Consumer Rights, Consumer Costs, and Justice

The worlds of consumer protection and their powerful antagonists, self-characterized as the financial services industry, are abuzz with the rule proposed yesterday by the Consumer Financial Products Bureau. Read the CFPB press release here. If adopted, the proposed rule would block mandatory pre-dispute arbitration agreements and permit aggrieved consumers to proceed via class action.

As many do not know, virtually every financial contract (e.g., credit card agreements, rent-to-own contracts, payday loan contracts, etc.) into which American consumers enter prohibit the consumer from suing the other party for breach of contract. Instead, consumers who have been injured must proceed to arbitration before an arbitrator chosen by the bank or other sort of lender. The dollar amount of such claims is typically in the hundreds which, when coupled with the expense and low likelihood of success, means that virtually no one even tries. (As many also do not know, most other consumer contracts similarly prohibit litigation as a mean of seeking justice. Read about an example of such a mandatory arbitration agreement in the nursing home industry here.)

Not surprisingly, the sexual financial services industry does not like this. Not one bit. You can read an article expressing their "concerns" in their mouthpiece here. Just as unsurprisingly, the banks' running dogs in Congress are joining the outrage.

Two thoughts. First, routine deprivation of consumers from the system of public justice is simply wrong. Justice is important and a system of justice that is not beholden to one party is a feature of the modern world. (And by "modern" I include the West since the eleventh century. See some of my relevant posts here, here, and here.) Parties should be free to opt out of the public system and arbitration presents one legitimate alternative. Yet opt-out at the will of one party with the power to influence the outcome should not occur before breach in a non-negotiable contract. In other words, non-salient, one-sided terms violate commutative justice.

Second: class actions. Critics of the proposed rule are correct to observe that many--but not all--class action cases redound more to the benefit of the attorneys than the injured parties. A simple solution to this problem would be to provide for an award of reasonable attorneys fees to an individual consumer who prevails in a lawsuit against the financier. The long-standing Magnuson-Moss Warranty Act does so and there's no evidence that it's been abused.

In short, I would take the protestations of concern by the banks and Congressman beholden to them seriously if they showed any evidence that some notion of justice influenced their positions. Until then, I won't.