Research and Statistics

Study makes the case against credit card arbitration


Millions of consumers have been forced to accept arbitration clauses in case of disputes, but few understand them, says a new study

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Requiring consumers to take disputes to arbitration instead of court deprives them of millions of dollars in awards from lawsuits, a study of financial products by the U.S. Consumer Financial Protection Bureau indicates.

“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.

Banks and other supporters defend  arbitration requirements as a cheaper, quicker way to resolve disputes. But consumer advocates said the CFPB’s study proves that consumers are harmed by the clauses, which shield companies from having to abide by consumer protection laws.

Among credit card customers, three-quarters of those surveyed said they didn’t know if they were subject to an arbitration clause or not. And of those who thought they did know, more than half were wrong.

“I reject the idea that it is OK in the U.S. to strip people of their constitutional rights, and say it’s their fault because they didn’t read the fine print,” said Paul Bland, executive director of Public Justice, during a hearing held by the consumer protection bureau Tuesday in Newark, New Jersey.

A little over half the credit card market is covered by arbitration requirements, the study found. It also looked at the markets for checking accounts, prepaid cards, student loans, payday loans and mobile wireless service. The study is the regulator’s second look at the effects of arbitration on consumers of financial products, and is expected to lead to restrictions on the controversial clauses.

“Now that our study is completed, we will consider what next steps are appropriate,” Cordray said.

Under the federal Dodd-Frank Act, the consumer protection bureau is supposed to study the impact of arbitration clauses in consumer financial contracts, then write new rules if necessary. The law also outlawed mandatory arbitration by mortgage lenders.

Arbitration versus going to court
In the CFPB’s study, 341 arbitration decisions examined at the leading firm in 2010 and 2011 resulted in 78 credits or payments to consumers, for a total of less than $400,000. The cases won by companies required consumers to pay $2.8 million.

In court, on the other hand, 32 million consumers per year were eligible for compensation through class actions over a five-year study period, the CFPB said. Awards totaled $2.7 billion, of which nearly $500 million went to attorney fees. In cases where data on the actual payments made to consumers was available, at least $1.1 billion was paid to 34 million consumers, the CFPB said.

“Further, these figures do not include the potential value to consumers of companies changing their behavior,” the CFPB said.

What about the savings of arbitration instead of court? The CFPB study didn’t find evidence that it is being passed along to consumers. Companies that dropped arbitration requirements didn’t increase their prices, the study found, nor did they reduce consumers’ access to credit.

In the credit card market, some major issuers dropped their arbitration requirements in 2009, after the major arbitration firm at the time was found to have secret ties to a debt collector. Citi, American Express, Discover and Wells Fargo are the largest issuers that kept arbitration requirements in their consumer card agreements.

Alan Kaplinsky, partner in corporate law firm Ballard Spahr, said during the hearing that arbitration clauses were developed as an antidote to a “broken” legal system. Aggressive attorneys cherry-pick a friendly courthouse and file frivolous lawsuits in order to shake down companies,  he said. More than half of the class actions studied by the CFPB were withdrawn or resulted in individual settlements, demonstrating that “the majority of class actions are frivolous or filed for purposes of extracting an individual settlement from companies,” he said.

The CFPB study lacked the views of people who participated in arbitration as an alternative to court, he added. “I’m not sure the bureau wanted to hear positive things about arbitration,” Kaplinsky said.

But other panelists said the voluminous study’s finding — that arbitration yields scant benefits for consumers while depriving them of legal protections — should end the debate and lead to a ban on arbitration requirements.

“Forced mandatory arbitration has nothing to do with dispute resolution,” said Myriam Gilles, a professor at Cardozo Law School, “what’s going on is liability avoidance.”

Companies can easily extend the benefits of arbitration to consumers without depriving them of court rights by making the choice voluntary, when a dispute arises, consumer advocates said.

Louis Vetere, CEO of Garden Savings Federal Credit Union in New Jersey, the sole lender on the panel, said that was his policy. “I am a huge believer in arbitration to settle disputes,” he said, “but that should be the decision of the customer.”

See related:Card issuers soften mandatory arbitration rules

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