Following up on one of it responsibility as the federal agency in charge of protecting American consumers, the Consumer Financial Protection Bureau (CFPB) has begun the task of evaluating how arbitration clauses financial services effect consumers. Generally, pre-arbitration clauses obligate consumers and companies to bypass the court system and take all disagreements about services or products to an arbitrator.
Richard Cordray, Director of the CFPB, said most contracts for consumer financial products contain arbitration provisions.
The Issue of Mandatory Arbitration
In September 2009, the Public Citizen, a national consumer advocacy group, released a report titled “Forced Arbitration: Unfair and Everywhere.” The report investigated the issue of mandatory binding arbitration between consumers and companies who have disputes about products or services.
Public Citizen representatives, acting as consumers, contacted companies in seven industries including banks, credit cards, Internet services, homebuilders and automobile dealerships.
Of the respondents to the Public Citizen queries, 75 percent of companies imposed binding arbitration. More than 66 percent of firms require customers to agree to mandatory arbitration as a course of doing business.
Public Citizens also reports that a poll conducted around the same period showed that 79 percent of consumers believed they had the right to sue a company if involved in a consumer dispute. Nearly two-thirds of consumers stated they did not recall seeing an arbitration clause.
How Arbitration Works
The arbitration process provides a fast, informal, less complex and inexpensive way to resolve conflicts without litigating matters in the court system. According to the National Arbitration Forum (NAF), parties to the dispute agree to have the issue decided by a “neutral third party” or arbitrator. The NAF defines it roles as “ensuring that cases proceed quickly and smoothly according to the rules of the arbitration agreement.”
An arbitrator has two primary responsibilities:
- Evaluates pertinent information presented by both parties
- Delivers a legally binding outcome to one of the parties in the dispute
The arbitration process also extends to dispute resolution between businesses, government agencies and judicial system.
Focus of Arbitration Clauses Study
The Dobb-Frank Act (Section requires the CFPB to review pre-arbitration clauses and determine if the CFPB needs to change current regulations to “protect consumers.” The CFPB study must also measure the effectiveness of the arbitration process when it comes to settling consumer matters.
The upcoming CFPB hearing will focus on obtaining the following information from the public:
- Frequency of arbitration clauses in contracts
- Type of claims made by consumers in arbitration cases
- Impact of arbitration provisions on consumers and companies
- Affects of arbitration clauses beyond the arbitration process
- Extent to which companies bring complaints against consumers
Consumer advocate groups have defined arbitration as a system of justice that takes away Americans’ rights to take a business to court if wronged by a product or service. As revealed in the Public Citizen study, many consumers unknowing give up their rights to go to court in the event of a dispute.
According to the CFPB, financial services companies prefer the use of arbitration clauses for financial services because of the speed, lower cost and its perceived fairness. A 2007 Public Citizen study, How the Credit Card Companies Ensnare Consumers, of data over a four-year period revealed the NAF ruled in favor of credit cards companies in 94 percent of the cases it arbitrated.