A new bill introduced by Sen. Sherrod Brown, chairman of the U.S. Senate Banking, Housing and Urban Affairs Committee, would prohibit big banks like Wells Fargo and other financial institutions from using forced arbitration clauses against consumers who want to seek restitution.
The “Arbitration Fairness for Consumers Act,” which has 21 co-sponsors, would ban pre-dispute arbitration agreements and class-action waivers in contracts for consumer financial products or services. Under the bill, such agreements would become invalid and unenforceable.
“I’m not saying ban arbitration, I’m saying ban forced arbitration,” said, Brown said at the hearing. The veteran lawmaker, an Ohio Democrat, also said that arbitration is costly and that consumers rarely prevail.
Almost all banks require customers to sign arbitration clauses prohibiting them from seeking a jury trial or joining class-action lawsuits. Instead, investors are required to use an arbitration forum to settle disputes.
“If Wells Fargo hadn’t snuck forced arbitration clauses into its contracts, maybe regulators and law enforcement officials could have discovered the bank’s illegal account-opening practices earlier, saving consumers thousands of dollars and massive headaches,” Brown said.
Financial companies often use arbitration clauses to avoid a trial by jury or prevent consumers from joining a class-action lawsuit. The contracts require that customers must settle disputes using arbitration rather than seeking a court trial or joining a class-action lawsuit. Brown said the proceedings can be inconvenient and costly and that consumers rarely prevail. He also stated that the clauses are typically buried in lengthy and dense agreements and are typically non-negotiable.
According to a report by the Economic Policy Institute cited by Brown, when corporations take consumers to arbitration, companies win 93% of time. When it’s consumers taking companies to arbitration, the consumers win only 9% of the time.
Some lawmakers argue, however, that arbitration has its advantages. One of them is Sen. Patrick J. Toomey, a Pennsylvania Republican and ranking member of the Banking, Housing, and Urban Affairs Committee. At the hearing on the legislation, he called arbitration “a fair, cost-effective process for resolving disputes outside of court, which generally leads to better outcomes for consumers than litigation.”
Protecting consumers “doesn’t require the government to stop adults from entering into agreements and undermine their freedom of contract. Nor does it require the government to micromanage the terms of contracts,” Toomey said.
Paul Bland, executive director of Public Justice, a nonprofit that fights forced arbitration clauses in court, said in testimony yesterday that arbitration “is a secretive, shadowy process that provides none of the openness of the public court system.”