What do you mean I can’t come to the hearing? It’s my case! (Help from the CFPB on Mandatory arbitrations)

Last week the Consumer Financial Protection Bureau (CFPB) announced that they were planning on issuing a new rule to deal with mandatory arbitration clauses in consumer contracts.  Groundbreaking in many aspects, this new rule will aim to stop the almost-universal use of one of industry’s main weapons for consumer crowd-control.

Editor’s Note of patience: we say “will aim to stop…” because in the world of consumer regulations, the regulator cannot just say “hey, here’s a new rule.”  They must study the problem; announce their intention to make a rule; wait for the aggrieved party to howl in protest; make the rule; wait for folks to comment on the rule; then make the rule.  The entire process could very well take years. If you are the type of person who does not like to wait too long for dinner, it’s best to start paying attention when the final rule is released.

The study

The CFPB released a comprehensive study earlier this year about the effects of mandatory arbitration in consumer disputes.  While advocates have been railing against mandatory arbitration clauses for years, data was impossible to obtain.  We’re pretty sure that most consumers lose when they go to arbitration – but how do you prove it?  The industry is very protective of information that could shed light on what really goes on in an arbitration.  Unlike court cases, arbitrations are not public and even come with rules that forbid the consumer from talking about what happened.

The Dodd-Frank Act which was passed in 2010 gave the CFPB permission to regulate arbitrations in transactions involving certain consumer financial products. But only after they published a study of arbitrations.  That study was release in March, 2015.  How deeply should you look at a consumer product to see if you should make a rule about it? We’re not sure. But, it seemed like the CFPB wanted to make sure that nobody could say “Hey, you didn’t look deeply enough at this problem.”

(In their words) they analyzed:

  • Over 850 consumer finance agreements between companies and consumers (Remember this is not 850 consumers. It’s 850 different product lines);
  • Over 1,800 consumer finance arbitration disputes filed over a period of three years;
  • A sample of the nearly 3,500 individual consumer finance cases filed in federal court over the same time frame;
  • All of the 562 consumer finance class cases filed in federal court and in selected state courts during the same time period;
  • 40,000 small claims filings over the course of a single year;
  • More than 400 consumer financial class settlements in federal courts over a period of five years; and
  • More than 1,100 state and federal public enforcement actions relating to consumer finance.

Say whatever you want about the CFPB arbitration study, except for “you need to look at more information.”

What is Mandatory Arbitration

Arbitrations were originally created to let businesses resolve disputes with each other businesses in a way that did not involve the time, money and incredible lack of control that comes with a lawsuit.  In the legal world these non-lawsuit resolutions are referred to as “alternative dispute resolutions” or ADR.  Many procedures fit under the ADR umbrella.  Arbitration (where you each present a mini-version of the case to a third party who gets to decide) and mediation (where a third party tries to make the parties settle by telling each one of them separately how they’re going to lose if the case ever gets to court) are the two most common.

Did someone say constitution?

Arbitrations may be the best thing for businesses.  But they are usually on equal footing (or close to equal) when it comes to negotiating the terms of the contracts that they use.  Consumers, however, don’t enjoy anything close to equal footing.  Not only that, one of your constitutional rights involves the so-called “day in court.”  (We’re not sure where this phrase comes from.  But, it stands to reason that it involves something happening in the daytime and actually being IN court)

The 7th amendment to the U.S. Constitution says thusly:

Amendment VII. In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any court of the United States, than according to the rules of the common law.

Many people don’t know how important having your day in court was to the framers of the constitution.  So important, in fact, that it’s in the Bill of Rights. Most of us know 3 things abou the Bill of Rights: that they guarantee freedom of the press and freedom of religion…and that there’s ten of them.  (Quick show of hands: how many people reading this knew that this one of your constitutional rights?)

How does arbitration work?

Instead of filing your case in court, you have to file it with one of the private companies that hear arbitrations.   None of the protections that a consumer has in court are present in an arbitration.  In addition, the company that provides the hearing officer (and your hearing officer) have a pretty good understanding that if they rule in your favor, they might not get hired to hear any more cases. (If you think we are overstating the conflict of interest, Dig this article by an ex-Judge who was hired to do consumer arbitrations)

Here’s a list of how having your case in court (and not in an arbitration) gives you an even playing field.  In court:

  • Filing fees are not too expensive to bring the case;
  • The case will take place in the same state where you are;
  • The decision will be made by a Judge who will have their performance reviewed (by re-election or some other type of public scrutiny);
  • You can complain in public about the decision and the process;
  • You will get a copy of WHY you won/lost;
  • The rules guarantee that you will get some documents about your case from the other side and a chance to put them under oath and ask them anything you want;
  • You will get a public hearing that will be recorded;
  • You can appeal the decision;
  • The other side will realize that whatever they do or say to you will come out in public;

If your case goes to arbitration, you can say good-bye to the bullet points above.  The case is will be decided in secret, you won’t get evidence from the other side to help you prepare for the hearing, you might not see why you lost and nobody will look at the case to see if you were treated fairly.

How important is it for a company to know that their arbitration hearings are going to stay secret?  Let’s say you’re a cell-phone provider (and your name is something like “Schmerizon”)  If you realize that when you get caught ripping people off you won’t have to answer for it, what incentive is there for you to clean up your act? Or to stop ripping people off?

You can ONLY file the claim in the state that they choose.  You have to follow their rules, pay their fees, listen to the judges that they hire and follow their decision (whether you like it or not). There is no actual “hearing.” The judge will decide the case based on what either party sends him in the mail and send you the decision.  You cannot appeal and have already agreed to pay the other side a penalty if you tell anyone else what happened (like a reporter).

You didn’t get enough time to present your claim? The company you were suing refused to send you the information that you needed to present your case?  The judge was a little too familiar with the company you were suing? You didn’t get an actual hearing? You had to pay $500.00 in filing fees and another $250.00 for a written opinion and another $200.00 to file your version of the facts? (all in support of your claim to be refunded $450.00?)…..too bad!

I’m not agreeing to THAT!

If you give reasonable people the chance to decide whether they want to give something up – something that they might just need – they’re gonna say “No.”  But as with every other term & condition in a consumer contract, we sign with a smile – not really knowing what we’ve given up or what we’ve agreed to.  That’s because consumer contracts are actually “Contracts of Adhesion” so-called because they are attached to the transaction – rather than being negotiated between the parties.  You don’t barter with the store about what it says in the contract and you can’t change any of the terms.

Here’s a fun game: next time you buy something that has a contract that you’re supposed to sign or try to download something that asks you to “Agree” to the Terms of Service before you proceed, try crossing out the bit about mandatory arbitration or putting a big XXXX over the line that says you waive your right to participate in an class action and see how that goes.

What the rule will actually do

The rule will do many things.  First and foremost it will put an end to the financial industry’s ability to make you waive your right to use a class action lawsuit when they misbehave. (Remember we’re only talking about financial products that fall under the umbrella of the CFPB)  They’ve been doing this with a two-step process that makes it impossible for consumers to assert their rights to bring a class-action lawsuit. The contract you sign says: you agree that A) any disputes that you have with the lender/credit card company/finance company will be decided by Mandatory Arbitration; and that you B) waive your right to join in any class action lawsuit against said lender/company.

What happens is that as soon as you file a lawsuit, their lawyers will ask the court to refer the matter to arbitration.  Because the U.S. Supreme Court’s decision in AT&T v. Concepcion and other cases like it, your Judge has no choice but to agree.  Once it gets to arbitration, the arbitrator will say “Nooo you can’t make this a class action! You gave up that right in your contract.  All decisions are made by me and I say you’re like a teach in the summer time.  You got no class”  (Or something to that effect).

What the rule won’t do

Stop all mandatory arbitration clauses (if only).  The only mandatory arbitration clauses that will be covered by this rule will be those that are: a) in contracts for; b) consumer financial products that; c) take away a consumer’s right to participate in a class action.  If you are buying a fridge or signing up for a cell phone, this won’t help you. (If you are borrowing money for either of those things, the financing contract WILL be covered)

What does all this mean?

Aside from the practical benefits to the consumer community (the potential of having class-action waiver clauses banned) there seems to be a change coming.  In the notice of the proposed rule that was published by the CFPB, they discussed why they were not proposing a ban on all consumer arbitration clauses:

The Bureau is not considering a proposal to prohibit arbitration agreements or to require safeguards for fundamental fairness for individual disputes at this time. The Bureau is not doing so because the evidence obtained thus far, including evidence analyzed in the Study, shows that few individual consumer finance claims are administered now and is inconclusive due in part to the low number of claims resolved in arbitration.

Since the CFPB couldn’t find enough evidence on how many individual arbitrations there are (or what the results of those have been), it might be hard to justify banning arbitrations altogether.  So, in addition to proposing this rule, the CFPB is going to start asking industry to hand over the results of the arbitrations that are currently happening.  If the CFPB finds that a ton of folks are bringing arbitrations – and losing – we might just see a rule banning all arbitrations at some point in the future.

Are we in the clear?

Not by a longshot.  It’s perfectly legal for companies to load up the contracts that we sign, or the Terms of Service that we agree to with nasty things like mandatory arbitration and class action waivers.  Since the Supreme Court has shown its willingness to uphold even the most consumer-unfriendly terms we seem to be on our own.

Unfortunately, as of this writing, the latest federal budget fight will include somebody’s plan to defund (or otherwise gut) the CFPB and to put the Kibosh on this rule.  We’ll see….

Posted by: Mark Wiseman (who once had a hotel clerk in another country refuse to tell him what he was paying for the room, saying “it’s confidential.” It wasn’t an arbitration but it sure felt like it)