Mandatory Arbitration in Consumer Finance and Investor Contracts

25 Pages Posted: 14 Oct 2015

See all articles by Michael S. Barr

Michael S. Barr

University of Michigan Law School; University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; University of Michigan, Center on Finance, Law, and Policy

Date Written: October 2015

Abstract

Mandatory pre-dispute arbitration clauses are pervasive in consumer financial and investor contracts — for credit cards, bank accounts, auto loans, broker-dealer services, and many others. These clauses often ill serve households. Consumers are typically presented with contracts on a “take it or leave it” basis, with no ability to negotiate over terms. Arbitration provisions are often not clearly disclosed, and in any event are not salient for consumers, who do not focus on the importance of the provision in the event that a dispute over the contract later arises, and who may misforecast the likelihood of being in such a dispute. The lack of salience means that there is no meaningful competition over arbitration provisions or likely any price effect. Some arbitration proceedings lack procedural protections, and unbiased arbitrator selection essential for fair outcomes. In addition, many arbitration provisions contain “gag” rules barring disclosure of reasoning, evidence, or outcomes. Moreover, arbitration clauses typically preclude consumers from banding together in aggregated actions, which diminishes redress and weakens deterrence. In the wake of the financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the new Consumer Financial Protection Bureau and the U.S. Securities and Exchange Commission to prohibit or condition the use of arbitration clauses in consumer finance and investment contracts, respectively. It is well past time for these agencies to use this authority.

Keywords: arbitration clause, consumer finance, investor contracts, labor agreement

JEL Classification: K20

Suggested Citation

Barr, Michael S., Mandatory Arbitration in Consumer Finance and Investor Contracts (October 2015). New York University Journal of Law and Business, Vol. 11, No. 4, 2015, Available at SSRN: https://ssrn.com/abstract=2673012

Michael S. Barr (Contact Author)

University of Michigan Law School ( email )

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University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

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University of Michigan, Center on Finance, Law, and Policy ( email )

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Ann Arbor, MI 48109
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