The Consumer Financial Protection Bureau finds arbitration clauses restrict consumers’ ability to file class-action lawsuits. Tens of millions of consumers are subject to such contracts, which hamper their ability to seek financial redress.
Customers who have disputes with banks or credit-card companies often can be forced to go to arbitration before a private lawyer to try to resolve the problem, rather than before a judge in court.
That’s because many financial accounts come with built-in contracts containing “pre-dispute” arbitration clauses — so-called because consumers agree to them when they sign up for the account, before they actually have a disagreement.
The federal Consumer Financial Protection Bureau on Tuesday released a study critical of such arbitration clauses, and suggested the agency may consider new rules to limit them. The agency found that the clauses restrict consumers’ ability to file class-action lawsuits, in which many people with similar complaints file suit as a group, instead of individually. Tens of millions of consumers are subject to such contracts, which hamper their ability to seek financial redress, the agency found.
“Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year,” Richard Cordray, the bureau director, said in prepared remarks.
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The study was required by the Dodd-Frank financial-overhaul law, which bans such clauses in mortgage agreements, and also gives the bureau authority to limit or ban them in other types of contracts. Cordray said the bureau now will “consider what next steps are appropriate.”
The bureau has been collecting information on the issue for about three years, and held a public hearing on Tuesday in Newark, N.J.
Industry groups defend the use of arbitration clauses in financial contracts, saying they offer a faster and less-costly way to resolve disputes.
“This is an important tool for the customers of financial institutions that helps keep costs down and keeps financial products, including credit cards and checking accounts, affordable,” said Richard Foster, senior vice president of legal and regulatory affairs for the Financial Services Roundtable.
However, the bureau report found “no statistically significant” evidence that companies that have eliminated arbitration clauses increased their prices, or reduced access to credit, compared with those that made no change.
Various groups, including the Pew Charitable Trusts’ consumer banking project, have recommended that the bureau prohibit the clauses.
The agency’s report, based on an examination of more than 850 financial contracts, found that use of the clauses is widespread, especially in credit-card and checking accounts, but also in private student loans, payday loans and mobile wireless contracts. Credit-card issuers accounting for more than half of all card debt, for instance, have arbitration clauses affecting as many as 80 million people. Banks representing 44 percent of insured deposits have such clauses in their checking account agreements.
Here are some questions about pre-dispute arbitration clauses:
Q: How can I tell if my account agreement has one of these clauses?
A: The language is often in the fine print, which many customers don’t read. About three-quarters of consumers don’t know that they are subject to such rules, the Consumer Financial Protection Bureau study found. The bureau’s report found that among consumers whose credit-card contract included an arbitration clause, fewer than 7 percent recognized that they couldn’t sue their card issuer.
Q: Can I negotiate to have the clause removed?
A: The clauses are typically “take it or leave it” language in standardized contracts, Cordray said, and aren’t open to negotiation. In some cases, the report found, customers may be given the chance to opt out of arbitration clauses if they do so in writing within a certain amount of time — but consumers are generally unaware of that option, Cordray noted.
Q: What if I go through arbitration, but end up with a result I think is unfair?
A: It’s difficult to have a court review a binding-arbitration award, said F. Paul Bland Jr., executive director of Public Justice, a national consumer advocacy group. But a larger concern, he said, is that the clauses discourage consumers from pursuing valid claims in the first place.
“The biggest issue with mandatory arbitration is that consumers just don’t bring claims; they walk away from the process, by and large,” he said in an email.