It remains to be seen how much of a kickass sheriff Richard Cordray is going to be, but if he really wants to do some real and immediate good he can start with pulling the reins in tight on the utterly unfair system of arbitration that is used to settle most disputes with large companies these days.
You probably know this, at some level or another, most of the contracts you sign with credit card companies and cell phone providers and just about anyone else that extends you some service on the promise you’ll pay it back don’t have to go to court if you get in a dispute.
Instead you’ll go to mandatory arbitration. Arbitration is a little like going to court, you present your case, the company presents its case and then the arbiter decides. Where it is different from our justice system is significant.
First off, you are bound by the decision. There is no appeal in arbitration. Think of it as every case goes to the Supreme Court.
Next and this is the really troubling part, it is done for profit. Yeah, you can probably see where this is going. The arbitration firms are money making entities and their biggest client is the credit card companies. Now, kiddies, who do you think wins in most of the disputes brought before these supposedly fair arbiters? Got it in one! The credit card companies that spend millions yearly for arbitration!
This is situation just begs to be abused, which is why it is have become the norm in just about any contract, including some employment contracts. Since it is a one shot, win or lose kind of thing it is much less expensive for companies, at the expense of the little guy.
The good news is that the new Consumer Financial Protection Bureau (CFPB) has the power to restrict or end this practice, if it finds that it is in the public interest to do so. Take a look at the relevant section:
(a) STUDY AND REPORT.—The Bureau shall conduct a study of, and shall provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.
(b) FURTHER AUTHORITY.—The Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, 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. The findings in such rule shall be consistent with the study conducted under subsection (a).
Of course they can’t just move in with a machete and start prohibiting this kind of binding agreement based on your desire to have a new cell phone. The CFPB does have to do a study, but that is probably going to pretty quick and damning.
Take the example of the National Arbitration Forum. It was a Minnesota based arbitration firm that handled more than 50,000 arbitration cases a month before the Minnesota AG brought the hammer down on it.
This company was so corrupt it agreed in 2009, to exit the arbitration business rather than face a trial. Think about that for minute, this was a very profitable company but when the state attorney general investigated its practices and went to it with the evidence NAF basically agreed to shut down rather than face a trial.
Some of the corruption involved stemmed form the fact that the company, the largest arbitration company in the nation at that time, was owned by hedge funds that also owned debt collection agencies. These agencies used NAF for their arbitration. That is a nice, tight, little circle of conflict of interest, don’t you think?
Think Progress has a little more on the nature of their abuses:
once ordered a woman to pay a credit card company almost $8,000 because she had the same name as another woman who owed that company money. When a Harvard law professor who used to work part-time as an arbitrator handed down a single decision against a credit card company she was stripped of her caseload by the arbitration firm at the request of the credit card industry.
Now, NAF is gone, but is there anyone out there that really thinks that the abuses went away? I didn’t think it through at the time but it seems to me that the people pulling the strings in the arbitration scam folded NAF not just because they were going to lose in court, but because exposing the scam in public records would make it hard to keep going with other arbiters
I don’t have any evidence of this, but common sense says that most of the people involved in this company found employment in other arbitration companies or founded new ones. This is an excellent strategy because it took a long history of abuse to bring down NAF. If you knew you could keep the golden goose laying egg for another 15 years under a different company name, why not do it?
Hopefully the CFPB will not take too long to look at this area of abuse by the financial services companies. Every single credit card agreement includes you giving up your right to a trial before a judge and requires you to go to arbitration.
Given where their major source of income comes from there can be no presumption of impartiality on the part of arbitration companies. It is unconscionable that doing business with a company requires you to settle any dispute in a court owned by that company.
This is an area that Mr. Cordray should direct the attention of his nascent agency towards with all due speed.
The floor is yours.