by Jeff Sovern
I have a suggestion for the CFPB relating to arbitration. Many readers will know this background, but for those who don't: in 2010, Congress enacted the Dodd-Frank Act, which in section 1028 directed the Consumer Financial Protection Bureau to study arbitration. The statute also authorized the Bureau to regulate consumer financial arbitration "if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers." Any such regulation would also have to be consistent with the Bureau's arbitration study. The Bureau released a massive study of arbitration in 2015. In 2017, the CFPB issued a rule barring the use of class action waivers in arbitration clauses, but Congress and then-president Trump invoked the Congressional Review Act to block the rule from going into effect.
Nevertheless, the CFPB still has room in which to protect consumers from arbitration abuses in the financial arena. The CRA blocks the Bureau from issuing new rules that are "substantially the same" as the regulation that Congress voted down. The Bureau has at least two sources of authority to issue a new arbitration rule. One is the original section 1028 authority, described above. The other is its authority to prohibit abusive practices. As long as any new arbitration rule is sufficiently different from the rule Congress rejected, and either blocks the use of abusive arbitration clauses or is supported by the Bureau's study, in the public interest, and protects consumers, it would be within the Bureau's power.
What might such a rule look like? How about a rule that prevents companies from blocking consumers from suing in court unless consumers specifically opted in to the arbitration clause after a Bureau-mandated disclosure that stated that the terms of the contract would otherwise be the same if the consumer declined to enter into the clause. Something like this:
If you sign below, you agree that if we violate your rights, you may not sue us in court. The Consumer Financial Protection Bureau recommends that you NOT sign below. Signing or not signing below will not have any impact on what you pay for our services or on the services we provide. If you do NOT sign, and we violate your rights, you may still sue us in court or later agree to arbitration.
The opt-out would have to on the first-page of any contract, in big print, and require a separate signature. And it would have to be read out loud to the consumer. As for online contracts, it would have to be similarly prominent. If someone can come up with a suitable emoji, so much the better.
This regulation would be supported by the CFPB study because that study made clear that consumers didn't understand that arbitration clauses prevent consumers from suing in court. A study my co-authors and I conducted also found that consumers didn't realize that. I am not aware of any study that shows that consumers do, in fact, understand arbitration clauses. Consequently, just as with countless other consumer protections, a disclosure would be an appropriate response.
Such a regulation would also be within the Bureau's abusiveness power because section 5531 of the Dodd-Frank Act defines abusive as including a practice which "takes unreasonable advantage of– (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service" and as already noted, consumers are bewildered by these clauses. Because these clauses elude consumer comprehension, and consumers who enter into them are waiving their constitutional rights, such a regulation would protect consumers and be in the public interest. After all, how can it be in the public interest for consumers to waive a constitutional right unknowingly?
No doubt the industry will object to an opt-in provision. But many in the industry use something similar. Many businesses include in their arbitration clauses a provision allowing consumers to opt-out of arbitration, provided they notify the company soon after signing the contract. Sauce for the goose, sauce for the gander. And doesn't it make more sense for the default dispute resolution process to be the one prescribed by the founding fathers in the constitution?
One advantage of opt-in provisions over opt-out provisions is that opt-in provisions give the industry an incentive to explain to consumers why an arbitration clause is preferable while opt-out provisions give the industry an incentive not to say anything about the matter. See Jeff Sovern, Opting In, Opting Out, or No Options at All: The Fight for Control of Personal Information, 74 Washington Law Review 1033 (1999). Watch any congressional arbitration hearing, and you will hear industry witnesses argue that arbitration is better for consumers. An opt-in provision gives them an incentive to make that argument to consumers themselves, and gives consumers an opportunity to decide. In other words, it allows the free-market to operate. The industry may also claim that a contract is itself a form of opt-in, and consequently no other opt-in is necessary. The problem with that argument is, again, that consumers don't realize they are surrendering a constitutional right by, say, getting a credit card. Constitutional rights deserve more protection than a fine-print statement that no one reads and even fewer understand.
This rule would also preserve consumer freedom by allowing consumers to opt in to arbitration, perhaps because they don't trust the government. And those of us who do trust the government could simply decline to sign. As long as enough consumers didn't opt in so that class actions would make economic sense, companies would be deterred from misconduct. They would lose their ability to cheat consumers out of small amounts with no consequences.
It's time for the CFPB to get back to arbitration clauses, either with this or some other way to protect consumers.