Arbitration issue cuts both ways for NADA

A 2002 law that exempted auto dealers from mandatory binding arbitration clauses in their franchise agreements was a victory for dealers and for NADA, but it hasn't been the last word on the issue.

Today, the Consumer Financial Protection Bureau is reviewing draft rules that would limit mandatory binding arbitration in consumer finance contracts and make it easier for consumers to file class-action suits against all kinds of creditors, including dealerships.

NADA argues that these two issues are far different in scope. Dave Regan, NADA executive vice president for legislative affairs, said that, for starters, the CFPB is seeking to change contracts across the entire consumer financial services market, not just in auto finance.

Consumer advocacy groups that support the CFPB's move to limit arbitration cite the 2002 Motor Vehicle Franchise Contract Arbitration Fairness Act to single out dealers and accuse dealers of hypocrisy on the issue of arbitration.

Consumer advocates say that dealers are against arbitration when the factories try to impose it on dealers, but support arbitration when it protects dealers from consumer lawsuits.

"Consumers deserve at least the same freedom, protection, and access to justice as car dealers, who were granted a special exemption from the Federal Arbitration Act by Congress," said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, of Sacramento, Calif., in a written comment submitted to the CFPB in August.

"Clearly, consumers are in an even more unequal bargaining position compared to auto dealers and auto lenders than are dealers, compared to auto manufacturers," she wrote.

In a joint written comment submitted to the CFPB, the Washington-based National Association of Consumer Advocates and the Boston-based National Consumer Law Center made a similar argument.

"These businesses that sing the praises of the efficacy, efficiency and low cost of arbitration, somehow don't seem to prefer it as a suitable forum to resolve their own disputes against consumers. Their hypocrisy is simply astounding," the groups said in a 2012 submission.

"No greater example of this "chutzpah' can be found in the "do as I say, not as I do' behavior of our nation's automobile dealers," the groups said.

Attorney Tom Hudson, a partner at Hudson Cook and an expert in consumer finance law, estimated about 50 to 60 percent of the contracts he sees contain a mandatory arbitration clause. Hudson said it looks as if the CFPB is determined to eliminate or dramatically limit the clauses, but until a final rule passes, no auto lender he knows of has changed its contracts.

According to a note published in May by the Washington office of law firm White & Case, the soonest a final rule from the CFPB would likely take effect would be the second quarter of 2017.