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Mandatory Arbitration in Consumer Finance and Investor Contracts

by Beth Graham
October 2015

From Karl Bayer's Disputing Blog

Beth Graham

Michael S. Barr, Roy F. and Jean Humphrey Proffitt Professor of Law at the University of Michigan Law School, has published “Mandatory Arbitration in Consumer Finance and Investor Contracts,” New York University Journal of Law and Business, Vol. 11, No. 4, 2015. In his article, Professor Barr argues that federal agencies should use their authority under the Dodd-Frank Act to restrict or eliminate the use of arbitration provisions in consumer finance and investment contracts.

Here is the abstract:

Mandatory pre-dispute arbitration clauses are pervasive in consumer financial and investor contracts — for credit cards, bank accounts, auto loans, broker-dealer services, and many others. These clauses often ill serve households. Consumers are typically presented with contracts on a “take it or leave it” basis, with no ability to negotiate over terms. Arbitration provisions are often not clearly disclosed, and in any event are not salient for consumers, who do not focus on the importance of the provision in the event that a dispute over the contract later arises, and who may misforecast the likelihood of being in such a dispute. The lack of salience means that there is no meaningful competition over arbitration provisions or likely any price effect. Some arbitration proceedings lack procedural protections, and unbiased arbitrator selection essential for fair outcomes. In addition, many arbitration provisions contain “gag” rules barring disclosure of reasoning, evidence, or outcomes. Moreover, arbitration clauses typically preclude consumers from banding together in aggregated actions, which diminishes redress and weakens deterrence. In the wake of the financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the new Consumer Financial Protection Bureau and the U.S. Securities and Exchange Commission to prohibit or condition the use of arbitration clauses in consumer finance and investment contracts, respectively. It is well past time for these agencies to use this authority.


Beth Graham received a J.D. from the University of Nebraska College of Law in 2004 and a M.A. in Information Science and Learning Technologies from the University of Missouri in 2006. She also holds a B.S. in Public Administration from the University of Nebraska-Omaha. She is licensed to practice law in Texas and the District of Columbia.

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