After unprecedented levels of fraud by banks put the U.S. into the Great Recession in 2008, Congress created the Consumer Financial Protection Bureau to rein the abuse practices of consumer financial companies. This includes banks, credit unions, mortgage lenders, payday lenders, private education lenders, debt collectors, and credit reporting companies. Congress authorized the CFPB to enforce existing consumer financial protection laws and propose new regulations to protect consumers from unfair, deceptive, or discriminatory practices by financial institutions.
In creating the CFPB, Congress specifically asked the federal agency to study the breadth and scope of pre-dispute arbitration agreements that are often included on “take it or leave it” terms in credit card, bank, mortgage and lender agreements. These arbitration agreements prohibit consumers from suing the financial institutions in court and require, instead, that any dispute be resolved through private arbitration. Most also specifically prohibit consumers from participating in class action lawsuits. In a class action, hundreds or thousands of individuals who have all been victims of the same fraud or misconduct join together in a lawsuit against the corporate defendant. Class actions have been a tremendously effective tool for bringing corporate wrongdoers to justice and deterring future misconduct.
Congress was concerned that arbitration agreements were keeping consumers from having an effective remedy against fraudulent or discriminatory actions by consumer credit companies. After three years of study, the CFPB made some startling findings. Companies comprising more than half of the credit card market include arbitration provisions in their agreements. Forty-four percent of all insured bank deposits are covered by an arbitration agreement. And it’s worse for those with pre-paid cards, private student loans, and payday loans, where nearly every agreement includes an arbitration provision.
Over a three-year period, from 2010 through 2012, consumers filed nearly 3,500 lawsuits in federal court and initiated nearly 1,500 arbitrations, all against financial institutions. The companies initiated another 370 arbitrations against consumers, largely to recoup on debt owed. In the arbitrations, the financial and credit companies were awarded $2.8 million, or more than seven times what the consumers were awarded as damages or received as debt forbearance. Seven times.
But the lawsuits told a different story. On average, 32 million consumers each year were eligible for relief through a consumer class action filed in federal court. And those class action lawsuits resulted in more than $650 million in monetary relief over the three-year period for consumers against the credit, loan and banking companies.
It’s no wonder, then, that banks, credit card issuers, and loan companies have led the effort by American corporations to force consumers into arbitrations and prohibit them from seeking relief in a class action, as reported by The New York Times in a three-part series on the gross inequities of these “take it or leave it” arbitration agreements. As The Times noted:
By banning class actions, companies have essentially disabled consumer challenges to practices like predatory lending, wage theft and discrimination, court records show.
“This is among the most profound shifts in our legal history,” William G. Young, a federal judge in Boston who was appointed by President Ronald Reagan, said in an interview. “Ominously, business has a good chance of opting out of the legal system altogether and misbehaving without reproach.”
Now, the CFPB is taking action to protect consumers. The federal watchdog agency has taken the first step toward new regulations that would ban credit card issuers, banks, credit unions, payday lenders, and private student loan companies from including arbitration provisions in their agreements that prohibit consumer class actions. The proposal would also require these companies to notify the CFPB when arbitration proceedings are initiated under the agreements, and to provide copies of the complaint and final award.
But it’s just a first step. Federal law requires the CFPB to consult with small businesses on the plan, and then issue proposed regulations subject to public notice and comment. Consumer advocates expect consumer credit companies to use this process to try to slow down and ultimately kill the CFPB proposal.
For more detailed information on CFPB’s arbitration study and proposal for eliminating class-action bans in arbitration agreements, you can read CFPB’s report here.