AG Coakley Urges Regulation of Mandatory Arbitration Clauses in Contracts for Financial Services
AG Leads Multistate Letter to Consumer Financial Protection Bureau Requesting Restoration of Consumer Protections
BOSTON – Attorney General Martha Coakley is urging the U.S. Consumer Financial Protection Bureau (CFPB) to restore fundamental consumer protections, rights and bargaining power by regulating arbitration clauses in financial products. Leading a group of 16 states, AG Coakley sent a letter regarding the mandatory arbitration clauses that are often inserted by financial institutions into contracts for credit card, payday loan and checking account agreements.
Along with AG Coakley, the letter to CFPB Director Richard Cordray is co-sponsored by Delaware Attorney General Beau Biden and Kentucky Attorney General Jack Conway. The attorneys general, as chief consumer protectors of their state, are seeking to protect consumers’ fundamental rights to assert their claims in court. The letter comes as the CFPB concludes a two-year study into the use of pre-dispute arbitration clauses in contracts for financial products and services.
“Over the past decade, judicial decisions and business practices have diminished consumers’ rights and bargaining power with respect to contracts for financial services,” the letter states. In light of these developments, the attorneys general urge the CFPB to exercise its authority to adopt rules concerning the use of these clauses in certain contracts to protect the public interest.
The language in these arbitration clauses either has the effect of prohibiting the consumer from pursuing a claim against the financial institution in court, or makes it prohibitively expensive to do so by restricting the consumers’ ability to proceed as a class-action lawsuit. Also, unlike court proceedings, arbitration matters are usually decided privately and the decisions are not publicized.
As these clauses have become a standard fixture in commercial and business contracts with consumers, the Supreme Court has upheld the validity of these clauses against judicial challenges. The letter urges the CFPB to exercise its specific statutory authority to regulate the financial industry’s use of such mandatory arbitration clauses in consumer agreements.
The Federal Arbitration Act (FAA) was intended to facilitate the settlement of disputes between commercial entities. In recent years, however, companies now routinely impose mandatory arbitration in a wide range of consumer contracts. Financial institutions tuck the arbitration into the fine print of contracts, and often make it mandatory that consumers agree to submit to the arbitration process before opening a checking account or issuing a credit card. Consumers often are not aware of what they are agreeing to in these contracts, and have no real way to negotiate or otherwise insist on protecting their rights.
“Mandatory pre-dispute arbitration is procedurally unfair to consumers, and jeopardizes one of the fundamental rights of Americans; the right to be heard and seek judicial redress for our claims,” the attorneys general wrote. “These contractual requirements are neither voluntary nor readily understandable for most consumers. Often consumers do not recognize the significance of these provisions, if they are aware of them at all.”
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires the CFPB to conduct extensive research before determining whether mandatory arbitration clauses are harmful to consumers before issuing any regulations.
In June 2012, AG Coakley’s Office sent comments to the CFPB in response to its request for information regarding the scope of its study into these pre-dispute arbitration agreements. As the CFPB concludes its study, AG Coakley has determined that specific rulemaking or legislation, when it comes to financial services, is essential in restoring important consumer protections.
Other states participating in today’s letter include California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, New Mexico, New York, Oregon, Rhode Island, Vermont, and Washington.