Earlier this year, first tuesday reported on a new prohibition on mandatory arbitration in certain consumer agreements. Since this rule was created in July 2017, it has been overturned by the U.S. Senate and the President.
Arbitration is a method of dispute resolution used in many industries, including real estate. Agents and brokers will recognize the term as it appears in real estate agreements published by the trade organization.
Editor’s note — The rule was enacted by the Consumer Financial Protection Bureau (CFPB), under former director Richard Cordray. At the time of this writing, it’s unclear who the CFPB’s current director is, as two sets of laws allow different people to appoint a replacement director — and they have. Thus, there are two directors when there only can be one, and a judge will ultimately have the final say on leadership at the CFPB.
The CFPB’s ban on mandatory arbitration in consumer agreements followed a four-year-long process of study and implementation. However, members of the Senate decided this ban was excessive regulation of the financial market. Those who voted to overturn the ban felt it would empower consumers to bring frivolous lawsuits against major companies, which they felt would harm the economy and primarily benefit lawyers.
Despite the rollback, mandatory arbitration agreements are still prohibited in residential mortgage agreements. This prohibition is codified in the Truth in Lending Act (TILA), though Fannie Mae and Freddie Mac also did not allow arbitration provisions in their mortgage agreements prior to TILA. [12 Code of Federal Regulations §1026.36(h)]
Arbitration harms consumers
The reason cited by lawmakers for overturning the rule is simple: to save money. It’s true, arbitration saves consumers and companies money since arbitrators are less expensive to employ than trial lawyers. But the trade-offs for arbitration include giving up the right to:
- appeal the arbitrator’s decision, even when it goes against legal precedent or is based on faulty information;
- have their decision published in the public record, since the results of arbitration are not required to be published like court cases are; and
- have an unbiased arbitrator, since arbitrators are usually chosen by the company involved in the dispute and thus have a monetary incentive to continue to represent the best interests of the company.
The type of arbitration agreement the CFPB was attempting to ban prohibits consumers from participating in class action lawsuits. But with the Senate’s overturning of this rule, consumers under these arbitration agreements will continue to be prohibited from joining together to sue a company for wrongdoing.
Real estate agents and brokers: don’t let your clients sign away the right to their day in court. Encourage knowledge by educating your clients about arbitration, as most individuals who agree to arbitration do so without knowing what arbitration is or how it affects their rights.
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 unsatisfied with the outcome.