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Richard Cordray is a Badass

The more rational of the current players

Seldom has a new government agency done more for citizens at a lower cost to taxpayers than the Consumer Financial Protection Bureau, or CFPB. In just five years of existence, it has returned $12 billion of illegal or inappropriate fees to consumers of financial products. Who knows how many other bad actions weren't taken because of the presence of a strong regulator. We missed out on our first choice for the CFPB's leadership (although I heard she found other work), the Bureau under Richard Cordray had doggedly fought for our legitimate rights, despite an onslaught of attempts by the GOP to limit the power of the CFPB. It's not a perfect organization, but nothing is.

Which is all a long way to say that when Cordray showed up in the New York Times, firing away against one of my pet peeves, I felt the need to highlight it.


Unless you have a weird obsession (much weirder than any of my obsessions), you have probably never read your iTunes agreement or your credit card agreement. This will shock you - but that long, legalese document is not written to protect your rights. It is written by Apple or Capital One or American Express to protect their rights. Whenever a consumer does something the company doesn't like, they add a paragraph saying you aren't allowed to do that thing any more. They have a lot of consumers, so a lot of paragraphs get added over time and the document grows to resemble the length of some of my worst efforts at LobbySeven. Companies are perfectly fine with this; the longer they are, the less likely people will read them before buying their cell phone or whatever.

A favored provision in all of these contracts is "mandatory arbitration." What this says, generally, is that if you have a problem with your rental car provider, you aren't allowed to take them to court. If you want to pursue a claim, you are required to follow the private route of arbitration. Companies often present this as being friendly to consumers; arbitration, after all, is usually a more efficient process than a lawsuit. But this misses the point.

Most claims that you would have against a company would be small - your cable company cancels its teaser rate after 6 months instead of the 12 they promised, costing you $200. For a claim of $200, it doesn't make sense to go to either a courthouse or an arbitration panel; the cost of the claim is multiples of what you could possibly recover. But, in the court system there are these things called class action suits. You might get together with 1,000,000 others who were screwed by your cable company and sue together - for $200 million. Now you're cooking with gas.

Mandatory arbitration clauses prevent this from even being an option for people who have been wronged. There are no "class action arbitrations." A company might fear the cost of following this procedure for the occasional zealot who will take on $200 in costs to get their $200 back. But these will be few and far between.

Now, class action suits - or, to use another term, "mass torts" - are not perfect either and they are certainly abused on occasion. It is easy for an unscrupulous lawyer to advertise and sign up a boatful of clients and file a spurious claim. Maybe the company will think it is cheaper to settle the claim than to fight an expensive lawsuit, even if the result is fairly certain. But the validity of a claim is for a court to decide. There are sanctions laws in place to penalize lawyers who abuse the system. These laws are a balancing act - they must consider the benefits of preventing abuse against the possibility of chilling legitimate actions due to fear of being caught by said sanctions. But it isn't that hard to tell the difference between a legitimate and illegitimate claim - even if the former might eventually lose in front of a jury.

The problem gets worse because there is no "market" for mandatory obligation clauses. To blame the cable companies again: where you live, you probably have only one choice for your bundle of internet, cable TV and the phone service they paid you to take. That company has a mandatory arbitration clause; they don't offer a comparable package, but with friendlier terms of service. If you think about it, onerous documents are endemic to industries that operate with a limited number of competitors, so-called oligopolies. You don't sign anything when you eat at a restaurant, buy food or fill your car with gasoline. These industries operate well in unregulated markets (unregulated with regard to this issue; I'm perfectly OK with the FDA checking my food before its sold). Generally, the power to force consumers into onerous agreements is a sign that the companies in an industry exert monopolistic power in a non-functioning market.

OK - rant over from here. Simple message: mandatory arbitration clauses are bad, those who fight them are good, so Richard Cordray and the CFPB are good. Of course, you might remember that the New York Times did an entire series on arbitration a couple years ago. I definitely encourage you read the whole series if you want to learn more.

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