You may have unwittingly ceded your rights to sue your credit card or bank.
Consumers who have serious beefs with their financial institutions can’t get much relief these days, according to a study released today by the Consumer Financial Protection Bureau.
The research looked at mandatory arbitration clauses in contracts for credit cards, prepaid cards, payday loans, checking accounts, private student loans and mobile wireless contracts.
These clauses state that either the company or the consumer can require any dispute over the product or service to be settled through arbitration rather than the courts—and generally allow companies to block class-action lawsuits, which tend to be a more lucrative means of getting redress.
The Bureau found that arbitration clauses were prevalent in the six consumer product markets it looked into. A full 92% of the prepaid cards obtained by the CFPB were subject to arbitration and 53% of the market share of credit card issuers, for example. And while only 8% of checking accounts have these clauses, that percentage represents almost half of insured deposits.
Meanwhile, three quarters of consumers surveyed didn’t know whether any contracts they signed had an arbitration clause, and only 7% understood that they could not sue their credit card issuer if their contract does include such a clause.
Why Mandatory Arbitration is Bad for Consumers
The arbitration practice is generally preferred by financial institutions since it reduces legal expenses.
But the CFPB notes that class-action suits tend to provide greater renumeration than other routes of seeking restitution, and that “larger numbers of consumers are eligible for financial redress through class-action settlements than through arbitration or individual lawsuits.”
In the 1,060 arbitration cases filed with the American Arbitration Association in 2010 and 2011, consumers received less than $400,000 in relief and debt forbearance, compared to the $2.8 million companies received (mostly for disputed debts).
The CFPB also noted that only about 1,200 individual federal lawsuits are filed by consumers per year in the consumer markets studied.
Comparatively, the CFPB found that more than 160 million class-members were eligible for some kind of relief in class actions taken over a five-year period—equating to about 32 million a year. This resulted in $2.7 billion in settlements.
One argument against class-action lawsuits is that litigation leads to higher costs for financial institutions—which could then be passed down to consumers. The CFPB, however, found no evidence to suggesting that arbitration clauses led to lower prices for consumers.
What Happens Next
The study was mandated by the Dodd-Frank Act, and the CFPB has the authority to issue regulations regarding arbitration clauses.
The CFPB says it will be meeting with stakeholders after they have had a chance to read the report, and invites comments regarding its findings.
Consumer advocates have long called for banning mandatory arbitration clauses.
Getting rid of a financial institution’s ability to use them “gives the consumer the ability to decide how they want to decide the case,” says Pew Charitable Trusts’ consumer banking project director Susan Weinstock.
By avoiding arbitration, she says, consumers aren’t subject to the rulings of arbiters who are often selected by the financial institutions, who may not hold law degrees and whose rulings need not be made public.
Even some in the industry are not fans. “Mandatory arbitration has proven to be a thorn in consumers side,” says Adam Levin, chairman and co-founder of Credit.com. “These clauses are biased towards the company.”