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CFPB report: Biggest card issuers push consumers into arbitration

Few consumers use the dispute resolution format favored by banks

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A new study by the U.S. Consumer Financial Protection Bureau supports the charge that financial companies use arbitration clauses to muzzle customers who think they were ripped off.

Big banks and credit card issuers often require customers to give up their right to go to court in a dispute, and submit their gripes to arbitrators instead, the study found.

CFPB arbitration study

While tens of millions of consumers are covered by arbitration requirements, only about 300 a year actually filed arbitration claims against companies during the three years from 2010-2012, the CFPB found.

During the same period, more than 3,000  federal lawsuits were filed against credit card issuers alone, 400 of which were class-actions that involved masses of people.

"One significant takeaway from these various points is that few consumers use arbitration at all, at least when compared to the number of consumers involved in lawsuits and class actions," CFPB Director Richard Cordray said in a statement announcing the results.

Looking at eight class actions against banks, credit cards and payday loans that were settled since mid-2009, the study found that 13 million consumers made claims and received benefits totaling $350 million.

Rulemaking possible
The preliminary study was released early Thursday, the day that the agency is holding a hearing on arbitration in Dallas. Under the Dodd-Frank Act, the consumer protection bureau must study whether arbitration is harming consumers of financial products, and make rules accordingly. The agency's next step will be a survey to determine how many consumers are aware they have signed away their court rights. Experts expect that any potential rulemaking remains months in the future.

Arbitration advocates say arbitration provides a speedier and cheaper route to justice than the procedure-bound court system. Critics of arbitration counter that the ban on class actions -- a part of most arbitration requirements -- prevents consumers from banding together and getting the legal help necessary to take on corporations.

"The main thing they want to do is make sure no one can bring any class actions," said Paul Bland, senior attorney at Public Justice, in an interview before the study was announced. Public Justice is a nonprofit group that fights for court access and opposes mandatory arbitration clauses.

In the credit card world, arbitration requirements are less widespread than a few years ago. Bank of America, Capital One, Chase Bank and HSBC dropped their arbitration requirements in 2009 after they became controversial.

Big banks prefer arbitration
Still, big banks remain much more likely to require arbitration than small ones or credit unions, the study found.

"That raises interesting questions about why smaller institutions and credit unions do not use arbitration clauses as frequently in these markets," Cordray said. Consumer advocates believe the answer is that small companies have less to fear from class actions, which usually take aim at deep-pocketed corporate targets.

Among the preliminary study's findings:

  • 52 percent of balances at major credit card issuers were covered by mandatory arbitration clauses, compared to 31 percent at smaller banks -- and just 2.5 percent at credit unions.
  • Arbitration clauses are even harder to read than other parts of the credit card contract, by grade level of readability.
  • About nine of 10 arbitration clauses ban consumers from filing class arbitration as well as court filings.
  • The most frequent claims in arbitration other than debt collection involved credit reporting issues or interest rates and charges.
  • The main thing they want to do is make sure no one can bring any class actions.

    -- Paul Bland 
    Attorney, Public Justice 
  • Almost no consumers filed arbitration for amounts under $1,000. The average amount involved in debt disputes was more than $13,000, while claims for other issues averaged more than $38,000.

The study noted that courts have increasingly supported arbitration clauses in recent years, and the requirements have become more common in consumer financial contracts. In 2011, the Supreme Court ruled in favor of arbitration, saying that the Federal Arbitration Act trumps state laws that sought to preserve consumer class actions. Consumer advocates and some allies in Congress believe the courts have stretched the arbitration law to fit situations for which it wasn't designed. The Senate Judiciary Committee has scheduled a Dec. 17 hearing on the fairness of arbitration to consumers, workers and small businesses.

"We recognize that Congress intends the results of this study to be the basis for important policy decisions that the Consumer Bureau will have to make in this area," Cordray said.

WHICH CREDIT CARD ISSUERS REQUIRE ARBITRATION?
The larger the bank, the more likely it is to require consumer disputes be settled by arbitration, not litigation.
  Require arbitration No arbitration clause
  Number of contracts % of credit card loans outstanding Number of contracts % of credit card loans outstanding
50 largest bank issuers 29 52% 21 48%
Other bank issuers 25 31% 31 69%
Credit unions 9 3% 266 97%
Source: Consumer Financial Protection Bureau, preliminary study on arbitration, December 2013

See earlier stories: Binding arbitration system crumbling, Federal watchdog gives consumers a chance to speak on arbitration

Published: December 11, 2013


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Updated: 12-05-2016


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