After the Equifax debacle and the Wells Fargo scandal, Republican Senators were still able to scrape by last week, voting to repeal the contentious arbitration rule, recently introduced by the Consumer Financial Protection Bureau (CFPB). Vice President Mike Pence was brought to Capitol Hill to cast the tie-breaking vote, making for a 51-50 victory for Wall Street financial institutions and their political counterparts.
The rule effectively prohibited the inclusion of pre-dispute arbitration clauses in consumer contracts drawn up by companies selling financial products. Arbitration clauses, which are increasingly used in most consumer contracts, prevent customers from filing class action suits and require all disputes to be settled in a private “black box” arbitration.
Trump signed the resolution last Wednesday, striking down the CFPB rule once and for all. Since the rule was rescinded via the Congressional Review Act (CRA), there can be no substantially similar regulations written in the future. CFPB Director Richard Cordray expressed dismay over the CRA resolution: “This vote means the courtroom doors will remain closed for groups of people seeking justice and relief when they are wronged by a company.”
The vote comes after a drawn-out debate on the topic – at least since the CFPB launched an inquiry in 2012 regarding the effects of arbitration agreements. That debate extended all the way up to the recent vote. Acting Comptroller of the Currency Keith Noreika attacked the CFPB Rule in a recent opinion piece in The Hill, attempting to shift the focus from major financial companies to small banks who would purportedly suffer without mandatory arbitration agreements: “Small bankers, already struggling to compete with big banks and nonbank financial service providers, tell me that the cost of defending specious legal claims and the increased risk of such legal battles could threaten their very existence.”
But Cordray, in a follow-up piece, countered those claims, saying, “Over 90 percent of the community banks and credit unions we studied do not even have these clauses in their checking account contracts.” Instead, he argued, these typed of banks focus on “relationship banking” and “customer service.”
And, in an appeal to common sense, Cordray asked, “Why should Equifax be able to force people to surrender their legal rights when the company put their personal information at risk?”
To answer that question, proponents of arbitration agreements argue that class action suits ultimately provide streams of money to plaintiff attorneys, while doing very little for consumers. But arbitration agreements, which have been entrenched since a 2011 Supreme Court decision, do very little for consumers, providing a mere 7 percent win rate. And according to data from the American Arbitration Association, in 1,060 cases filed in 2010 and 2011, consumers received $400,000, a paltry sum compared to the $2.8 million granted to corporations. Additionally, those in favor of these types of agreements say nothing about the systematic changes often imposed by class action suits – changes that, according to the CFPB, prevent further harm and thus provide value to consumers.
Effects on the Common Person
The damaging effects of arbitration agreements are thoroughly illustrated in an NYT report, published in 2015. That report tells the story of Matthew Kilgore, a California resident who decided to actualize his dream of becoming a helicopter pilot by taking out a $55,000 loan from a company called Key Bank. Prior to completing his training, Kilgore was informed that the school had gone bankrupt and would no longer be offering its services. He and many other students filed class action lawsuits against Key Bank and Student Loan Xpress after the companies demanded repayment. Student Loan Xpress, lacking arbitration clauses, were forced to acquiesce to the suit, forgiving nearly $100 million in loans. By contrast, Key Bank was armed with arbitration agreements and was able to refuse the class action suit altogether. Kilgore’s debt skyrocketed as interest accrued. By 2015, he owed $110,000. With insurmountable debt, Kilgore’s credit score plummeted, causing all kinds of fiscal hardship.
That is just one example, but it helps illustrate that arbitration agreements serve corporate interests; any assertion to the contrary should be regarded with extreme suspicion.