A critical step in the CFPB’s march to restore consumers’ rights

On Wednesday, the Consumer Financial Protection Bureau (CFPB) will hold a field hearing in Denver. The hearing will feature remarks from CFPB Director Richard Cordray and focus on an incredibly pernicious consumer problem (albeit a less well-known one): forced arbitration clauses. These dangerous clauses are buried in the fine print of contracts and take away our right to go to court if harmed by corporate bad actors.

The hearing will help drive home the point that lenders use forced arbitration clauses to make it significantly more difficult for consumers who have been the victims of illegal conduct to get any relief.

{mosads}Even worse than the substance of these clauses, consumers who are subject to them usually don’t know that they have given up their rights. According to the CFPB’s landmark study on the topic, only 7 percent understand that these clauses prohibit them from going to court.

At the field hearing, the agency likely will announce the first official step of the agency’s pursuit of rule-making on this topic — and for consumers, it couldn’t be needed more. The Dodd-Frank Wall Street Reform and Consumer Protection Act gave the CFPB the authority to create a regulation to protect consumers from forced arbitration clauses in contracts for such products as car loans, checking accounts, payday loans and credit cards, and the results of the agency’s study show the wisdom of the statute.

The study found that tens of millions of consumers are restricted by arbitration clauses. And although the CFPB’s study (as makes sense) examined only consumer financial contracts, the problem is actually far more pervasive. Consumers encounter these clauses whether signing a contract of employment, buying a cell phone or receiving a loan for a new car — and the take-it-or-leave-it terms give them no choice but to sign away their rights.

Because the private system of forced arbitration benefits companies and puts consumers and employees at a disadvantage, more and more industries are using forced arbitration clauses to evade accountability. In an arbitration proceeding, there is no publicly accountable judge or jury, and there is no right to an appeal. The arbitrators do not have to follow the facts or the law, and there is no public review of decisions to ensure the arbitrators got it right.

The CFPB study highlighted that forced arbitration clauses are becoming standard business practice for corporations. In fact, the study confirms that the main impact of forced arbitration is to stop most injured consumers from getting any relief at all. For example, the CFPB looked at arbitration clauses in private student loans and found that 86 percent of the largest lenders include in their contracts arbitration clauses that prevent students from seeking recourse in court. The study also found that among mobile wireless providers who authorize third parties to charge consumers for services, 88 percent of the largest carriers include arbitration clauses. Those providers cover over 99 percent of the market.

Still worse, companies often use the nefarious combination of forced arbitration clauses and class action bans to eliminate the ability of consumers to band together against corporate bad actors, which in many circumstances is their only means to vindicate their rights. Class actions can provide real and meaningful benefit to harmed consumers and can prod companies to reform unsavory business practices.

The great news from this week’s field hearing is that the CFPB and Director Richard Cordray are taking this consumer problem head-on, and are moving toward creating rules to protect the public. The final rule should ban both forced arbitration clauses and limits on class actions in contracts for financial products and services. Creating a strong rule fits perfectly with the mandate of the agency to protect consumers from secretive corporate driven practices.

Gilbert is director of Public Citizen’s Congress Watch division and manager of the Bright Lines Project.