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Spangenberg, Shibley & Liber, LLP | Apr 16, 2015

Mandatory Arbitration: A Bad Deal For Consumers

You may have experienced this first hand: you make a major consumer purchase and the paperwork that you have to sign has a “mandatory arbitration” clause, or perhaps it requires that you waive your right to participate in a class action lawsuit in the future.

The Federal Consumer Financial Protection Bureau (“CFPB”) just released a study last month that confirmed a simple fact that attorneys who represent individuals in class action lawsuits have known for years: those mandatory arbitration clauses and class action waivers provide no benefit to consumers and instead, serve only to protect the banks and other companies that frequently use them.

In the most thorough research study ever done on the issue, the CFPB examined how consumers sought (and obtained) relief for what they viewed as unlawful or unfair consumer practices by consumer finance companies - such as banks, mortgage servicers, and credit card companies.

· Only 600 consumers per year sought relief from financial services providers through arbitration and only 1,200 sought relief by filing a case in federal court.

· Those arbitrations resulted in under $400,000 total being returned to customers. The federal court cases were similarly unsuccessful or resulted in small recoveries.

· On the other hand, roughly 32 million consumers per year obtained relief from financial services providers through class action litigation.

· These class action cases – even once attorney’s fees and litigation expenses are accounted for – returned over $220 million dollars to American consumers.

Looking at the numbers, it is obvious why banks like mandatory arbitration and dislike class actions lawsuit. When it comes to obtaining legal relief for consumers, class action lawsuits work. Arbitration serves only to benefit the banks and deny Plaintiffs their right to go to court.

The hope, on the tails of this report, is that the CFPB will seek to ban class action waivers and mandatory arbitration clauses in consumer finance agreements.

The Chamber of Commerce has already made clear that it will oppose any such ban…probably by filing a lawsuit.