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Forced Arbitration Clauses Harm Consumers: CFPB

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State securities regulators and consumer advocates are applauding a just-released report by the Consumer Financial Protection Bureau that found that across substantially all consumer finance markets, pre-dispute forced arbitration clauses are extremely prevalent and detrimental to consumers’ ability to seek legal relief when they are wronged.

In its report to Congress, mandated under the Dodd-Frank financial reform act, the CFPB found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class-action settlements.

Dodd-Frank mandates that the CFPB conduct a study on the use of pre-dispute arbitration clauses in consumer financial markets.

The Bureau’s report also found that more than 75% of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers, and fewer than 7% of those covered by arbitration clauses realized that the clauses restricted their ability to sue in court.

“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” said CFPB Director Richard Cordray, in a statement accompanying the report. “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. Now that our study has been completed, we will consider what next steps are appropriate.”

William Beatty, president of the North American Securities Administrators Association and Washington Securities Director, said the CFPB’s findings should encourage the Securities and Exchange Commission to use its authority under Dodd-Frank to “investigate the impact of similar clauses used by broker-dealers and investment advisors, and prohibit or restrict their use in the public interest and for the protection of investors.”

Americans for Financial Reform says that CFPB’s study “confirms” what consumers and consumer advocates have long said about forced pre-dispute arbitration: “It is a private dispute system stacked against individuals seeking justice.”

Micah Hauptman, financial services counsel for the Consumer Federation of America, said in a statement that “forced arbitration is often justified on the premise that it is beneficial for everyone, but the results of this study show that it is not beneficial for consumers.”

Forced arbitration “cannot persist if it is used by financial services firms to prevent consumers from vindicating their legal rights, and to insulate themselves from being held accountable for their actions,” Hauptman said.

Both AFR and CFA urged the CFPB to move forward with rulemaking to prohibit forced arbitration in consumer financial contracts. “With the release of this study, the CFPB now has the legal authority to prohibit the use of forced-arbitration clauses in consumer finance markets,” AFR said.

The CFPB’s data “refutes financial industry claims” that giving consumers access to the court system raises costs, AFR said. In its examination of financial companies that dropped their arbitration clauses, the CFPB found ‘‘no statistically significant evidence” that customers experienced increased prices or reduced access to credit, AFR said.

Further, the CFPB study “clearly states that forced arbitration insulates companies against being held accountable for rip-offs that affect large numbers of people,” with more than 90% of contracts containing arbitration clauses explicitly prohibiting class-actions. When consumers “are forced to pursue their grievances one by one, it turns out that very few pursue them at all.”