Signing away your right to go to court is part of most credit card agreements, but the CFPB is taking a look at mandatory arbitration requirements
Going into arbitration against a credit card company is a David-versus-Goliath mismatch. But new terms are popping up in card agreements that might at least give the little guy a slingshot.One big credit card issuer has softened its arbitration rules, which generally stop you from banding together with other angry customers and taking your beef to court. And more cards may follow its lead, as mandatory arbitration comes under increasing scrutiny.
“The advice we’re giving to clients is to make arbitration consumer-friendly,” said Alan Kaplinsky, partner at the corporate law firm Ballard Spahr and an architect of arbitration clauses. “You want to make sure the agreements get enforced in court.”
In the credit card arena, American Express built an exit door into its previously mandatory arbitration requirement in the first quarter of 2013, according to card agreements filed with the U.S. Consumer Financial Protection Bureau. The new language lets you opt out of arbitration, within certain deadlines. It also helps cover filing fees and lawyers’ bills in some circumstances and bumps up your award to $5,000 if you win. And instead of arbitration or court, the new language allows third-party mediation as another way to settle conflicts.
“While these are the early days (we only started doing this nine months ago), we are seeing consumers use these new channels so we know that they’re finding them valuable additions,” AmEx Vice President for Public Affairs Marina Norville said in an emailed response to questions.
But consumer advocates are skeptical. They say wording changes — short of dropping mandatory arbitration completely — are an empty gesture designed to fool courts and regulators. They deride pre-dispute arbitration as a kangaroo court where big companies hold all the cards and — as a 2007 study found — win practically all the cases.
Lopsided results helped prompt Congress to target arbitration for special scrutiny when it passed the Dodd-Frank Act. The law requires the CFPB to study pre-dispute arbitration clauses in financial products and impose new regulations if necessary to protect consumers. The agency — which has already outlawed mandatory arbitration by mortgage lenders — is expected to announce the study’s phase-one results this month, with possible new rules to follow sometime in 2014. The CFPB has scheduled a hearing on arbitration in Dallas on Dec. 12, which may provide the occasion for releasing study results.
When it comes to arbitration, “what makes it fair is for the consumer to have a choice after the dispute arises,” said Christine Hines, consumer and civil justice counsel at Public Citizen. “Putting that language into the fine print of these contracts is not fair.”
Giving up your day in court
Signing away your right to go to court probably isn’t your first concern when choosing a credit card. Who wants to sue a big bank? But consumer advocates say that locking the courthouse door to cardholders removes an important check on corporate behavior. Shielded from having their laundry aired in open court — and insulated from multi-million dollar class-action awards — card issuers can indulge in tricks to boost revenue, critics say.
A class-action lawsuit against Chase Bank — which doesn’t require arbitration for credit cards — for interest hikes on balance transfers in 2012 resulted in a $100 million settlement. The beef in the Chase Check Loan litigation was an example of “small-dollar” disputes that would be too costly for a single cardholder to pursue, but which can add up to millions of dollars in refunds when consumers band together. The base payment that cardholders will receive is $25, with additional awards based on the size of their costs resulting from Chase’s change in loan terms.
“People don’t sign up for financial services with the expectation they’re going to sue the company,” said Hines. “But they’re surprised if a dispute arises that they don’t have this right.”
The Supreme Court disagrees, or at least five-ninths of it does. Two of the top court’s decisions rebuffed challenges to corporate arbitration requirements. In 2011, Vincent and Liza Concepcion sued AT&T Mobility over a $30.22 sales tax on phones advertised as “free.” The court found that the company’s mandatory arbitration rule barred the couple’s lawsuit. The arbitration rule contained numerous protections and benefits for customers that helped offset the ban on class actions, including coverage of many customers’ legal costs and a minimum $7,500 award, or bump-up, for customers who win their dispute. In 2012, the court reinforced its ruling in Concepcion with a decision involving American Express that butressed the arbitration clause’s ban on class-action lawsuits.
Can’t get no litigation
Although some big card issuers dropped their arbitration requirements in 2009, it is still common to steer disputes away from the legal system. In a 2012 analysis, researchers found that 95 percent of card balances were subject to arbitration agreements. Similarly, arbitration is common for bank account customers at large banks, a study by Pew found.
Major cards differ in how tough they are in their arbitration language. For example, Discover allows new cardholders to reject the mandatory arbitration clause if they send a letter within 30 days of receiving the card. Many cards allow a review of decisions and offer help with filing fees and lawyer costs. So far, AmEx’s is the only major card agreement with a bump-up clause that provides a bounty for cardholders who win their argument.
CREDIT CARD ARBITRATION POLICIES
|Bank of America||No||NA|
|Sources: U.S. Consumer Financial Protection Bureau, CreditCards.com research. Updated Oct. 6, 2015|
Consumers are of two minds about arbitration versus court. While half in Pew’s survey support the goals of arbitration, such as avoiding costly and sometimes frivolous lawsuits, 68 percent say they want the option to go to court in a dispute.
“Consumers overwhelmingly wanted a choice, but they were very conflicted,” said Susan Weinstock of Pew Trusts. Proponents argue that an independent arbitrator can deliver justice faster and cheaper than court.
CFPB looks at the clauses
The CFPB’s study will provide a rare look inside arbitration. Only one state, California, requires arbitrators to report the won-lost record for companies versus consumers, and even there the reports are criticized as opaque and incomplete. Bob Wieckowski, the head of the state legislature’s judiciary committee, introduced a reform bill in April to tighten the reporting requirements on arbitration companies.
When it announced the launch of its study, the CFPB said people may not understand they are giving up their access to court when they sign a financial agreement. But reading the arbitration clause in your card agreement does not mean you’re necessarily protected from abuses.
“[E]ven if consumers understand arbitration clauses, these clauses may still have significant impacts that warrant study by the CFPB,” the agency said as it announced the launch of its analysis in 2012. Critics say the clauses can have a chilling effect, especially when they require that customers pay their own legal bills, even if they win. A court lawsuit typically makes the loser pay, and lawyers may work on contingency. But in pay-your-own-way arbitration, where damages are limited, it may not be worth it to bring a gripe even when your case is a slam-dunk.
A fighting chance?
Those are the sorts of imbalances that the new arbitration terms are aimed at correcting.
In its template agreement filed with the CFPB as of March 31, American Express’ Gold Card now has, instead of a standard pre-dispute arbitration clause, an expanded “Claims Resolution” section. It takes up one-and-a-half pages of the agreement’s seven-and-a-half page total. Other AmEx consumer credit cards have nearly identical language. The new section says that new cardholders can reject the pre-dispute arbitration requirement by sending a written notice within 45 days of making their first purchase.
If you don’t opt out by the deadline, the language contains the common arbitration clause barrier against taking a gripe to court, with the exception of small claims court. And it forbids joining forces with other consumers in a class action, either in court or in arbitration proceedings.
On the plus side, AmEx will pay your fees to bring a dispute against it, if fees exceed the amount you would pay to file in court, the agreement says. The company will consider whether to temporarily cover your costs for expert witnesses, if you ask in writing. And if you win an amount greater than the company’s settlement offer, the award will be bumped up to a minimum of $5,000, plus reasonable attorney fees and costs for experts.
“We have a vested interest in ensuring we handle these issues early and in a way that satisfies customers because we want them to continue doing business with us,” AmEx’s Norville said.
How well the new consumer-friendly clauses actually level the playing field remains to be seen — and the CFPB’s analysis will provide an important look. Consumer advocates suspect that big banks are willing to write clauses that sound fair, but have little chance of being used, in return for barring the door against class action lawsuits.
“People really don’t read those things,” said Brad Reid, business professor and senior scholar at the Dean Institute for Corporate Governance and Integrity at Lipscomb University in Nashville, Tenn. “While the 45-day opt-out is good, they’re probably counting on very few people ever triggering it.”
Arbitration proponents say that a look at the results of class-action lawsuits won’t be entirely rosy for consumers. Corporate targets of class actions often say they settle only to avoid the costs of court, and a big slice of the award frequently goes to lawyers rather than consumers.
In individual arbitration cases, “I think the outcomes will be similar to how consumers are doing in court,” Kaplinsky said. Since 2007, card issuers have largely stopped using arbitration for debt collection cases, which inflated their winning record, he said. And while the new arbitration language keeps its ban on class actions, that doesn’t mean gotcha practices by a bank can be kept quiet by keeping angry consumers out of court.
“It’s very easy for people to find out if a bank or a credit card issuer is not treating a customer right,” he said, including regulators and state attorneys general. In an Internet-enabled world, “It’s very easy for the word to get out.”