Jace FerraezMandatory arbitration provisions are once again at the forefront of policy discourse on Capitol Hill as government agency heads and members of Congress grapple with how to best balance the interests of both companies and consumers. But there doesn’t seem to be much hope for one side of the debate, as Congress is set to overturn a rule issued by the Consumer Financial Protection Bureau (CFPB) in July of this year. The arbitration rule restricts certain companies’ ability to include arbitration clauses in contracts for things like bank accounts, credit cards, and payday loans. Despite the likelihood of Congress overturning the rule, CFPB Director Richard Cordray recently published an op-ed piece in the New York Times attempting to clarify the necessity for the rule.

Specifically, Cordray cites arbitration clauses in ordinary consumer contracts that make it very difficult, if not impossible, to take a company to court if they end up on the short end of the stick. To follow up on that point, my colleague, Ron Syktus, has written several articles concerning the need for consumers to be weary of arbitration clauses and arbitration as an alternative to resolving disputes outside of court. You can find those articles here:

For the sake of this article, let’s go through a couple of the arguments against the arbitration rule and how Cordray refutes those arguments.

Do Trial Lawyers Benefit More Than Consumers?

According to some Congressional members, the CFPB’s arbitration rule allows trial attorneys to force consumers into class action lawsuits. Cordray disagrees, citing that fact that under the rule, while arbitration may be used as an option to resolve contractual disputes, companies cannot block class action lawsuits altogether. Further, studies have shown that attorneys, who represent consumers that have been wronged by companies, only receive a small portion of the fee. And that is only when the consumer is successful.

Are Individual Lawsuits Better Than Group Lawsuits?

Opponents of the arbitration rule cite to studies that find that arbitration is a relatively fair means to resolve disputes outside of the formal litigation process. In other words, consumers would be better off if they chose to act individually, rather than in a large group. Cordray responds by citing statistics in CFPB’s study that show group lawsuits give more money to consumers per year. Over a five-year period, 6.8 million consumers involved in class actions were paid an average of $220 million. Compared with arbitration cases, 16 consumers received less than $100,000. Cordray does acknowledge that payouts are higher in individual suits, but that is because the very few times consumers do go through arbitration, more money is at stake.

Despite the back and forth on this particular arbitration rule, we as consumers should be mindful when signing contracts that contain binding arbitration clauses, which limit our options. And while the focus of any regulation should be to balance the interests of consumers and companies, if a company commits a wrongdoing, consumers should have all options at their disposal to seek justice, whether by means of formal litigation or alternative dispute resolution tools like arbitration.

Jace Ferraez
Written by Jace Ferraez

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