What single business practice is so detrimental to the average American that the New York Times recently dedicated a three-part series to an in-depth exploration of its impact? Hint: This same practice prompted leading social justice and consumer advocates to visit the offices of over 50 members of Congress this week alone to encourage them to support common-sense rules surrounding its use.
If you guessed “forced arbitration”, you’re right. Unfortunately, like most Americans you probably haven’t even heard of arbitration, despite the fact that you likely signed a cell phone or credit card contract with a hidden clause that binds you to it. Since the late ‘90s, Consumer Action, where I work, has been fighting this blatant assault on the rights of consumers to secure protections afforded them under law.
Let’s say you find out that your cell phone provider has tacked hundreds of dollars in unfair charges on to your bill. But wait, the carrier has a “ripoff clause” in the fine print of your cell phone contract to stop you from suing it in court and even worse from engaging in class actions (in which consumers join together in a lawsuit). Banks, lenders and other big name companies who use these arbitration clauses get to choose a private arbitration firm to decide the outcome of any dispute that you have with them. This “kangaroo court” (not an impartial judge or jury) often blatantly disregards recognized standards of law or justice. They pick what rules apply to your case and how much this secret process will cost you. Adding insult to injury, the process typically denies you any real opportunity to appeal a bad or unfair decision.
It’s clear that the arbitration system is rigged. A comprehensive 2015 study by the Consumer Financial Protection Bureau (CFPB)—the federal agency created following the 2008 financial crisis—revealed that corporations win 93 percent of all arbitrations cases, which is not surprising as the arbitration firm wants to keep the corporation’s business. And in the exceedingly rare instances where consumers do recover money, it’s a mere 12 cents on each dollar they’ve lost to anti-consumer practices by businesses.
Forcing people into arbitration and banning them from joining class actions shifts the costs of corporate malfeasance onto the backs of consumers. Take Matthew Kilgore, a young man who for years dreamed of becoming a helicopter pilot. Matthew decided to enroll at Silver State Helicopters, a for-profit aviation school that advised him to take out a private student loan from the lender KeyBank. In 2008 his school abruptly went out of business and filed for bankruptcy, leaving him (and many other students) with tens of thousands of dollars in student loans but no marketable skills or diplomas. Since then, Matthew’s loans have nearly doubled to $103,000 with accrued interest. When Matthew and his peers filed a lawsuit against KeyBank, they found that their loan contracts contained a clause prohibiting class actions. Meanwhile, other Silver State students with similar loans from another lender, Student Loan Xpress, Inc. received $150 million in debt relief because their loan agreements did not include an arbitration clause preventing them from joining class actions.
While Matthew’s story is horrifying, there is a silver lining. The CFPB recently proposed a rule to lift class action bans in arbitration contracts and track data on individual arbitration claims. We have urged the CFPB to go farther, and ban the use of binding arbitration clauses by the companies it regulates.
The CFPB proposal, along with another recent U.S. Department of Education action to ban the use of forced arbitration in student borrower defense claims, could make things right in the future for thousands of consumers like Matthew Kilgore.
However, the CFPB is under constant attack by self-serving industries that don’t want to play by the rules. Because of this, we need to urge the Bureau to remain strong in its mission to protect consumers. Meanwhile, we’re grateful to the pro-consumer members of Congress who almost weekly resist blatant attacks on the CFPB, working diligently to block bills and midnight amendments brought by industry-friendly lawmakers that would strip the CFPB of its authority.
Consumers are very close to winning this battle. The CFPB proposal would restore our rights to hold big banks, lenders and other corporations accountable for denying our access to the courts and to justice. But we need to fight for it. Let the CFPB know that we support its efforts to empower consumers. Visit http://www.fairarbitrationnow.org/noripoffclause/ and weigh in now!
Linda Sherry is director of national priorities at Consumer Action, a nonprofit educational and advocacy organization.