November 17, 2015

Proposed limits on arbitration fuel latest CFPB controversy

In October, the Consumer Financial Protection Bureau unveiled proposed restrictions on "arbitration clauses" in financial products. The argument goes that legal language prohibiting customers from filing class action claims undermines a key individual right. If the rule goes into effect, it could come close to a ban on arbitration clauses, writes American Banker.

'Beware the Fine Print'
The New York Times recently published three days' of stories on arbitration clauses. The series, called "Beware the Fine Print," begins with the example of a California restaurant owner who joined a class-action suit against American Express. It points to page five of an AMX credit card contract that says the company "may elect to resolve any claim by individual arbitration," effectively preventing participation in class-action suits.

"By inserting individual arbitration clauses into a soaring number of consumer and employment contracts," the Times reporters write, "companies like American Express devised a way to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices."

The CFPB rule would cover a wide range of financial agreements, including car leases, credit cards and debt collection.

'Significant, demonstrable benefits' over litigation
But proponents of the arbitration clauses say that, far from "stacking the deck of justice," as one Times' headline reads, that arbitration benefits consumers and companies, producing superior results than courts do.

Forbes' Daniel Fisher, who covers law and finance, argued that arbitration clauses provide a less-costly alternative to class actions. Fisher aims to prove that the primary beneficiaries of class-action suits are not consumers but rather the lawyers who assemble these types of cases.

"But are we really to believe these plaintiffs sprang up spontaneously and went out and hired lawyers to vindicate their rights? Please," writes Fisher, saying that while many class actions amount to a handful of dollars per plaintiff, they can be quite lucrative to law firms.

A group of banking trade associations including the American Bankers Association conducted a study that, they said, gave evidence that arbitration clauses work well in the marketplace

"The Study clearly illustrates that arbitration has significant, demonstrable benefits over litigation in general and class action litigation in particular," the trade groups wrote in a letter to the CFPB. "It is faster, less expensive, and more effective than class action litigation. Customers who prevail in an individual arbitration recover monetary benefits that, on average, are approximately 166 times greater than the sums received by the average class member in a class action settlement."

Skepticism over the plusses of arbitration
Industry claims that arbitration brings better results for all concerned do not hold up under examination, writes Jeff Sovern, a professor of law at St. John's University, in a column published in American Banker. 

"But if the industry truly believes that arbitration is so much better than litigation at resolving disputes," Sovern wrote, "shouldn't it prefer arbitration to litigation for resolving individual disputes, where there is not a threat of a class action? Or should we be shocked, shocked, to discover the industry's love of arbitration is about barring class actions?"

Political ad campaign attacks CFPB
The controversy over the proposed CFBP rules on arbitration clauses look to be among the reasons for a $500,000 ad campaign recently launched by the American Action Network, a Political Action Committee. The spots depict a Stalinistic CFPB interfering with consumer's rights by denying them credit.

The president of the American Action Network, Mike Shields, told the New York Times that the CFPB's position on arbitration clauses "is a perfect example of how government is taking away the power of individuals and handing it to the trial lawyers."

Loan sale advisory firm Garnet Capital Advisors can help banks navigate the many issues involved as they consider whether to sell or hold given loan portfolios.