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

Under mandatory arbitration, companies can require their customers to take disputes into a private panel, chosen by the company, instead of going to court.

While corporate groups say arbitration is a streamlined alternative to the lengthy court process, consumer advocates say it is designed to shield corporate wrongdoing.

Legislation signed Nov. 1 repealed a consumer protection rule that would have curtailed arbitration clauses in financial contracts. The rule by the Consumer Financial Protection Bureau, which would have taken effect in 2018, forbid companies from using arbitration to block group action by their customers.

“President Trump just handed a get-out-of-jail-free card to financial fraudsters,” Melissa Stegman, senior policy counsel at the Center for Responsible Lending, said in a statement on the legislation. “This unjust law enables companies to block group lawsuits by consumers, thus removing an indispensable check on corporate misconduct.”

Options to avoid card arbitration 

A CreditCards.com review of 30 large card issuers finds that two-thirds use mandatory arbitration clauses to block customers’ access to court, based on their current credit card agreements filed with the CFPB. (Editor’s note: Since publication of this story, one of the banks has been taken over by a larger bank.)

However, there are significant exceptions. Card users who want to keep their rights to a day in court can:

• Pick a card that doesn’t require arbitration. Of the 30 issuers, nine didn’t have a mandatory arbitration clause in their terms and conditions, including some of the largest – Chase, Bank of America and Capital One.

• Opt out of arbitration early in the contract. Of 21 issuers that do have an arbitration requirement, 12 allow customers to reject the clause by sending an opt-out letter. The letter must be sent within the first month or two of opening the account. Opting out won’t cause you to be treated differently by the company, the opt-out clauses say.

• Take the dispute to small claims court, or the equivalent in your jurisdiction. All but two of the banks (Key Bank and Fifth Third Bank) with mandatory arbitration clauses made an exception for disputes brought in small claims court, allowing them as long as they only involve individual claims.

Arbitration clauses are common practice

The options available for credit card users are relatively rare, according to studies of arbitration. Among payday lenders and cellphone providers, arbitration clauses cover practically all consumers, the CFPB found in a 2015 study. Mandatory arbitration clauses are also widespread in contracts for home building, nursing homes and other services outside the financial sector.

Among major card issuers, Chase, Capital One and Bank of America agreed to give up their credit card arbitration clauses for a period as part of a 2009 settlement of anti-trust claims. The period expired in 2013. So far, the three banks have continued to leave the clause out of their credit card contracts. Credit unions – few of which have substantial credit card businesses – rarely have arbitration clauses for their cards or other types of services.

The impact of arbitration clauses on consumers

While card users focus on miles or points – or just making their minimum payment – they overlook important terms in the fine print. By blocking customers’ legal rights with an arbitration clause, banks can insulate themselves from court actions that might challenge their fees, debt collection and other practices.

California resident Laurie Scott sued Chase Bank in 2013 for enrolling her in overdraft protection, linking her checking account to her credit card, without her consent.

The practice racked up fees for the bank – including a $50 transfer charge to cover a 26-cent overdraft in 2010. Scott filed a class-action suit seeking refunds for other Chase customers in her position, estimated to total more than $5 million.

But a mandatory arbitration clause covered the Chase checking account – although not the credit card – causing her lawsuit to be thrown out. Under the arbitration clause, Scott could only bring an individual action against Chase, and only through the arbitrator listed in Chase’s contract with her, a federal appeals court ruled.

Individual cardholders don’t relish the idea of taking on a big bank in court. But they can have strength when banding together in class actions.

According to the CFPB’s study of arbitration in 2015, consumers lose more than they win in the private forums, which lack an appeal process and are not bound to enforce consumer protection laws.

By contrast, class-action awards in a four-year period yielded $2 billion in cash refunds, plus in-kind benefits and changes in business practices, the CFPB found.

The clauses “restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year,” former CFPB director Richard Cordray said in announcing the report on arbitration agreements.

Limits of opting-out

Opting out of arbitration individually doesn’t necessarily restore consumers’ ability to join group lawsuits, legal experts said. Court rules require at least 100 other people with the same problem to create a class.

For the case to make economic sense to class-action lawyers, who may face years of work, the number may need to be much larger, legal experts said. Without a critical mass of other consumers with the same complaint, a class action is unlikely to make economic sense.

“If I want to go after Discover, I’m going to have to bring that case alone,” said Myriam Gilles, professor at Cardozo Law School in New York who has studied arbitration.

The CFPB rule took aim at banks’ “class-action waivers,” a part of the arbitration requirement that prevents customers from joining group lawsuits. All 21 of the mandatory arbitration clauses in card issuers’ contracts reviewed by Creditcards.com contained such a waiver blocking group action.

Consumer advocates say that’s no coincidence. Companies are more concerned about groups of customers represented by teams of lawyers seeking large-dollar claims than one-on-one court fights with individuals.

“Yes, you do have a right not to be pushed into arbitration,” said Gilles, who has studied arbitration clauses and class actions. “But it’s not a very significant or meaningful right.”

Soldiers, dependents, exempt from mandatory arbitration

However, it’s not just people who opt out who are exempt from mandatory arbitration clauses.

Under the Military Lending Act, active service members and their dependents are exempt from mandatory arbitration in financial contracts.

There are about 1.3 million active duty military in U.S. forces, according to the Defense Department. That means civilians who opt out join a relatively large group of other consumers – active servicemembers – who are eligible to start or join a class-action lawsuit.

Small claims court doors remain open

Of the 30 card issuers reviewed, all but two – Key Bank and Fifth Third Bank – made an exception to arbitration for actions brought in small claims court.

“Most of the mandatory arbitration clauses we see almost everywhere these days do carve out an exemption for small claims court,” said Martin Wegbreit, director of litigation at the Central Virginia Legal Aid Society in Richmond.

Although the rules differ from state to state, most small claims courts are characterized by low dollar limits on claims – usually with ceilings of $2,000 to $7,000, with an upper limit of $15,000, according to a paper by the American Bar Association.

Sometimes called county courts or magistrate’s courts, they offer low filing fees to launch a case and informal procedures that allow arguments to be made by consumers unrepresented by lawyers. Indeed, some of the courts don’t allow lawyers.

Small claims court is often where card issuers, or their debt collectors, file lawsuits against customers to collect debts. But it can work the other way as well, when a customer has a gripe that can’t be resolved by complaints to customer service.

“It’s not intended to help the consumer \u2026 [companies] want to have the ability to take consumers to court for collection,” Gilles said. She said she sometimes recommends that wronged consumers file in small claims. “It’s good to be heard – sometimes they’ll [card issuers] even default, not show up,” handing a victory to the consumer.

See related: Senate repeals rule that allows consumers to band together and sue, DIY credit card arbitration: You may be able to opt out, Credit card arbitration: What it is, how it works