The Whole Point of the CFPB Was to Level the Financial Playing Field. Why is Congress Focused on Making Sure It Remains Uneven?

By pushing consumers away from the court room and into an arbitration proceeding, the odds are stacked against these individuals as oftentimes arbitration decisions are made by firms hired by the same companies they are making judgments against.

Last week, after years of research to better understand forced arbitration clauses in consumer financial products, the Consumer Financial Protection Bureau (CFPB) released a final rule that would prohibit the use of such clauses in consumer financial products. Although this might sound like a wonky issue, it’s a pretty big deal as forced arbitration, or “rip-off clauses”, are essentially vehicles used by corporations to deny wronged consumers of their fair day in court.  

By pushing consumers away from the court room and into an arbitration proceeding, the odds are stacked against these individuals as oftentimes arbitration decisions are made by firms hired by the same companies they are making judgments against. In essence, the practice allows corporations who have wronged consumers to write the rules that would protect them against being held accountable for their actions—including banning consumers from sharing their stories with the public. Overall, these secretive cases brought forward through the arbitration process end up being ruled in favor of the corporation a staggering 93% of the time.  

If that’s not convincing enough of the importance of this rule, take note that use of forced arbitration—which has been found to act as a wealth transfer from the bottom up— is so wide spread that it is present in a whole range of financial products from bank accounts to private student loans to prepaid cards to payday loans (they can also be found in employment contracts and the terms of shoe inserts—really). When it comes to the ladder two products, research conducted by CFPB found that in some states forced arbitration clauses were respectively included in 92% and 99% of prepaid and payday loan contracts.  

In finalizing its rule to ban forced arbitration clauses, the CFPB once again fulfills another Congressional mandate given to it when it was created seven years ago today. More importantly, through this rule it also continues to level the financial playing field as it restores the right of consumers to a trial by jury (although the CFPB's rule bans arbitration for class-action disputes, it does not ban the practice for individual arbitration disputes). Absent this right, the CFPB found that each year only about 25 consumers filed arbitration claims of $1,000 or less. Compared with class action lawsuits, these figures are barely a noticeable blimp on the radar. Between 2008-2012, class action lawsuits returned $2.2 billion back to 34 million people who had been wronged. That’s after deducting legal fees and court costs. 

Unfortunately, despite the years of effort and consideration the CFPB has given to this issue on behalf of consumers everywhere, yesterday Republican policymakers in both chambers introduced legislation that would block the rule from ever taking effect. Just as bad, because the effort relies on the obscure but powerful Congressional Review Act (CRA), if Congress is successful in striking this rule it would mean that the CFPB could never introduce a rule that is ‘substantially similar’ without first asking for permission from Congress. Beyond the bitter partisanship that surrounds the CFPB and its work, a CRA challenge would effectively mean a total ban on ever regulating this market since ‘substantially similar’ has yet to be defined by Congress or by the courts. Coming on the heels on an unsuccessful CRA challenge to the CFPB’s final prepaid card rule, this challenge against the arbitration rule presents another test case for Republican efforts to undermine the CFPB, which could have implications on the bureau’s upcoming payday lending rule. 

If the purpose of the CFPB is protect consumers and ensure that consumer financial markets are fair, transparent and working for the consumers, instead of against them, why is Congress bent on keeping the playing field uneven? Moreover, why is it focused on tearing down an independent agency that, since it first opened its door six-years ago, has done a tremendous amount to protect consumers beyond just writing and implement new rules such as the arbitration rule.  

In fact, over the past six years the CFPB has secured about $12 billion in relief for 29 million consumers—about one out of every eight adults in the country. That’s more people than live in Texas. But beyond returning about four dollars back into the pockets of consumers for every one dollar it spends, the CFPB has worked to rectify the predatory lending practices that were rampant before the financial crisis, including fair lending abuses. For example, as part of its fair lending work, the CFPB has returned $450 million to nearly 1 million consumers who fell victim to unfair, deceptive and predatory lending practices, such as discriminatorily being denied access to credit or being charged much higher for credit then a comparable peer.  

We applaud the CFPB for its release of its final arbitration rule and for all the work its done since it was created six years ago today. Instead of working to keep the financial playing field uneven, Congress should join us and other consumer advocates in supporting and protecting the work the CFPB has done on behalf consumers and constituents everywhere.

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