Arbitration Contracts and a Different Problem of Bargaining Power

Joe Nocera has a column in the New York Times about the fight to nominate, or for that matter confirm, Elizabeth Warren, or for that matter anyone, to head the new Consumer Financial Protection Bureau, created by last year’s historic Wall Street reform legislation. Senate Minority Leader Mitch McConnell has preemptively threatened to filibuster Warren if she’s nominated by President Obama, and gone further by insisting that significant changes be made to the agency’s structure and powers before any nomination happens. House Oversight and Government Reform Committee Chairman Darrell Issa has poured fuel on the fire with his “round[s] of browbeating” in that committee, subjecting Warren to accusation and embarrassment over what has actually been a quite successful tenure as advisor to the nascent CFPB.

But this story is about more than Capitol Hill power-politicking. Elizabeth Warren and President Obama aren’t even the real victims here. The CFPB was tasked by the Dodd-Frank bill with conducting a study on forced arbitration clauses (“arbitration of any future dispute,” in the statutory language) in consumer financial products and services. Once that study is complete, the agency will have the power to enact regulations consistent with its results. Those results probably won't look good for the financial industry.

Millions of Americans are already subject to forced arbitration contracts, and every day thousands more unwittingly sign, click, or become unilaterally subject to new fine-print terms. The Supreme Court’s decision in AT&T Mobility v. Concepcion will likely increase the pace at which corporations add binding arbitration clauses to their consumer contracts. The CFPB can stop or limit the practice, but only after its study is complete, and only after writing and issuing a regulation. Even then, the Dodd Frank Act builds in a 180 day waiting period after the regulation takes effect (which in itself can be delayed by the administrative process), and only after that will new arbitration contracts be regulated.

Every day that the White House and Senate are delayed from confirming a director to the CFPB pushes back the time when this badly-needed change will come to the financial industry. And that day is already going to be six months too late for many.