Those of you with more longevity in the consumer finance world may recall the dark days of the 1990's. Credit sellers and installment lenders were suffering at the hands of an aggressive plaintiff's bar that was finding fault with just about every contract written by creditors. As one plaintiff's attorney (who shall remain unnamed) said, “It was like shooting fish in a barrel!” The judgments awarded against creditors were the cause of many sleepless nights for lenders and their lawyers.

Something had to be done. Legislative efforts were made at tort reform, but that was a slow and arduous process. A silver bullet was needed. And, it actually already existed. With the rediscovery of the Federal Arbitration Act, the birth of the use of mandatory, pre-dispute arbitration in consumer transactions became pervasive. While the plaintiff's bar didn't surrender without a struggle, creditors and their lawyers soon learned that a well drafted, mutually applicable arbitration agreement would be enforced by the courts.

The indicia of an arbitration agreement that will withstand attack includes the following elements:

  • Invoking of federal jurisdiction
  • Clear scope or explanation of what subject matter is covered by the agreement
  • Clear waiver of having a judge or jury resolve the claim or controversy
  • Mutuality of application of the agreement
  • Consumer choice in the selection of the arbiter or administrator
  • Fairness in cost allocation
  • Fairness in venue selection
  • Clearly articulated rules of law, evidence, process and procedure
  • A tightly constructed class action waiver (if chosen)

All of these elements must be written with clarity and precision, so that they are comprehensible by the average consumer.

Ever since the U.S. Supreme Court weighed-in on the side of the enforceability of arbitration under the Federal Arbitration Act in consumer credit transactions, much of the heat being generated by the plaintiff's bar cooled. We have enjoyed a period of contracts being enforced by the courts and arbiters as written, without fear of losing our business over some newly evolving theory of liability where there is little actual harm to an individual as the customer, but a great windfall for the individual as the plaintiff.

However, as Yogi Berra is credited with saying, “It ain't over ‘til it's over” … and, along came the Bureau of Consumer Financial Protection. In July of 2017, the Bureau decided that arbitration of consumer disputes was an OK thing, but that arbitration of a class-wide consumer dispute was not. The Bureau promulgated rulemaking on the subject.

Industry groups were outraged, and like all good Americans, they took their fight to Congress. And, last fall, industry won. Congress rejected the Arbitration Rulemaking of the Bureau before it could take effect. The status quo that existed before the Dodd-Frank Act and the CFPB has been restored.

I recount this history as a reminder of the importance of arbitration in consumer transactions. I also want to remind us that all arbitration agreements are not created equal. Some have been thoughtfully drafted to include the items specified above, while others have been plagiarized leaving out one or more of the important elements of a fair and enforceable agreement. Accordingly, today's practice pointer:

Practice Pointer #1: Take a good look at the arbitration agreement(s) that you use in your business today. Is it composed of the elements set out above? If not, why not?

Mandatory pre-dispute arbitration is a powerful defensive tool for the consumer finance industry. Its use should never be taken for granted.

Please note: This is the eleventh blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.