Recently, 93 members of Congress (all Democrats) signed a letter in support of the pending Petition for Rulemaking filed by consumer advocacy groups in September that would prohibit pre-dispute consumer arbitration clauses and permit only post-dispute clauses.  The letter argues that the proposed rulemaking is “much-needed” to protect consumers from “forced arbitration clauses in the fine print, take-it-or-leave-it terms accompanying many financial products and services.”

The letter was reported in the legal media under the headline, “Nearly 100 Dems Urge CFPB To Limit Arbitration Clauses.”   The real story here, however, is that the remaining 442 members of Congress (about 83%) did not join in the letter.  That is hardly  surprising.  While the letter touts that “Congress has limited the use of forced arbitration for certain sectors and cases” such as sexual assault and harassment, it neglects to mention that some members of Congress have tried for years—without success—to pass much broader legislation (the “FAIR Act”) that would prohibit pre-dispute consumer arbitration altogether (together with arbitration of employment, antitrust and civil rights disputes).  Elimination of consumer arbitration is what the Petition for Rulemaking also hopes to achieve.  The 93 lawmakers who signed the letter are thus trying to accomplish indirectly—through agency overreach—what they have failed to accomplish legislatively.    

The supermajority of Congressional members who did not sign the letter made the right choice.  As we showed in our own comment letter to the CFPB and related podcast, there are many compelling reasons why the CFPB should deny the Petition for Rulemaking: 

• the proposed rule is prohibited by the Congressional Review Act (CRA) because it is substantially the same as the final arbitration rule promulgated by the CFPB in July 2017, which Congress overrode under the CRA on November 1, 2017;
• any attempt by the CFPB to promulgate a rule under its authority to declare an act or practice as abusive would create a “major questions doctrine” issue;
• petitioners’ argument that rulemaking is necessary because consumers lack informed consent and are forced to arbitrate is based on unacceptable policy positions that create a moral hazard and run counter to bedrock contract principles and the Federal Arbitration Act;
• empirical research studies show that, as a practical matter, post-dispute arbitration would fail to resolve consumers’ disputes because it does not work and is almost never utilized; and
• The proposed elimination of pre-dispute arbitration agreements will harm consumers, businesses, the courts, and the economy.

That final point, in particular, bears particular mention because supporters of the Petition ignore it in their rush to annihilate consumer arbitration.  The CFPB’s 2015 study confirmed that arbitration is a faster, less expensive and far more effective way for consumers to resolve disputes with companies than class action litigation.  It showed that consumers who prevailed in an individual arbitration recovered an average of $5,389.  By contrast, the average class action settlement for consumers who received cash payments was only $32.35, and those consumers often had to wait as long as two years to receive that paltry sum.  Class counsel, however, recovered a staggering $424,495,451 in attorneys’ fees. 

Eliminating pre-dispute arbitration would also inflict serious financial harm on the American federal and state court systems, which are already seriously overburdened, underfunded and bursting at the seams, and on financial services providers.  When it promulgated its earlier arbitration rule, the CFPB estimated that the rule would cause 53,000 providers who presently utilize arbitration agreements to incur between $2.62 billion and $5.23 billion in defending against an additional 6,042 class actions that would be brought within five years after the rule took effect.  That data, compiled in 2017, undoubtedly understates what the current numbers would be some six years later.  No wonder Congress overrode the CFPB’s prior rule.

In their letter, the 93 members of Congress urge the CFPB to “act swiftly to rein in forced arbitration” because consumers lack “awareness and understanding” about their contractual rights.  But the wholesale elimination of consumer arbitration is not the solution.  That would not only deprive consumers of the proven benefits of arbitration, but would do so without educating them about what awaits them in the world of litigation, which can be chock full of delays, hostilities, inefficiencies and unpleasantries.  Rather, as we have argued, the goal should be to educate consumers about the role that arbitration can play in resolving disputes with companies.  The CFPB  has both the money, the resources and the national platform to mount a robust arbitration education program, but it has lacked the will to do so.  It has a Consumer Education and External Affairs division which claims to have reached more than 24 million people during Fiscal Year 2023 and purports to  “offer consumers a variety of information, tools, and programs to assist consumers in understanding and asserting their rights.”  However, the topic of dispute resolution is not included in its agenda.  That needs to be rectified.  Education is something everyone should be able to agree on, and it does much more to foster consumer “awareness and understanding” than partisan letter writing or any regulation the CFPB could promulgate.

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