The Consumer Protection Financial Bureau has been on a roll in the last
year trying to pass new rules to protect consumers. A rule they proposed
recently, if passed, would stop credit card companies, banks, payday lenders
and student loan companies among others from including mandatory arbitration
provisions in their contracts. What is a mandatory arbitration provision
and why does that matter? A mandatory arbitration provision is a portion
of a contract which provides that instead of suing the other party to
the contract if they break it, the parties will instead go to legally
binding arbitration. There is nothing inherently unfair with arbitration
however the process is expensive, complicated and tends to favor large
companies as a result. Arbitrators are usually retired judges or older
attorneys and the process can be quicker and cheaper for businesses than
going to court but can pose a serious problem for consumers.
Suppose a person signs a contract to open a bank account and the contract
contains a mandatory arbitration provision. Suppose also that the bank
charges every person who opened an account who signed that contractor
a $3.00 fee which they are not authorized by the contract. The consumer
can’t sue the company to resolve the issue, they have to take it
to arbitration if there is a mandatory arbitration clause in their contract.
These clauses generally provide that the winning side does not get any
of the money they spent bringing the dispute to arbitration. This means
that for a consumer to win over the $3.00 issue they may have to spend
hundreds or even thousands of dollars to get their money back. Since none
of the consumers can sue and it is never worthwhile to bring the matter
to arbitration, this incentivizes companies to take a little bit from
every consumer. This also makes class action cases impossible, an important
tool for stopping companies who try to rip off many members of the public
for just a little bit each.
This problem has been plaguing consumers for years. However if the new
CFPB rule is passed this may become a thing of the past. Without mandatory
arbitration clauses a consumer could potentially sue a company who is
ripping them off for a small amount and potentially recover their attorney
fees. The rule has not been passed yet and it can be a slow process but
we can hope for the best and hope that mandatory arbitration provisions
become a thing of the past.
This document has been provided for informational purposes only and is
not intended and should not be construed to constitute legal advice. Please
consult your attorney in connection with any legal issues related to the
matters discussed in this article as the applicability of state, local
and federal laws may vary.