New limits to arbitration in consumer agreements

October 24 update: The U.S. Senate struck down the CFPB’s arbitration rule, thus no changes to arbitration in consumer agreements will occur as a result of the CFPB’s rule.

Arbitration has taken another hit, as new rules limit its use in certain agreements.

Arbitration is a method to resolve disputes arising in many situations, include real estate transactions. Choosing arbitration is usually a less costly alternative than taking the dispute to court, but the disadvantages are many.

Agents are perhaps most familiar with arbitration as it appears in real estate forms published by California’s real estate trade union. Arbitration provisions are prohibited in residential mortgage agreements, and this prohibition is now broadening to include other forms of consumer credit.

Beginning September 18, 2017, providers of certain consumer financial products and services are prohibited from using consumer agreements which require the consumer to solve a dispute through arbitration, precluding them from participating in any class action. Further, service providers already involved in arbitration will need to hand over arbitration records to the Consumer Financial Protection Bureau (CFPB).

The new rules applies to providers of consumer financial products and services in the business of:

lending;
storing money;
moving money; and
exchanging money.

This includes those who lend to consumers, broker automobile leases, provide debt assistance or debt collection.

Arbitration’s drawbacks

It’s true, arbitration often reduces the expense produced by legal fees and courts. But literally everything else about arbitration is bad for consumers, including homebuyers and sellers.

Unlike judges, arbitrators do not need to apply legal precedent, hence their final “arbitrary” decision. Arbitration proceedings are also not required to be published like court cases are, so it’s impossible for outsiders to know how disputes are decided.

Arbitrators are also not required to be unbiased or lack connections to individuals in the case. In fact, many arbitrated disputes have assigned an arbitrator who is a long-time friend or acquaintance of one of the individuals involved in the dispute.

In other words, it’s difficult to predict the outcome even when one party is clearly on the right side of the law.

With this regulation, the CFPB is targeting a specific type of arbitration: agreements which do not allow consumers to come together and pursue a joint action, or group lawsuit. Individual consumers rarely pursue legal action on their own, as it is simply too expensive to seek relief when a large company (with its vast financial and legal resources) has done harm.

Clients also need to watch out for binding arbitration — the type of arbitration included in certain real estate forms. This type of arbitration requires the buyer and seller to waive their constitutional rights to a trial by jury. It also prohibits them from appealing the arbitrator’s decision, even if there was an egregious error or the arbitrator applied the law incorrectly. [Hall Superior Court (1993) 18 CA4th 427]

The good news is homebuyers and sellers do not need to agree to arbitration. Simply refusing to initial or sign an arbitration provision is enough to save them from the perils of arbitration when a dispute arises. It’s as simple as submitting the form without the arbitration provision signed.

Editor’s note — As a matter of policy, RPI (Realty Publications, Inc.) forms do not include arbitration provisions. RPI forms include a mediation provision to be followed in case of a dispute. Like arbitration, mediation is usually less costly than heading directly to court. But unlike arbitration, decisions negotiated in mediation can always be brought to court when the individuals involved are not satisfied with the outcome.

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