CFPB moving in the right direction
March 13, 2015  //  By:   //  Op-Ed  //  No Comment

by the editorial staff

The Consumer Financial Protection Bureau took a giant step forward this week when their long-awaited study on mandatory arbitration was released. It’s a giant step forward because, while truthful and compelling, it’s sure to rock the financial world.

Of course, the banks and other financial institutions love mandatory arbitration and why wouldn’t they? According to the 700-plus page report issued by the CFPB banks and credit card companies win a majority of cases.

The study found that of the 1,060 arbitration cases filed with the American Arbitration Association in 2010 and 2011, consumers received less than $400,000 in relief and debt forbearance, compared to the $2.8 million companies received.

In other words, the consumer’s odds at winning an arbitration hearing are pretty slim and the consumer might have better luck winning the lottery.

Arbitration clauses are often buried in the fine print, the part of contracts that few read, or can’t read without a magnifying glass. As the CFPB pointed out, few of those surveyed were aware of the arbitration clauses and most didn’t understand what was meant by “mandatory arbitration.”

What’s worse is that often those clauses say that should the company win the arbitration, they are entitled to legal costs. That means should the consumer lose, they can be stuck with a pretty hefty bill.

We pointed that out in our story about a California resident who lost an arbitration case against Palms Place, LLC. Not only did the consumer lose the case–he was ordered to pay Palms Place, LLC over $90,000 in legal fees. Not too many consumers enter arbitration and expect the outcome to cost them tens of thousands of dollars. Sadly, because many don’t read arbitration clauses, they aren’t aware that a loss can bankrupt them.

It only stands to reason that arbitration organizations, such as the American Arbitration Association, probably aren’t feeling all warm and fuzzy about the CFPB report. Less arbitrations could mean AAA won’t be able to afford President and CEO India Johnson’s $644,215 salary and compensation package that could be even higher now as the figures are from AAA’s 2013 IRS form 990.  And with nine employees making in the quarter-million dollar range, far less arbitrations could put a roadblock in the gravy train.

The report was ordered under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which banned arbitration clauses from being added to most residential mortgages. If the CFPB does what’s right, the clauses will be banned from other consumer contracts as well.

Image: Flickr/Ester S

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