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CFPB fires first salvo against arbitratio­n

In financial services industry, process is rigged against consumers

- Darrell Delamaide @ddelamaide Special for USA TODAY Columnist Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron’s, Institutio­nal Investor and Bloomberg News service, amo

The new consumer finance watchdog agency is now tackling one of the biggest tricks the financial services industry plays on customers.

The Consumer Finance Protection Bureau this month proposed rules that would limit a company’s ability to deny customers their day in court when disputes arise.

Most financial service providers include an arbitratio­n clause in their contracts with consumers, which makes it mandatory to submit eventual disputes to an arbitrator rather than taking them to court.

But the dirty little secret in the industry is that these arbitratio­n forums are effectivel­y rigged against consumers.

The CFPB documented the fact in a study of arbitratio­n disputes published in March, even though it didn’t directly accuse the industry of rigging the process.

In an analysis of arbitratio­n cases affecting the products it supervises — credit cards, bank accounts, payday loans and other consumer products — the agency found that arbitratio­n proceeding­s overwhelmi­ngly came down in favor of the provider.

In 341 cases resolved by an arbitrator in 2010 and 2011 that had a clear outcome, consumers obtained relief regarding their affirmativ­e claims in just 32 disputes.

Consumers obtained debt forbearanc­e in 46 cases. The total amount of affirmativ­e relief awarded was $172,433 and total debt forbearanc­e was $189,107.

During the same period, by contrast, in 244 cases studied in which companies made claims or countercla­ims that were resolved by arbitrator­s, companies ob- tained relief in 227 disputes. The total amount of such relief was $2,806,662. You see the pattern? It is the reason lawmakers mandated the CFPB, when they created it as part of the 2010 Dodd-Frank financial reform, to study mandatory arbitratio­n clauses and to take appropriat­e steps to protect consumers.

In its proposed new rules, the agency is targeting specifical­ly the provisions in arbitratio­n clauses requiring customers to waive their right to recourse in a class-action lawsuit or in a group arbitratio­n action.

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” CFPB Director Richard Cordray said in a statement announcing the rules. “Companies are using the arbitratio­n clause as a free pass to sidestep the courts and avoid accountabi­lity for wrongdoing.”

Companies, in short, have been free to pursue a divide-and-conquer approach that allows them to settle or arbitrate any number of individual disputes without changing the practices that gave rise to the dispute.

The proposed rules would require companies to explicitly state that the arbitratio­n clauses don’t apply to potential class-action lawsuits, unless a judge denies class certificat­ion or dismisses the underlying claims.

The proposal raised the predictabl­e howls of protest from the U.S. Chamber of Commerce, which trotted out the standard industry objections that class-action lawsuits increase costs to consumers and only enrich plaintiffs’ lawyers while consumers receive just a pittance.

What the Chamber’s protest convenient­ly ignores is the deterrent aspect of allowing class-action lawsuits.

However much trial lawyers make from the cases, or however little victims actually receive, a successful lawsuit costs the companies a lot more than the few arbitratio­n cases they lose. This should deter them from engaging in predatory or illegal practices to begin with, the CFPB feels.

“The proposals under considerat­ion would incentiviz­e companies to comply with the law to avoid lawsuits,” the agency said in announcing the proposed rules. “When companies can be called to account for their misconduct, public attention on the cases can affect or influence their individual business practices and the business practices of other companies more broadly.”

The CFPB rules would also require companies that use arbitratio­n clauses to submit claims and awards under arbitratio­n to the agency, so that it can monitor the procedure and increase transparen­cy.

Mandatory arbitratio­n clauses are not confined to the services CFPB supervises, but the agency so far is the only regulator willing to act.

The Securities and Exchange Commission had the same mandate from Dodd-Frank to examine the issue in the brokerage and financial adviser firms it supervises, but it has dragged its feet on all the Dodd-Frank measures, and this is no exception.

Whether the CFPB rules end up underminin­g the arbitratio­n clauses altogether, as the Chamber of Commerce predicts, or whether it will have any spillover effect on the SEC or other agencies remains to be seen.

But at least the CFPB has taken the first step to limit what consumer advocates have long seen as a racket favoring the industry against consumers.

In 341 cases resolved by an arbitrator in 2010 and 2011, consumers obtained relief in just 32 disputes.

 ?? H. DARR BEISER, USA TODAY ?? Richard Cordray, director of the CFPB, says companies are using arbitratio­n as a “free pass to sidestep the courts.”
H. DARR BEISER, USA TODAY Richard Cordray, director of the CFPB, says companies are using arbitratio­n as a “free pass to sidestep the courts.”

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