Consumers may have a chance in disputes with financial institutions if the CFPB is able to limit forced arbitration. The financial industry loves forced arbitration and for good reason. When a consumer “agrees” to the bank’s required terms of doing business with it, if there are any problems, the consumer is prevented from seeking redress in the courts. Consumers can’t band together in class action lawsuits either, under the terms of these agreements.
An arbitration is essentially a private trial in which one or both of the parties pick an arbitrator, or group of arbitrators, to resolve the dispute. Evidence is presented and arguments are made by both parties, but there are normally far fewer procedures compared to a trial.The newly formed federal Consumer Financial Protection Bureau (CFPB) is expected to propose that the use of mandatory arbitration in consumer financial contracts be limited, according to an article in American Banker written by Georgetown Law School professor Adam Levitin.Professor Levitin argues the question about consumers and forced arbitration boils down to: Is it fair for a business to effectively force its consumers into a dispute resolution system that it choses? His answer is no.
The industry paints the arbitration process as being as good, if not better, than the court system because it’s faster and cheaper. Levitin doesn’t see it that way. He says arbitration provides a fundamentally different and inferior justice compared to the court system. Arbitration decisions are inferior to court rulings because they cannot be appealed to the court system except on very limited grounds resulting in more erroneous outcomes. With the financial firms picking the arbitrators, there are financial incentives to cater to the industry and get repeat business, not necessarily come up with the proper decision.
Consumers suffer from the lack of procedural protections compared to trials in the court system. Arbitration hearings do not use the rules of evidence and procedure, including the ability to obtain information about the other party related to the case. The defendant normally holds most of the evidence and plaintiffs often can’t get it. Binding mandatory arbitration provisions are often written to prevent class action lawsuits and even class arbitrations. Class actions are particularly appropriate in financial cases because many people can be cheated small amounts of money, which add up to huge amounts of money over time considering how many people could be impacted. It makes little sense for a single person to go to arbitration over a $30 charge. It makes much more sense if the millions of customers affected could be considered as a class of plaintiffs.
The arbitration of one case may be less expensive but in the long run, it’s actually much more expensive because an arbitration ruling doesn’t create a legal precedent binding on other parties. A court decision, even one that’s appealed, may be a better deal because it can set rules that parties can rely upon and plan their actions upon. Binding, mandatory arbitration agreements are a bad deal for everyone except the financial industry. If the CFPB can limit their application, it would be a step in the right direction. Only time will tell if they actually do that and the limitations survive the inevitable political push back from the financial industry.