Tens of millions of American consumers use consumer financial products or services governed by predispute arbitration clauses that may put them at an unfair disadvantage, suggests a United States Consumer Financial Protection Bureau report released last week.
In some cases, the arbitration clauses are mandatory, meaning that either side can mandate that any dispute arising between both parties be resolved in binding arbitration, and if one side sues the other in court, the defendant can invoke the arbitration clause.
Big Banking Tool
Larger banks often include arbitration clauses in their consumer checking account and credit card contracts, and more than half of outstanding credit card loans are subject to such clauses.
Prepaid card, private student loan, payday loan and wireless third-party billing agreements generally include arbitration clauses.
Nearly all the arbitration clauses studied include provisions stating that arbitration may not proceed on a class basis; some preclude all class proceedings in court or in arbitration, while others waive the consumer’s right to participate in class actions.
Most so-called “no-class”arbitration clauses also contain an antiseverability provision — that is, if the no-class provision is held unenforceable, the entire arbitration clause also is deemed unenforceable.
The bureau last week reported its findings to Congress.
Saving the Consumer Money
Arbitration “is an efficient, fair and low-cost method of resolving disputes in a fraction of the time — and at a fraction of the cost — of expensive litigation, which helps keep costs down for all consumers,” said Nessa Feddis, senior VP and deputy chief counsel for consumer protection and payments at the American Bankers Association.
However, the “robust dispute resolution procedures” used by banks “ensure that the overwhelming majority of disputes are resolved long before they get to arbitration,” Feddis told CRM Buyer.
True, court costs are steep — and large companies often drag out cases so the other side runs out of money.
Silence of the Lambs
Consumers are generally unaware of whether their credit card contracts include arbitration contracts, and generally either don’t know whether they can file suit in court, or mistakenly believe that they in fact can do so, the CFPB found.
They also mistakenly believe that they can participate in class actions.
They typically are not aware of any arbitration clause opt-out opportunities their card issuer may have offered.
Arbitration clauses can put unwitting consumers at the mercy of a biased decision maker who is not bound to follow the law, Vail pointed out. Further, mandatory arbitration clauses impose waivers of consumers’ fundamental constitutional rights without meeting the generally required standard for informed consent — that the waivers be knowing, intelligent and voluntary.
‘Fair’ Is a Changing Word
There’s one other problem with mandatory arbitration — it generally requires that disputes are resolved in confidence, meaning that no one except the parties directly involved will know that a dispute took place or how it was resolved. That benefits companies with a less-than-stellar record.
Consider this: Almost all the arbitration proceedings reviewed by the CFPB involved companies with repeat experience.
Companies almost always brought their lawyers, while consumers were represented by counsel in only about 60 percent of the cases.
Consumer rights group Public Citizen has launched a petition against forced arbitration.
It calls on the CFPB to ban arbitration clauses, contending that they strip consumers of their right to hold banks accountable in court.
Are Arbitration Clauses Necessary?
CFPB has the authority to eliminate the use of arbitration clauses in consumer contracts under its purview, according to Public Citizen.
“Now that our study has been completed,” CFPB spokesperson Moira Vahey told CRM Buyer, “we will consider what steps are appropriate.”