Late in 2009, Leyna Novak, a car buyer in Pennsylvania, received a request from the auto financing company that held her car loan. For four years she had been making her monthly payments by mail. Now, the company asked her to make those payments by phone.
Novak obliged -- only to discover a nasty surprise: When she started paying by phone, the finance company tacked on a "convenience" charge of $14.95 per month -- even though it was the company that asked her to pay by phone in the first place.
As The National Association of Consumer Advocates and Public Citizen explain, Pennsylvania law specifies that all auto loan finance charges must be disclosed in a single contract when the buyer signs the loan. Other states have similar laws. Novak tried to join together with many other borrowers in the same position and sue the finance company.
That's when she got the second nasty surprise. Her contract has a clause shutting her out of court. She'd have to take the case to an arbitrator effectively chosen by the company. Worse, she's prohibited from banding together with other borrowers to bring a class-action suit. Each borrower would have to go it alone and wade through a cumbersome arbitration proceeding rigged against them, with the hope of only a small payment even if they won.
Novak's experience is not the exception, and today victims of predatory business practices routinely find themselves locked out of court because of forced arbitration clauses. That's why the Consumer Financial Protection Bureau is proposing to prohibit what are known as "class-action bans" in contracts for consumer financial products. "Consumers should not be asked to sign away their legal rights when they open a bank account or a credit card," said CFPB director Richard Cordray when he announced the proposal. "Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing." That's a point we've been making for more than a year in our short documentary, Lost in the Fine Print.
That conclusion came after a three-year 700 page study -- a study Congress ordered CFPB to undertake. Among the findings:
● Tens of millions of consumers use financial products subject to forced arbitration, and nearly all forced arbitration clauses contain a ban on class actions.
● Very few consumers seek to arbitrate individual disputes for the obvious reason -- the costs outweigh individual rewards.
● In contrast, in just one four-year period, consumers won more than $2 billion in relief when they were able to band together to protect their rights.
● In the relatively rare cases where individuals took disputes to arbitration they won only 9.3 percent of the time.
● In contrast, when businesses took a dispute to arbitration they won ten times more often.
This is an issue that crosses ideological lines. Dean Clancy, the former FreedomWorks vice president who describes himself as "tea party aligned," writes:
Business interests are predictably lobbying to block the rules. Conservatives should take the other side. On this issue, the left is right and the right is wrong -- or rather, the pro-business right is wrong. The pro-market right should join the consumer advocates in opposing pre-dispute mandatory arbitration as a violation of liberty and an infringement of the Seventh Amendment right to a civil jury trial.
Indeed, Clancy sees the issue as a chance for conservatives to join forces with consumer advocates "and steal some of their thunder." While we're not inclined to have our thunder stolen, we're delighted to share it.
There is still a long way to go before consumers regain their right to band together in court when they are wronged by financial services companies. Before enacting a new rule, the CFPB must consider the views of small financial services providers as part of the so-called "SBREFA process," named after the law that requires it: The Small Business Regulatory Enforcement Fairness Act. But these providers should be eager for reform. As the CFPB points out, its proposal levels the playing field, so honest companies are not at a disadvantage compared to those that cheat. And while business-to-business disputes are not covered by the rules, small businesses also have been victims of forced arbitration when they've tried to take on big businesses that have harmed them -- as we illustrate in Lost in the Fine Print.
We commend the CFPB for moving to prohibit class-action bans. But the agency should go further and ban forced arbitration entirely wherever it has the power to do so. And Congress should take the matter further still. Forced arbitration isn't limited to financial services -- companies of all kinds use it to cheat consumers and avoid accountability.
Cell service providers are some of the worst offenders. AT&T forces its wireless customers into individual arbitration, and a recent law review article found that the company faced just 134 individual arbitration claims during a five-year period, even as its customers grew from 85 to 120 million people. Congress should pass the Arbitration Fairness Act which would ban forced arbitration not only in all consumer disputes but also in another area where they are becoming increasingly common - employment contracts.
Forced arbitration has no place in an American judicial system dedicated to equal justice under law.