New Mandatory Arbitration Guidelines?

New Mandatory Arbitration Guidelines?

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For decades, companies have worked double time to keep consumers from suing and instead, entering into arbitration.

In some ways, it’s worked since consumers often can’t enter into a contract – be it a mortgage, credit card or new car – until and unless they agree to enter arbitration if disagreements occur. Now, though, regulators are getting in on the deal – and it looks like the tide might finally turn.

At least two agencies, the new Consumer Financial Protection Bureau (CFPB), along with the Securities and Exchange Commission (SEC) are strongly considering whether to take steps to limit or even outright ban so-called mandatory arbitration clauses from financial contracts with consumers. And consumers are rejoicing.

Shifted Action

Deepak Gupta, a one time government attorney, said,

The action on mandatory arbitration has shifted to the agencies.

What’s interesting is Gupta argued for arbitration in several Supreme Court cases. Now, though he’s shifted his position. What’s needed, said Alan Kaplinsky head of the consumer finance practice at Ballard Spahr LLC, is a “regulatory rollback of mandatory arbitration”.

It has the potential to impose new litigation risks and costs on providers of checking accounts, credit cards and even payday loans. These clauses are also found in various contracts for apartments, cell phones and some rental equipment. Gupta agrees with Kaplinsky. Both say the clauses are anything but beneficial to consumers and are “utterly ubiquitous in financial services.”

The SEC forced the Carlyle Group to remove a clause found in its proposed public offering documents that require new shareholders to agree to arbitration in the event of a disagreement or other legal disputes. This showed up earlier this year. Before long, a study was set into motion with the goal of determining if arbitration does more damage than any good.

The Consumer Financial Protection Bureau was founded as a result of the new credit card and financial regulations over the past few years.

So why did companies begin insisting on arbitration to start with? It has a lot to do with offsetting the number of class action lawsuits that are expensive for everyone and are usually only beneficial to the law firms handling the lawsuits. Consumer groups charge it limits redress, especially in cases where the individual damage is small but the collective cost is large.

Elizabeth Warren, the Obama adviser who set up the consumer bureau, has always felt that mandatory arbitration should be banned. She strongly supports eradicating the mandatory arbitration clauses.

One more recent class-action lawsuit involved Wells Fargo Bank and the way it assessed its overdraft fees on checking accounts. The judge ordered the bank to pay more than $200 million to customers who paid significantly higher fees due to how the bank posted transactions to checking accounts.

For instance, if there was $500 available in a checking account with three checks that totaled $400 and one check that totaled $118, the one big check would be cleared and the three smaller checks would be assessed NSF fees. The banks weren’t allowing the smaller checks to clear because one check with an NSF charge isn’t as profitable as three smaller checks that didn’t clear as a result of the larger check.

In a report published in April 2011, the Pew Charitable Trusts found that 94 percent of checking accounts at the 10 largest U.S. banks include a clause waiving the right to bring a class-action suit. Also, 71 percent explicitly require arbitration in case of disputes, according to Pew.

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