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Terrible North Carolina Supreme Court Decision Underscores Need For CFPB Action On Forced Arbitration

Terrible North Carolina Supreme Court Decision Underscores Need For CFPB Action On Forced Arbitration

photo credit: afagen via photopin cc

By Paul Bland
Executive Director

Yesterday, Public Justice responded to a request from the Consumer Financial Protection Bureau for input on a survey it wants to send consumers, by basically telling the Bureau your survey will help bolster the case for banning the use of forced arbitration for all lenders, but new events in the world make it more and more obvious that you should do that ANYWAY.

Our comments pointed to a decision handed down a few weeks ago from the North Carolina Supreme Court in Torrence v. Nationwide Budget Finance, which further establishes the point we have been making for a while that lenders use forced arbitration clauses to suppress valid legal claims by their customers. As I’ll explain in a minute, in the Torrence case, the court refused to do anything about a case in which people harmed by predatory and illegal loans lost all their legal rights because of a forced arbitration clause to which they had not really even agreed.

It’s the latest poster child for how forced arbitration gives lenders a free pass to ignore consumer protection laws.

So, just to review the bidding, some quick background about what’s going on with the CFPB: For a number of years now, lenders have been using forced arbitration clauses in an effort to exempt themselves from consumer protection laws. And their success in getting away with breaking those laws has grown enormously, as the love affair between the five conservative members of the U.S. Supreme Court and forced arbitration has gotten more intense. The Court has made explicit that arbitration clauses are enforceable even when they gut other federal statutes.

But there is an enormous piece of good news: under the Dodd-Frank Act, the CFPB has power to sharply regulate or ban forced arbitration by lenders. We, along with some other advocates, had urged the Bureau that one reason it should ban arbitration is that it’s not really voluntary–consumers don’t really know the rights they’re losing. As the Bureau began to study the issue, it decided to do a survey of consumer knowledge and attitudes about the forced arbitration clauses squirreled away in mouse print contracts. We endorsed the Bureau’s doing so.

A funny thing happened. The Chamber of Commerce and other industry groups that think no bank should ever be sued no matter what they do, responded to the Bureau’s announcement that it was going to survey consumers by saying that it didn’t matter whether consumers knew about their rights or what they’re losing or not. While the Chamber and corporate groups used many thousands of words to explain why it supposedly doesn’t matter if forced arbitration is truly voluntary or not, the upshot of their answer was “because.” As I’ve pointed out here, before, that is crazy talk, and of course it matters enormously if people realize that they’ve been cheated.

O.K., enough background. What’s just happened? So in the comments we filed yesterday, we shined a bright light on the Torrence case. This is a case where a trial judge heard extensive evidence – including sworn testimony from dozens of experts and a number of fact witnesses, documents from the predatory lender’s records, etc. – and concluded that it had clearly been proven that in this case, the payday lender’s arbitration clause would insulate it from the state’s consumer protection laws even if it had plainly violated them. After the U.S. Supreme Court’s 2011 and 2013 arbitration-loving cases, the North Carolina Court of Appeals said, in essence, it doesn’t matter if the arbitration clause is a get-out-of-jail free card for a lawbreaking corporation, we have to enforce it anyway. And a few weeks ago, the North Carolina Supreme Court essentially said O.K. with us.

Based upon eye-popping insider whistleblower testimony and internal documents showing an ugly undisclosed conflict of interest, the trial court had held that the arbitrator chosen by the predatory lender was corrupt. The trial judge also concluded that the consumers never knew about this fact. In a really depressing conclusion, the appellate courts in North Carolina didn’t particularly care about that, either. The clause still had to be enforced. (For some additional facts about the troubled arbitration firm at issue here, see this document.)

One of the great things about the Torrence case is that there is a “control group” for what a working judicial system (as opposed to forced arbitration) would mean here. As the Bureau documented in an earlier report, several remarkably similar cases against payday lenders in North Carolina recovered tens of millions of dollars for hundreds of thousands of people. Look at pages 107-108 in this document: http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf.

The upshot here is pretty straightforward – if consumers could go to court, predatory lenders who break the law will be held accountable. If consumers are subject to forced arbitration, the lenders can flat out ignore the laws. End of story.

The bottom line is that the Bureau HAS to ban forced arbitration if it’s going to live up to its title, that it’s there to “protect consumers.” If the Bureau thinks forced arbitration is O.K., it should change its title from “Consumer Financial Protection Bureau” to “Complete Waste of Time and Space Bureau.”

This isn’t a very difficult question. The Chamber policy papers defending forced arbitration insist that only formalities matter here. According to the Chamber, it does not matter if forced arbitration actually delivers justice to more than a handful of consumers, so long as there is a formal possibility of that consumers could go to arbitration. According to the Chamber, it does not matter if consumers know of rights they’re losing, because Justice Scalia has said that forced arbitration is fair.

The Chamber position is akin to this: CFPB Director Richard Cordray should look at labels and formalities over realities on ground for consumers. Imagine that Cordray encountered a wild porcupine in his office one day, and needed to decide what to do about it. Further, imagine that someone has taped a sign on the animal that says “Justice Scalia and the United States Chamber of Commerce have deemed this to be a goldfish.” The Chamber’s position is that so long as there’s a sign there, then Cordray should ignore the creature’s sharp quills and snorting and just pretend it’s just a goldfish.

If the CFPB is going to actually protect consumers, it has to have clearer eyes and better judgment than that. The North Carolina Supreme Court’s “see no evil” approach doesn’t cut it.