Menendez Wants Action to Protect Consumers’ Rights in Disputes with Financial Services Providers

U.S. Senator Robert Menendez, member of the Senate Banking Committee, today urged the nation’s top consumer agency to protect consumers’ right to seek legal relief in disputes with financial services companies.  Joining a letter from more than 50 members of Congress, Menendez called on the Consumer Financial Protection Bureau (CFPB) to eliminate the use of mandatory arbitration clauses that are often buried in the fine print of checking accounts, private student loans, credit cards, and other contracts. These clauses prevent consumers from taking companies to court or participating in class action lawsuits when a dispute arises.

“No consumer should unwittingly be denied their right to seek redress against a financial institution because of a mandatory arbitration clause buried in the fine print of a contract,” said Sen. Menendez, who has been a champion of consumer financial protection.  “It’s time to end this practice and put the financial interests of consumers first.”

In March, the CFPB issued a study that found that the rights of consumers nationwide are being limited by mandatory arbitration in the financial services industry.  A full 92% of the prepaid cards obtained by the CFPB were subject to arbitration, along with 53% of the market share of credit card issuers, for example.  Meanwhile, three quarters of consumers surveyed didn’t know whether any contracts they signed had an arbitration clause, and only 7% understood that they could not sue their credit card issuer if their contract does include such a clause.  The study also found that there is no evidence that companies that use mandatory arbitration agreements – and therefore avoid some litigation costs – lower prices or increase access to credit for consumers as a result. A fact sheet of the report can be found here.

Menendez, author of the Prepaid Card Consumer Protection Act, is a longtime proponent of reining in harmful and hidden fees and strengthening financial protections for consumers who use prepaid cards. He is also a cosponsor of the Arbitration Fairness Act, which would protect consumers from forced arbitration agreements in employment, consumer, antitrust, or civil rights disputes.

The full text of the letter can be found here and below:

May 21, 2015

The Honorable Richard Cordray
Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20552

Dear Director Cordray:

We write to commend the Consumer Financial Protection Bureau (CFPB) for completing its study on the use of mandatory, pre-dispute arbitration (“forced arbitration”) in consumer financial products or services contracts, and to urge the CFPB swiftly to undertake a rulemaking to eliminate the use of forced arbitration clauses in these contracts.

These clauses force individuals into private binding arbitration as a condition of buying a product or service, and are designed to stack the deck against consumers and ensure that the final outcome of forced arbitration is unreviewable by courts. Forced arbitration clauses—often buried deep within the fine print of financial products and service contracts—harm American consumers by depriving them of their day in court even when companies have violated the law.

Recognizing the potential harm to the rights of consumers, workers, and small business owners, Congress has taken several actions to limit the harmful effects of forced arbitration agreements.  To date, Congress has passed a series of laws to limit the abusive use of forced arbitration clauses in mortgage loans, transactions involving auto dealers and automobile and truck manufacturers; livestock and poultry growers; military members with respect to payday loans, vehicle title loans, and tax refund anticipation loans; employees of government defense contractors with respect to Title VII and sexual assault tort claims, and whistleblower claims under the Sarbanes-Oxley Act of 2002. Congress directed the CFPB in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to study forced arbitration clauses and gave the CFPB express authority to issue regulations to prohibit or limit these clauses in consumer financial contracts.

The CFPB’s comprehensive report underscores the devastating effects of forced arbitration on tens of millions of consumers. The study found not only that more than three in four consumers were unaware of forced arbitration clauses in their contracts, but also that consumers rarely use arbitration on an individualized basis, especially for small-dollar claims, and that there is no evidence that forced arbitration lowers costs for consumers. The findings also demonstrate that forced arbitration clauses often prevent consumers from banding together through class actions, even though it is clear from the study that collective action more effectively compensates individuals and deters abusive corporate practices than arbitration on an individual basis. Indeed, while class actions resulted in over $200 million in average yearly settlements for consumers, disputes settled through arbitration netted just over $350,000 in damages and debt forbearance for consumers over a two-year period.

In total, the study conducted by CFPB at Congress’s request roundly confirms that individuals unknowingly sign away their rights through forced arbitration agreements, which do not reduce consumer costs for financial services.  Moreover, forced arbitration shields corporations from liability for abusive, anti-consumer practices, encouraging even more unscrupulous business conduct at the expense of individuals and law abiding businesses.

Based on this substantial bedrock of evidence, we urge the CFPB to move forward quickly to use its authority under the Dodd-Frank Act to issue strong rules to prohibit the use of forced arbitration clauses in financial contracts and give consumers a meaningful choice after disputes arise.