WASHINGTON, October 29, 2017 – Mandatory arbitration clauses contained in consumer financial and related contracts are perhaps one of the worst affronts to justice Americans have ever seen. Yet they are entirely legal.
Businesses LOVE arbitration. The process favors the business in almost every case. Businesses like it even more because it allows them to avoid bad publicity (the hearings are closed).
While there was hope for legislative change regarding this issue, now that hope is gone. Just last week, Congress killed a bill that would have allowed consumers to join class action lawsuits against financial institutions. The bill would have eliminated the mandatory arbitration process in consumer-financial business disputes.
Arbitration is a closed hearing where a single person, the arbitrator, decides the case. It is an opposite process from that in a civil trial, where a consumer can opt for a jury to decide the issues and where the consumer realistically has a chance to win.
After the financial crisis in 2008, the Consumer Financial Protection Bureau (CFPB), a watchdog organization created by Congress under the 2010 Dodd-Frank legislation, began crafting a rule restoring the right of consumers to sue banks, credit card companies and other financial institutions. The goal was to provide an avenue to crack down on predatory lenders and overly aggressive and deceptive debt collectors.
The final rule was set to go into effect in 2019. But, taking advantage of a 60-day period (established under the 1996 Congressional Review Act) during which they are permitted to block various agency rules from taking effect, Congress exercised its option. Vice-President Mike Pence broke a 50-50 Senate vote along party lines to kill the CFPB rule, allowing the Republicans to continue to destroy policies designed to reign in Wall Street.
The House voted 231-90 last July to kill the rule, and certainly President Trump is going to sign off. This will make permanent the death of justice for ordinary people filing claimsthat are important to them, but not so much to big businesses.
So congratulate big business and recognize another result that lining the pockets of Republicans for so long has finally caused. Senator Elizabeth Warren said that “the bill is a giant wet kiss to Wall Street,” noting that before the vote “bank lobbyists were crawling all over this place, begging Congress to vote and making it easier for them to cheat consumers.”
Arbitration involving financial institutions that cheat people is now and will continue to be the required process for resolving the average little guy’s grievances. The consumer-friendly law that was to go into effect in 2019 is now dead. Consumers have lost and big businesses have won. Gee, what a surprise! Look who is making our laws: Republicans who are indebted to big business interests.
Virtually every financial contract Americans sign with big businesses includes a fine print clause detailing that arbitration will be the method by which disputes will be resolved. Mandatory arbitration means the consumer has signed away his or her right to sue, either individually or through a class action lawsuit.
Millions of consumers, mostly unknowingly, have signed borrowing or credit card contracts that include fine-print clauses. These clauses contain language waiving the right to a civil trial by jury in favor or having an arbitrator act as both judge and jury. If disputes arise, arbitration will now resolve the dispute. Under mandatory arbitration, such consumers cannot join lawsuits, and thus, they will not now find the relief hoped for when Congress began looking at the financial industry after the 2008 crisis.
Arbitration clauses appear in virtually every consumer financial services contract. These clauses have now been given the “seal of good housekeeping approval.” Banks, other financial institutions, credit card companies, issuers of prepaid cards and lenders of payday loans and others who have dealings with consumers now have a solid green light to cheat, and their comeuppance is almost zero now that they dodged the bullet of the CFPB’s rule crafted years ago.
The banks now know that mom and dad must arbitrate their grievances if they want relief. Mom and dad are now prevented from initiating or joining a class action lawsuit with others who have similar claims.
CFPB Director Richard Cordray said in a statement: “Companies like Wells Fargo and Equifax remain free to break the law without fear of legal blowback from their customers.”
Tens of millions of Americans, most of whom didn’t know they would be covered by an arbitration clause when they signed up for a credit card, checking account or prepaid card, have effectively lost before the game begins should a dispute arise.
Consider an imaginary case of a consumer against a bank or a credit card company that made a mistake or intentionally tried to pull the rug over something shady. Imagine being overcharged $10 or $20 and being told there will be no refund. Submitting a claim for such a small amount is ridiculous if it must go through arbitration. Getting on the bus to attend the hearing will cost more than would be won.
What if, however, the wronged consumer could submit a claim on a short form and join a class action, becoming a part of a single case that could compensate 10,000 or 20,000 or 30,000 people, all of who were overcharged that $20? The wronged little guy would absolutely submit the form.
For conflicts that arise between everyday people, arbitration can be an excellent device to resolve differences. It is often faster and less expensive than going to court. For consumers with disputes with big businesses however, and particularly those businesses in the financial services world, arbitration is terrible.
Arbitration, absolutely, without any doubt and without any argument, is a decidedly horrible process for a consumer with a financial services dispute. The strength of the parties involved is highly unbalanced. A single consumer has limited resources and time issues. A major corporation has all of the resources x1000 needed, plus all of the time in the world, and could care less when or if the problem is resolved. Class action lawsuits even the playing field.
Why is financial-services arbitration bad for a consumer? Like all arbitrations, it is a closed, behind-the-doors process that involves a single person deciding the outcome of the claim. When it is a big-business dispute, the arbitrator is most often selected by the business entity. Arbitrators chosen by businesses often earn considerable income from this process, so, it is easy to connect-the-dots and understand that their decisions will most often favor the business, as the arbitrators do not want to alienate the hand that is feeding them.
Further, consumer-business arbitrations typically are held in a location far away from the consumer’s home, thus making attending a hearing financially cost-prohibitive.
Beyond the concerns of an individual consumer, consumer-business arbitration hurts the public in general, because the closed, non-transparent process assures there will never be changes in the behavior of the business. A consumer victory in a civil lawsuit might carry a large penalty against the offending business, motivating the business to correct the underlying problem.
President Trump lauded the Senate vote as “standing up for everyday consumers.” Is he delusional?
Paul A. Samakow is an attorney licensed in Maryland and Virginia, and has been practicing since 1980. He represents injury victims and routinely battles insurance companies and big businesses that will not accept full responsibility for the harms and losses they cause. He can be reached at any time by calling 1-866-SAMAKOW (1-866-726-2569), via email, or through his website.
His book “The 8 Critical Things Your Auto Accident Attorney Won’t Tell You” can be instantly downloaded, for free, on his website: http://www.samakowlaw.com/book.
Samakow has now also started a small business consulting firm. The website for this business is brand new and Mr. Samakow will be most appreciative of any and all comments. www.thebusinessanswer.com.