The Consumer Financial Protection Bureau, consumer advocates and the banking community debated the effectiveness of standard arbitration clauses in financial services contracts Thursday. For example, allegations of wrongful foreclosure may be impacted where there exists an arbitration clause.
The discussion illustrated how deep the divide is between the expectations of consumer rights advocates and the banking community on the issue of how consumer contract disputes should be handled in the future.
The debate occurred in Dallas where CFPB Director Richard Cordray held one of the agency's key field hearings, which are designed to engage consumers on the local level.
Arbitration clauses are standard agreements included in financial services contracts to limit future consumer disputes to arbitration — essentially serving as an out-of-court substitute to a typical legal dispute.
While federal law already expressly prohibits arbitration clauses in most home loan contracts, the CFPB is still interested in learning more about how arbitration clauses are impacting consumers and the financial services industry in other financial agreements. The bureau began studying the issue, prompting consumer advocates and local banking professionals to weigh in at the Dallas field hearing.
"In the second phase of our study, we will seek to obtain a better understanding of what explains the incidence and nature of arbitration claims, including small-dollar claims," Cordray said. "We will look to see what happens to arbitration filings and endeavor to compare what we see happening in arbitration to what we see happening in litigation, including class litigation."
But Shannon Phillips, deputy general counsel for the Independent Bankers Association of Texas, raised concerns that a broader requirement for the use of arbitration agreements would harm smaller banks that are already reeling from excessive regulation.
Phillips says smaller banks have already been ‘caught in the backwash’ of regulations designed to curtail the practices of big banks, and a newfound focus on arbitration clauses would only further frustrate their bottom lines and compliance costs.
“Not having arbitration clauses when they’re needed is going to increase their costs,” he noted.
Other panelists characterized the clauses as absolute bars in obtaining consumer relief.
Ellen Taverna, a senior legislative associate with the National Association of Consumer Advocates, cited the case of an active military member who was wrongfully foreclosed on while overseas as an example of a case where a pre-drafted arbitration clause kept his case out of court.
But Jess Sharp, managing director at the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, said the focus of any study should be on how the different types of dispute resolution stack up against each other. “We need to focus more narrowly on the outputs," he indicated.
Consumers do as well or better in arbitration when comparing their outcomes to the courts, he explained.
Phillips agreed, arguing that arbitration is not the more complex solution. “To say that arbitration is more complicated than litigation means you have never been in litigation,” he noted. As an example, he cited one consumer case that began 10 years ago and remains in litigation today.
Sharp also took aim at class-action disputes, saying "There is very little recovery through class actions; consumers are not really benefitting."
In response, Richard Frankel, an associate law professor at Drexel University School of Law, argued that class actions “are an important means for changing business practices … and that spreads out to the entire community.”
As for how the CFPB intends to use this input, it’s unknown for now. The bureau is in the process of studying arbitration agreements to decide whether it will advise Congress to keep, end or limit arbitration agreements in financial contracts in any way.
The bureau does have the ability to create regulations that either prohibit or impose limitations on agreements if it finds these additions would be in the public’s interest.