Consumer Rights to Expand Under Government Plan Against Restrictive Contract Language

By Joe Davidson, The Washington Post

08 May 16

he Consumer Financial Protection Bureau wants to give David a bigger stone to sling at Goliath.

In this case, David represents consumers who feel cheated by Goliath financial-service companies. Currently, many of the contracts consumers sign prohibit class-action lawsuits against a broad range of firms offering credit, including banks, credit card issuers and payday lenders.

The CFPB plans to change that with a proposed regulation announced during a hearing in Albuquerque on Thursday.

The proposal would stop “consumer financial companies from using mandatory pre-dispute arbitration clauses to deny their customers the right to band together to seek justice and meaningful relief from wrongdoing,” CFPB Director Richard Cordray said at the hearing. “This practice has evolved to the point where it effectively functions as a kind of legal lockout.  Companies simply insert these clauses in their contracts for consumer financial products or services and literally ‘with the stroke of a pen’ are able to block any group of consumers from filing joint lawsuits known as class actions.”

The proposed rule would empower consumers, by allowing them to band together in class action lawsuits against financial service companies. CFPB predicts the possibility of class action would deter misconduct. Officials say the proposal also would make arbitration more transparent by requiring companies to file information about arbitration claims and awards with CFPB.  The agency said this information “would also provide insight into whether companies are abusing arbitration or whether the process itself is fair.”

A 90-day comment on the proposal likely will begin later this month. The final rule would be issued after that, but it would take an additional 210 days for it to take effect.

Consumers will have more power once the regulation is implemented, but not everyone is pleased with it or the CFPB.

Rep. Jeb Hensarling (R-Tex.), chairman of the House Financial Services Committee, called Cordray a “de-facto dictator.” The bureau’s plans — a “big, wet kiss to trial attorneys.” The proposal, Hensarling added, “is just another example of the CFPB abusing power that it never should have had in the first place.”

Speaking of abuse of power, I was presented with such an arbitration-clause contract a few months ago. It said the buyers “agree that they will not assert a Claim on behalf of, or as a member of, any group or class.” It went on to state that both the contractor and the consumer “are giving up their constitutional right to have any dispute decided in a court of law, and instead are accepting the use of arbitration.”

The notion of giving up a constitutional right is a scary one.

But wait, the company had an out.

Just below the paragraph striking a constitutional right for both sides was another section that began “notwithstanding anything to the contrary, Contractor retains the option to use judicial or non-judicial relief to enforce the monetary obligation” of the consumer.

So, by signing the contract I would have given up my right to take the company to court, while the company was free to sue me. I take my constitutional rights seriously, so I crossed out those paragraphs.

But how many people feel free to do that? How many even read the fine print?

“Our research found that very few consumers know anything about these ‘gotcha’ clauses,” Cordray said. “Even fewer consumers know how they actually work.  Based on our research, we believe that any prospect of meaningful relief for groups of consumers is effectively extinguished by forcing them to fight their legal disputes as lone individuals.  These battles, frequently over small amounts of money, would often have to be fought against some of the largest financial companies in the world. When faced with the daunting prospect of spending considerable time and effort to recoup a $35 fee or even a $100 overcharge, it is not hard to see why few people would even bother to try.”

It’s worth noting that the bureau does not propose to ban arbitration, though opponents claim that would be the effect. Moments after acknowledging “the bureau has not outright prohibited the use of all arbitration,” Alan S. Kaplinsky, a Philadelphia lawyer representing the financial-services industry, told the hearing that “it is a de-facto ban — let’s call it what it is.”

Kaplinsky, an early and leading proponent of arbitration, argued that under the proposed regulation “most companies will simply abandon arbitration altogether.” He called it a “sad day for consumers” but a lucrative move for class-action lawyers “who will benefit the most.” The U.S. Chamber of Commerce’s Travis Norton added, “The bureau’s regulation is a back-door attack on arbitration.”

Not so, Cordray said: “If arbitration truly offers the benefits that its proponents claim . . . then it stands to reason that companies will continue to make it available.”

But mandatory-arbitration clauses “block consumers from ever securing any meaningful relief from violations of the law,” Cordray said.

“Simply by inserting the magic words of an arbitration clause,” he added, “financial companies can avoid being held directly accountable for their actions affecting their customers.”

Under the government’s plan, it is those magic words that would go poof.