Yesterday, several CPR Member Scholars and staff formally submitted comments on the Consumer Financial Protection Bureau's (CFPB) proposed rule to limit the use of forced arbitration agreements in consumer contracts for financial products like credit cards and bank accounts.
CPR Member Scholars and staff have been tracking this rulemaking for over a year and in May 2016 published a report that assessed several key issues shortly before the CFPB released its proposal. In particular, our report evaluated the CFPB's preliminary outline for the rule and a comprehensive study that the agency conducted to inform the rulemaking's provisions. Among other things, the report highlighted the important role of the civil justice system in reinforcing and complementing the U.S. regulatory system. By denying citizens access to the courts, forced arbitration effectively undermines the proper functioning of the civil justice system, thereby weakening regulatory programs aimed at safeguarding consumers.
Our report concluded that the evidence that the CPFB gathered demonstrated unequivocally that forced arbitration was harmful to consumers and that imposing limitations on this practice was in the public interest. As such, this evidence triggered a legal obligation for the agency to undertake this rulemaking.
Our comments build on the earlier report by evaluating the specific provisions in the proposed rule and the CFPB's underlying analysis in support of them. On the basis of this analysis, the comments conclude that the CFPB clearly has the legal authority to ban class action waivers, a provision often included in forced arbitration clauses that prohibits consumers from joining class action lawsuits against the financial services industry. In other words, the proposal would permit consumers to avail themselves of the civil justice system, but only as parties to a class action lawsuit.
However, the proposal stopped short of banning all forced arbitration agreements. Instead, it would still permit the financial services industry to force consumers to go through arbitration to resolve individual disputes. In its proposal, the Bureau explained that it took this more limited approach due to insufficient evidence that individual-based forced arbitration was harmful to consumers.
Our comments rebut this analysis, arguing that the Bureau's study on forced arbitration found the arbitration process contained several anti-consumer features that prevented individuals from bringing and maintaining their arbitration claims. Further, the CFPB's study found empirical evidence that individuals rarely pursued arbitration to completion; those who did rarely prevailed. On the basis of this evidence, then, the CFPB should – short of banning individual forced arbitration – at least impose limitations that would prohibit the financial services industry from including the worst anti-consumer features in the arbitration process.
Among other things, the CFPB should revise its rule to prohibit forced arbitration provisions that allow financial companies to choose their own biased arbitrators, require hearings in far-flung locations, or charge excessive fees for filing claims when an individual is forced to arbitrate a dispute. All of these features are harmful to consumers, and these prohibitions would be in the public interest. Accordingly, the CFPB has clear legal authority to revise its proposal to include these limitations.
CPR's comments were signed by Member Scholars Martha McCluskey, Thomas McGarity, and Sidney Shapiro and by CPR staff James Goodwin and Mollie Rosenzweig.
For more on CPR's work on the CFPB's forced arbitration rule, visit this page.
CPR was also among more than 280 public interest groups to sign on to a letter in support of strong CFPB restrictions on the financial industry's use of forced arbitration agreements. That letter is available here.