Arbitration clauses deprive many consumers of a forum for fairly resolving disputes with financial institutions, Professor Richard Frankel said at a hearing convened by the Consumer Financial Protection Bureau on Dec. 12.

The hearing, held in Dallas, Tex., aimed to gather input from experts and the public on the impact of arbitration clauses that appear in many contracts consumers sign with banks and other businesses.

Arbitration was originally intended to create a speedy and efficient alternative to court as a means of resolving disputes, Frankel said.

However, Frankel noted, most arbitration clauses specifically prevent consumers – including those who incur small losses – from pursuing class actions or other forms of collective relief.

“A lot of corporate wrongdoing involves cheating consumers out of small amounts of money, but doing that across thousands or millions of people, so that the company makes huge amounts of money,” Frankel said. “What it does is ensure that instead of arbitration being an alternate form of dispute resolution, it guarantees that consumers have no forum at all.”

Frankel also noted that the clauses tend to give businesses an advantage, since the companies write the agreements and arbitration rules allow them to “shop around” for arbitrators they think will give them preferential treatment. 

The hearing, which was convened by CFPB Director Richard Cordray and covered by HousingWire, featured testimony from representatives of the financial industry, who said that further regulation of arbitration clauses will drive up costs for consumers.

Frankel, who directs the law school’s Appellate Litigation Clinic, has written extensively about arbitration for scholarly journals including the Washington University Law Review, and he is a co-author of the legal treatise “Consumer Arbitration Agreements.”