Here's the text of CFPB Director Richard Cordray's remarks on the arbitration report, to be delivered at today's field hearing in Newark. He summarizes the legal backdrop to the Bureau's report, its empirical approach, and its key findings (which I've highlighted in bold). Well worth reading in full.
Prepared Remarks of Richard Cordray
Director of the Consumer Financial Protection Bureau
Field Hearing on Arbitration, Newark, New Jersey, March 10, 2015
Thank you for joining us for this field hearing of the Consumer Financial Protection Bureau. We are here in Newark today to discuss the subject of arbitration. At its most basic level, arbitration is a way to resolve disputes outside of the court system. Parties can agree in their contract that if a dispute arises between them at a later time, rather than take it before a judge and perhaps a jury as part of a public judicial process, they will be required to turn instead to a non-governmental third party, known as an arbitrator, to resolve the dispute in private. These contractual provisions are referred to as “pre-dispute arbitration clauses.”
Arbitration clauses were rarely seen in consumer financial contracts until the last twenty years or so. Arbitration is often described by its supporters as a “better alternative” to the court system – more convenient, more efficient, and a faster, lower-cost way of resolving disputes. Opponents argue that arbitration clauses deprive consumers of certain legal protections available in court, may not provide a neutral or fair process, and may in fact serve to quash disputes rather than provide an alternative way to resolve them.
Long ago, prior to the Great Depression, Congress provided a general framework that located the role of arbitration in federal law. Court decisions over the years refined the relationship between private arbitration and formal judicial proceedings under a number of federal business statutes, including the antitrust laws and the securities laws as well as under the labor laws. More recently, however, Congress has taken an increased interest in arbitration clauses in consumer financial contracts. In 2007, Congress passed the Military Lending Act, which prohibited such clauses in connection with certain loans made to servicemembers. That was the first occasion on which Congress expressed explicit concern about the effect such clauses may have on the welfare of individual consumers in the financial marketplace.
In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress went further and prohibited the inclusion of arbitration clauses in most residential mortgage contracts. Another measure in that same law is of special interest because it leads directly to our discussion today. In section 1028 of the Dodd-Frank Act, Congress directed the Consumer Bureau to conduct a study and provide a report to Congress on the use of pre-dispute arbitration clauses in consumer financial contracts. Further, Congress provided that “[t]he Bureau, by regulation, may prohibit or impose conditions or limitations on the use of” such arbitration clauses in consumer financial contracts if the Bureau finds that such measure “is in the public interest and for the protection of consumers,” and findings in such a rule are “consistent with the study” performed by the Bureau.
We have set about this mandatory task to study the use of arbitration clauses with conscious care. We began our study almost three years ago, when we issued a Request for Information seeking public input on the appropriate scope, methods, and data sources for this work. We received dozens of written comments in response and held a series of stakeholder meetings to gather more informal input. In December 2013, we released preliminary results from our study. We wanted to provide a progress report to the public on our work, while also eliciting further comments on the work plan that we had developed. In those results, we found that arbitration clauses are commonly used by large banks in credit card and checking account agreements. We also found that these clauses can be used to prevent any litigation, including class litigation, from moving forward. In addition, we observed that roughly nine out of ten such clauses barred arbitrations on behalf of a class of consumers.