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Washington Update: Forced Arbitration Rule

By Linda Lipsen, CEO, American Association for Justice

July 25, 2017

The Consumer Financial Protection Bureau (CFPB) issued a new, but long-awaited, rule on July 10 to curb the use of forced arbitration clauses in certain financial contracts and restore the ability of Americans to file or join group lawsuits. The rule has been widely celebrated by consumer rights advocates and by the press – increasingly so in the past few months – as a critical means to protect Americans from the negative effects of forced arbitration.

Wall Street has spent decades using forced arbitration to quietly strip Americans of their constitutional right to seek justice under the law. This rule gives those rights back. Consumers who are scammed, cheated, or defrauded by big banks will be able to join together to demand accountability and a fair and transparent path to justice.

Why Is Forced Arbitration Bad for Consumers?

Forced arbitration clauses are buried in the fine print of non-negotiable banking contracts and funnel all customer complaints into a secret, binding process overseen by an arbitration provider chosen by the bank. Before issuing the rule, the CFPB studied the financial sector’s use of forced arbitration against consumers. It released a 728-page report on its findings in March 2015, which confirmed forced arbitration denies justice to customers and allows big banks to escape accountability when they break the law.

Specifically, the CFPB found:

·        Consumers are blindsided by forced arbitration: According to the report, only 7 percent of consumers understood that forced arbitration clauses restricted their rights to hold financial institutions accountable in court.

·        Consumers lose and Wall Street wins in arbitration: Forced arbitration is rigged against consumers. In 2010 and 2011, consumers with claims against financial institutions received relief in only 9 percent of arbitrations. On the other hand, when corporations went after their customers, the corporations won in 93 percent of arbitrations.

·        Consumers don’t recover, even when they “win”: Consumers recovered little if any relief in forced arbitration. The CFPB found that consumers won on average, 12 cents for every dollar they claimed. This is in stark contrast to the arbitration awards for corporations, who won 98 cents for every dollar claimed.

·        Forced arbitration prevents any hearing for most consumers: The CFPB found that only about 300 consumer claims even go to forced arbitration each year. The contrast to the civil justice system could not be starker – the CFPB found that more than 13 million people received financial relief as a result of just eight class actions.

The evidence is clear: forced arbitration guarantees that Wall Street wins and consumers lose. For too long, big banks have ripped off their customers and hidden their wrongdoing from the public by forcing victims into rigged arbitration proceedings.

Efforts to Repeal Rule

Almost immediately after the CFPB announced the issuance of the new rule, the U.S. Senate and House of Representatives began making moves to overturn it. On July 25, the House voted to repeal the rule using the Congressional Review Act, which allows Congress to repeal regulations within 60 days of their issuance. The repeal resolution now moves to the Senate where it will face a tougher challenge.

The House and Senate efforts to wipe out the forced arbitration rule make it clear that Wall Street has taken charge in the 115th Congress. Instead of working together to restore the rights of Americans and rebuild confidence in the financial industry, members of Congress are turning their backs on their constituents to protect the special interests of the banking industry. It’s time to put politics aside and uphold efforts to restore the rights of all Americans.

Protecting those rights is now, and always, AAJ’s mission. We will fight congressional repeal of the CFPB rule with everything we have. If you have any questions, please contact me at Advocacy@justice.org.

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