DIY credit card arbitration: You may be able to opt out

Most card issuers with mandatory arbitration clauses offer a fine-print escape hatch

Many credit cards and other financial services require you to take disputes to private arbitration instead of court when you are wronged.

Now, lawmakers are battling over the use of mandatory arbitration in contracts, which consumer advocates call a "rip-off clause," saying it can shield companies from accountability.

The government's consumer watchdog agency has written a rule to limit how companies use arbitration – but deregulation-minded Republican lawmakers are working to repeal it. The House of Representatives voted 229 to 184 to void the rule on Tuesday in a party-line vote. A Senate repeal measure would only need GOP support to win, and the White House has signaled that President Trump will sign it.  

While Washington squabbles over the issue, credit card users can work to preserve their own legal rights by:

• Choosing a card that doesn't require arbitration.
• Rejecting the arbitration requirement in most cards that include it.

How, and when, it's possible to reject credit card arbitration clauses
A review of credit card contracts on file at the Consumer Financial Protection Bureau by CreditCards.com found that, of 11 major issuers, eight contained mandatory arbitration clauses. These contracts required customers to take disputes to arbitration instead of court, and forbid them from joining class-action lawsuits.

However, most of the issuers with arbitration clauses – five out of those eight – offered users a fine-print escape hatch. Within 30 to 60 days of opening the account, users can reject the arbitration clause by sending a formal rejection letter in writing.

Consumer advocates say, however, that the opt-out clause buried in the fine print is unlikely to be used by large numbers of people, limiting its effectiveness in restoring people's legal rights.

"It's a fig leaf merely intended to help the clauses look voluntary when they are not, and stand up in court," Lauren Saunders, associate director of the National Consumer Law Center, said in an email response to questions.

Does your credit card issuer allow you to opt out of mandatory arbitration?
The chart below shows the 11 major credit card issuers in the U.S. and their arbitration policies at a glance. To learn more about each card issuer's arbitration policy and instructions on how to opt out of mandatory arbitration, click on the link "See individual card details:" 

What is arbitration
Arbitration is a private dispute resolution process. Credit cards that require it for claims not resolved by customer service usually use the American Arbitration Association to administer cases and resolve disputes. Only individual legal claims in small claims court are exempt from the arbitration requirement.

Citibank's clause, for example, explains that "you cannot go to court, have a jury trial or initiate or participate in a class action if you have a dispute with us," the company's cardholder agreement states.

In a 2015 study, the U.S. Consumer Financial Protection Bureau found that over 50 percent of the credit card business, measured by balances, is covered by arbitration requirements. For checking accounts, about 44 percent of deposits are subject to an arbitration requirement, which is common at large banks. Smaller and mid-sized banks, and credit unions, usually don't have arbitration requirements.

Most arbitration clauses include a "class-action waiver," meaning a prohibition against joining or launching a class-action lawsuit involving a group of similar claims. Class actions allow consumers to get refunds and other kinds of payback for relatively small claims that affect large numbers of people, which wouldn't make sense to pursue individually.

Arbitration has a controversial history in the credit card market, where several large issuers dropped the policy after a scandal involving the National Arbitration Forum, then one of the largest arbitration dispute handlers. While representing itself as a neutral arbiter, the company was actually linked to a large collection agency.

Consumer bureau's rule ignites battle
The CFPB announced a final rule prohibiting class-action waivers in arbitration requirements on July 10. It published the rule in the Federal Register on Wednesday. Companies could still require arbitration in individual cases, but would have to file information about the cases with the consumer bureau, including the outcomes.

The chairman of both House and Senate banking committees, Rep. Jeb Hensarling and  Sen. Michael Crapo, announced a push last week to repeal the regulation using the Congressional Review Act, calling it bureaucratic excess that will harm consumers. The review act allows repeal of a regulation within 60 legislative days after it is published. A simple majority is required in both houses of Congress for passage, meaning that united Republicans could repeal the CFPB's arbitration rule over Democratic opposition.

The American Bankers Association applauded the repeal effort, saying that arbitration is more efficient than court and results in better outcomes for consumers than the legal system.

“As Congress considers changes to the CFPB’s structure and accountability, we also urge lawmakers to overturn this rulemaking,” ABA President Rob Nichols said in a statement.

If the rule survives repeal, and likely court challenges, it would take effect for contracts signed after March 19, 2018. Existing contracts would be grandfathered, meaning that consumers would still be bound by existing class-action waivers.

Allowing new customers to opt out of the arbitration requirement is seen as giving the contract greater legitimacy.

Whether the opt-out provision actually restores consumers' legal rights, however, depends on whether enough consumers use it to expose the corporation to court action. If relatively few customers take advantage of the opt out, there won't be enough of them to support a class-action lawsuit if a company action harms large numbers of customers.

"I generally think opt-out isn't enough," said Michael Best, director of advocacy outreach at the Consumer Federation of America. "You have to know you can opt out, you have to find it … these are long contracts."

Arbitration versus court
Supporters of arbitration say that class-action lawyers often reap most of the benefits, at consumers' expense. Consumer advocates respond that banning consumers from joining class actions merely shields companies from accountability. Before its fake account scandal became widespread knowledge, Wells Fargo used its arbitration requirement to block lawsuits from affected customers.

In its 2015 study, the CFPB examined 419 financial services class-action settlements from 2008 to 2012, which covered up to 350 million class members. Based on the 60 percent of cases where data was available, cash won by plaintiffs totaled $1.1 billion, after expenses and fees, including legal fees. The amount doesn't include in-kind relief, such as changes in company policies.

By comparison, a study of AAA arbitration cases in 2010 through 2012 found consumers filed an average of 411 cases a year. Average awards were higher than in court, but only a relative handful of people benefitted, with total payouts well under $1 million. In 240 company arbitrations initiated by companies where results could be determined, arbitrators sided with the company 93 percent of the time.

Arbitration and opting out: individual card details