latest report, now there is nothing to hide behind.

The two CFPB studies are significant, because the Dodd-Frank Act, which established the CFPB, also gives the agency the right to issue regulations on arbitration agreements in other consumer financial products. This revealing study really turns that right into an obligation. The CFPB’s Director, Richard Cordray, says, “Now that our study has been completed, we will consider what next steps are appropriate.” Anyone but a banker reading the latest study has to conclude: “There ought to be a law against it.” Maybe there will be soon. You can read the full report here.