For a while, the Ninth Circuit, which includes Washington, departed from other federal circuits in holding that a federal statute, the Credit Repair Organization Act (CROA), renders certain arbitration clauses unenforceable because the CROA provides consumers with a non-waivable right to sue. But, in 2011, the U.S. Supreme Court held that arbitration clauses are enforceable insofar as they are not unconscionable. The equitable rule that unconscionability can render a contract term unenforceable is a product of common law. The bar for establishing unconscionability can be very high and difficult for consumers (especially individual consumer plaintiff’s) to reach. Now the Consumer Financial Protection Bureau (CFPB) is considering rules that would forbid class action arbitration waivers in consumer financial services contracts.
Consumer contracts often include litigation waivers, which courts have construed as precluding consumers from joining together to bring class actions against individual creditors. Due to the severe imbalance in resources between many debtors and most creditors, and due to the fact that the amount of money in dispute is usually relatively low, the only practical way for debtors to assert their rights is often by joining in class actions. In 2013, the Attorneys General of several states including Washington wrote to the CFPB asking the Bureau to issue new rules that prohibit pre-dispute arbitration clauses in consumer contracts, which prevent consumers from being able to have their day in court. The Attorneys General also pointed out the conflict of interest that arbitrators have due to their need to impress creditors who are much likely to be repeat customers than is any individual consumers.
An irony of the financial industry’s reliance on mandatory arbitration clauses is that the industry itself uses the courts all the time to sue its customers. In most cases, a court judgment is necessary in order to take advantage of the most aggressive collection tactics (e.g., wage garnishment, placing liens on debtors’ bank accounts). The creditors’ bottom lines depend on a large number of the people they sue not responding to lawsuits and obtaining default judgments. Never let your creditors obtain a default judgment against you. If you are sued, respond. If a default judgment has been entered against you, contact an attorney to determine whether your creditor followed the proper procedure to obtain it. If not, court rules, and not the terms of your contract will determine whether you can get the judgment vacated.