The CFPB has the power to curtail the use of forced arbitration clauses that hinder consumer rights.
In February, civil justice advocates secured a major victory when the U.S. Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. This bipartisan law empowers survivors of sexual assault and sexual harassment by allowing them to file a case in court rather than being forced into arbitration.
Pre-dispute binding arbitration clauses and class action waivers, together known as forced arbitration clauses, are typically buried in “take-it-or-leave-it” agreements that waive individuals’ fundamental rights to seek accountability in court when they are hurt or when their rights are violated. These clauses deprive people of the opportunity to hold wrongdoers accountable, no matter how widespread or egregious the misconduct may be. The clauses also allow abuse, discrimination, and fraud to go unchecked.
As the U.S. Supreme Court has continued to give companies a green light to employ arbitration clauses in every sector of Americans’ lives, banning their use—even in just a slice of claims—is a win.
The recent victory in Congress led many to think back to when the Consumer Financial Protection Bureau (CFPB) took important action to limit the use of arbitration for products and services under its authority. Although Congress repealed that popular rule, the CFPB now has another chance to take a crack at banning these clauses and helping all Americans achieve economic justice.
The harms of forced arbitration are widely noted. Several reports indicate that 81 of the 100 largest U.S. companies use arbitration in their dealings with consumers and more than two-thirds of top selling products include a forced arbitration clause as a term of purchase.
The Economic Policy Institute has also found that “consumers obtain relief regarding their claims in only 9 percent of disputes. On the other hand, when companies make claims or counterclaims, arbitrators grant them relief 93 percent of the time—meaning they order the consumer to pay.”
The opposite finding is true when considering how wronged consumers fare in a court of law. According to a CFPB study, “between 2008 and 2012, 422 consumer financial class action settlements garnered more than $2 billion in cash relief for consumers and more than $600 million in in-kind relief”—money that goes back into the hands of consumers. The study noted these numbers served as the “floor” because many settlements included additional relief, such as provisions prompting companies to change their behaviors.
Curtailing forced arbitration clauses is not only important to return money back to cheated consumers, but as a tool to ensure that corporate wrongdoers do not keep ill-gotten gains—an important principle of economic justice.
Take, for example, payday lending. According to the Center for Progressive Reform, 99 percent of payday loan agreements include forced arbitration clauses. Victims of such behavior are likely to lose in arbitration when payday lenders break the law, and few of them even bother trying.
Black people are 105 times more likely than other racial groups to use payday loans. This is largely due to exclusionary measures that subject communities of color to so-called “bank deserts.”
According to at least one prominent expert on arbitration, people of color “stand to lose the most when arbitration is substituted for litigation.” Thus, the continued use of forced arbitration clauses hits lower-income Black and Brown communities more heavily and allows corporate wrongdoers that prey on these communities to get away scot-free if they act illegally.
Congressional repeal of the previous CFPB arbitration rule was a blow to consumer advocates. The repealed rule prohibited the use of class action bans in contracts governing consumer products and services—which would give consumers the ability to band together to give them more bargaining power—but still allowed, with guardrails, individual arbitration.
Given the backdrop of the CFPB’s previous action, civil justice advocates are working to outline what steps the agency should take now to restore the limits on the use of these clauses.
An advocate’s job is not simply to know the law. It is also important to understand the other factors that decision-makers take into account when making decisions—what I call the three p’s: policy, personalities, and politics. Whether the CFPB decides to take another swing at curtailing the use of forced arbitration clauses will likely depend on all of these factors.
The CFPB must first consider the policy options at its disposal. The Congressional Review Act (CRA) states that an agency may not issue another rule that is “substantially the same” as the one Congress repealed.
Consequently, any new rule cannot simply ban class action waivers, as the 2017 rule did. But the CRA hardly “salts the earth” for additional agency action, as previously thought. There are several options that the agency can take that would not violate the CRA. For example, the agency could ban both class action waivers and individual arbitration, which would not, in my interpretation, run afoul of the CRA.
Then there is personality. CFPB Director Rohit Chopra has made a name for himself as a strong consumer advocate who, throughout his career, has been unafraid to take on big corporate entities. Which direction and how robust a rule the CFPB decides to develop may well depend on how far Chopra, in consultation with his staff, is ready to go as he balances competing priorities.
And the politics. The 2017 CFPB rule enjoyed wide bipartisan support. Since then, support to ban forced arbitration clauses has only increased. A majority of Republican, Democratic, and independent voters support banning forced arbitration across the board. Taking action again to ban forced arbitration is a political winner.
The CFPB has the chance to give people access to the justice system when harmed by corporate abuse. Doing so will drive economic justice and continue the hard work of ensuring a consumer financial system that works for all. I hope the agency seizes the opportunity.
This essay is part of a six-part series entitled Promoting Economic Justice.
