Just weeks after the Consumer Financial Protection Bureau released a report showing that tens of millions of Americans have clauses in their credit card, checking account, student loan and wireless phone contracts that take away their rights to sue those companies in a court of law, more than 100 consumer groups have signed a letter urging the Bureau to address the use of forced arbitration clauses by issuing rules forbidding the clauses.
The consumer groups, which include the Center for Responsible Lending, the National Association of Consumer Advocates, the National Consumer Law Center and our colleagues at Consumers Union, sent the letter [PDF] to CFPB director Richard Cordray reiterating the need for the bureau to create rules to protect consumers.
“Few practices are as abusive, unfair, and deceptive as the widespread use of forced arbitration clauses,” the letter states. “Forced arbitration funnels consumers into a private system set up by corporations to protect and hide harmful and unlawful corporate behavior. Not only do these terms eliminate the right to a jury trial in a civil action, limit discovery and make meaningful appeal impossible; they also often prohibit consumers from banding together in a class action as an effective way to seek legal accountability.”
According to the CFPB’s report, 53% of credit cards currently have arbitration clauses, 92% of prepaid debit cards are subject to arbitration, and 99% of all payday loans in California and Texas include the restrictive clauses. In all, more than 93% of consumers under these clauses have no idea they’ve had their rights taken away from them.
Additionally, the report found that most arbitration clauses include a ban on class actions, even if the group of wronged consumers hope to seek joint arbitration. As the report pointed out, these bans have become an important tool for credit card companies who frequently cite their arbitration clauses as a way to preempt group litigation.
The prevalence of forced arbitration clauses stems, in part from a 2013 Supreme Court decision that gave credit card companies more of a reason to use arbitration clauses. At the time a divided SCOTUS ruled that the clauses could be used to preempt class-action lawsuits, even in cases where class actions are the only economically feasible way for the plaintiff to make its case.
Following the CFPB’s report on forced arbitration clauses, several national consumer groups applauded the study, saying it proved financial institutions used the clauses as a “license to steal.”
Consumer groups contend that by eliminating class actions the financial industry can ignore laws far more easily and operate with impunity.
“We believe that the final results of the CFPB arbitration study offer concrete evidence that the use of forced arbitration clauses is harmful to consumers, and therefore, it is in the public interest and in the interest of consumer protection to prohibit the practice,” the groups state. “The CFPB must act now to use its statutory authority to prohibit the use of forced arbitration clauses in contracts for consumer financial products and services, and restore consumers’ right to choose how to resolve disputes with financial institutions.”
The national groups urge the CFPB to follow recent federal government actions that curb forced arbitration clauses.
In the past, Congress banned forced arbitration in transactions with military servicemembers with respect to payday loans, vehicle title loans, and tax refund anticipation loans; auto dealers and automobile and truck manufacturers; livestock and poultry growers; and employees of government defense contractors with Title VII and sexual assault tort claims.
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