Arbitration Clauses for Credit Cards, Other Services May Harm Consumers

Man yelling into a phoneMillions of consumers may not be getting a fair resolution in disputes with their financial institutions over products and services, according to a report released Tuesday by the Consumer Financial Protection Bureau.

The CFPB examined the arbitration clauses in contracts for credit cards, prepaid cards, private student loans, payday loans, cellphone service and checking accounts. These clauses generally permit companies to resolve consumer complaints using arbitration. Most bar consumers from filing class-action suits, which may provide a fairer and more lucrative way to get relief.

What’s also troubling, the bureau found, is that most people aren’t even aware they’ve given up their rights to sue. More than 75 percent of 1,000 consumers surveyed by the CFPB said they didn’t know they were bound by an arbitration clause in agreements with their financial service providers. Fewer than 7 percent said they understood that their ability to sue in court was blocked as a result, the report said.

AARP Foundation Tax-Aide: Get free help preparing and filing your taxes »

“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” CFPB Director Richard Cordray said in a statement. “These arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year.

“Now that our study has been completed, we will consider what next steps are appropriate,” he said.

The CFPB has the authority to issue regulations on the use of arbitration clauses in consumer finance markets to protect the public interest.

Some 80 million people hold a credit card with an arbitration clause. Likewise, nearly half of all insured bank deposits are subject to these clauses in checking account agreements, the bureau said.

Consumer advocates over the years have urged lawmakers and regulators to ban arbitration clauses, saying they’re unfair to consumers. They also say no evidence supports the claim that companies with these clauses save money and in return offer lower prices to consumers.

A report by the nonprofit Center for Responsible Lending (CRL) in 2009 cited research that found arbitrators’ decisions favored firms over consumers 94 percent of the time.

“The arbitrator, which is essentially the judge, is often picked by the company. So if you’re fighting a large bank or auto lender in a dispute, they get to pick the arbitrator,” said Gary Kalman, executive vice president of the CRL. “If that arbitrator wants future business from this company, it clearly presents a conflict of interest.”

Get discounts on financial services with your AARP Member Advantages. »

Richard Foster, senior vice president of legal and regulatory affairs for the Financial Services Roundtable, an industry group, called arbitration “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.”

The CFPB reviewed data from arbitration cases, most of which involved disputed debts. Of the 1,060 cases filed in 2010 and 2011, arbitrators awarded consumers in total less than $175,000 in damages and less than $190,000 in debt forbearance. On the flip side, arbitrators ordered consumers to pay $2.8 million to companies.

Micah Hauptman, financial services counsel at the Consumer Federation of America in Washington, said the CFPB study shows that the premise of the arbitration process — that it’s fair, efficient and cost-effective — fails on all counts and consequently should be banned or restricted.

“Right now, forced arbitration is incredibly pervasive, harmful, and it forces people to give up their rights,” he said. “This is not a recipe for success for consumers. It’s a recipe for success for the financial industry.”

Photo: Lipowski/iStock

Also of Interest:


See the AARP home page for deals, savings tips, trivia and more.