BACK

Research and Statistics

CFPB moves toward restriction on mandatory arbitration

Summary

The Consumer Financial Protection Bureau is considering a rule that would ensure consumers’ right to band together and sue credit card issuers

The editorial content below is based solely on the objective assessment of our writers and is not driven by advertising dollars. However, we may receive compensation when you click on links to products from our partners. Learn more about our advertising policy.

The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired. Please see the bank’s website for the most current version of card offers; and please review our list of best credit cards, or use our CardMatch™ tool to find cards matched to your needs.

CFPB considers rule limiting mandatory arbitration
CFPB considers challenge to mandatory arbitration

Credit cards and other financial products would lose their shield from group lawsuits under a potential new rule from the U.S. Consumer Financial Protection Bureau.

The rule would ban “class-action waiver” language in contracts, which blocks consumers from banding together to challenge practices they think are illegal.

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” CFPB Director Richard Cordray said in an announcement of the potential rules.

CREDIT CARD ARBITRATION POLICIES

IssuerArbitration?Opt-out?
American ExpressYesYes
Bank of AmericaNoN/A
BarclayCardYesNo
Capital OneNoN/A
ChaseNoN/A
CitiYesNo
DiscoverYesNo
Wells FargoYesNo
US BankYesNo
Sources: U.S. Consumer Financial Protection Bureau, CreditCards.com research, October 2015

Many financial products — and other services such as cellphone contracts — require customers to arbitrate disputes in an out-of-court forum, instead of filing lawsuits. Most such mandatory or “pre-dispute” arbitration language also contains a class-action waiver that blocks customers from taking united action, either in court or group arbitration.

In a March study, the CFPB found relatively few consumers challenged financial companies on their own. But group lawsuits generated refunds for millions of consumers while they deterred harmful corporate practices.

“Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing,” Cordray said.

Because arbitration is generally private, companies may continue to profit from a harmful practice even while they compensate individual consumers who complain about it.

While it is taking aim at barriers to group lawsuits, the CFPB is not considering outlawing all arbitration clauses, the outline states.

However, the rule may make information about arbitration claims and awards public, and publish the information on the CFPB website.

The outline of the potential rule released Wednesday will be discussed by a panel of small-business representatives before a formal regulation is proposed. The release of the outline comes the same day that the CFPB held a public hearing on arbitration in Denver.

Supporters of class action waivers at the hearing said they save companies costly and usually unnecessary court battles, thereby reducing prices. Most consumers are able to resolve their disputes informally, and shouldn’t have to shoulder the hefty legal bills run up by court battles, they said.

Companies’ dispute costs will soar — consumers will be the losers,” said Alan Kaplinsky, a partner at law firm Ballard Spahr who pioneered class action waivers. As a corporate lawyer, Kaplinsky said he’s seen how most class action lawsuits are settled with no money going to consumers. “Most of them are meritless,” he said. “They are brought by plaintiffs’ attorneys with no idea to prosecute the class action, but to extract a settlement and to be paid an attorney’s fee.”

Consumer advocates disagreed, saying arbitration clauses deprived consumers of legal help, putting them at the mercy of corporations.
“Clients indicated to us they were surprised they would not be able to have their day in court, as a result of an arbitration clause,” said Jose Vasquez, supervising attorney at Colorado Legal Services. Like most lawyers, attorneys at the legal aid office don’t represent arbitration proceedings because they lack the rules of evidence and procedure that are standard protections in court, he said.

The rule, if issued, would affect agreements for bank accounts, prepaid cards, private student loans, auto title loans and payday loans, as well as credit cards and some other financial products. It would not apply to arbitration agreements signed before the rule’s effective date, according to the CFPB outline.

In the credit card market, about 53 percent of card balances at major issuers are subject to arbitration clauses, a CFPB study found. In response to court rulings, some card issuers have softened their contract language to permit small-claims court actions or open an opt-out window for a limited period.

The rule-making appears to set up a conflict with the financial services industry. While mandatory arbitration is criticized by consumer advocates, companies say it can avert costly court battles. The U.S. Supreme Court has backed corporations in recent rulings, deciding that mandatory arbitration contracts shielded AT&T Mobility and American Express from lawsuits by disgruntled customers.

Across all financial products, tens of millions of consumers are covered by arbitration clauses, the CFPB said. The Dodd-Frank Act that created the CFPB requires the consumer protection bureau to study the impact of mandatory arbitration and regulate it if necessary. Federal laws already ban arbitration clauses in mortgage contracts and in consumer credit contracts for certain military service members and their families. In health care, the Department of Health and Human Services is considering rules for arbitration requirements in long-term care contracts.

See related:Credit card arbitration: What it is, how it works

What’s up next?

In Research and Statistics

Poll: Most cardholders lack smart-chip cards, despite deadline

No EMV card yet? You’re not alone. Even as an Oct. 1 deadline looms, 6 in 10 cardholders don’t have a chip card yet, our national survey shows

Published: September 30, 2015

See more stories
Credit Card Rate Report Updated: June 19th, 2019
Business
15.61%
Airline
17.54%
Cash Back
17.68%
Reward
17.57%
Student
17.79%

Questions or comments?

Contact us

Editorial corrections policies

Learn more

Join the Discussion

We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company’s business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.