Watchdog: You Should Be Able to Sue a Credit Card Issuer

For years, consumer advocates have claimed that binding arbitration clauses have quietly but dramatically limited consumers’ ability to seek justice and have their day in court. On Tuesday, the Consumer Financial Protection Bureau released results of a broad study that appears to support those claims. While a majority of banking customers are subject to arbitration agreements that restrict their ability to join class-action lawsuits, three-quarters of consumers are unaware of the agreements, and only 7% realize a clause in the agreements restricts their ability to sue in court.

“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” said CFPB Director Richard Cordray. “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. Now that our study has been completed, we will consider what next steps are appropriate.”

Arbitration is intended to provide dispute resolution outside the traditional court system. In recent years, many consumer contracts have included a “pre-dispute arbitration clause” — where such a clause exists, either side can generally block lawsuits, including class actions, from proceeding in court. Instead, disputes are heard by an arbitration panel. Industry groups argue that arbitration saves money, which in turn lowers consumers’ costs for services; but opponents say the process unfairly favors corporations over consumers.

The Dodd-Frank financial reform bill banned arbitration clauses in mortgage contracts and enabled the CFPB to make more rules about their use. The study, released in advance of a hearing to be held Tuesday in Newark on arbitration clauses, is the first step in potential rule-making. Here are a few of the study’s most important findings:

Tens of millions of consumers are covered by arbitration clauses. For example, in the credit card market, card issuers representing more than half of all credit card debt have arbitration clauses – impacting as many as 80 million consumers. In the checking account market, banks representing 44% of insured deposits have arbitration clauses.
Companies do well in arbitration proceedings. Consumers filed roughly 600 arbitration cases per year on average in the markets studied: The CFPB’s review of case data from the leading arbitration administrator indicates that between 2010 and 2012, across six different consumer finance markets, 1,847 arbitration disputes were filed. More than 20% of these cases may have been filed by companies, rather than consumers. In the 1,060 cases that were filed in 2010 and 2011, arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance. Arbitrators also ordered consumers to pay $2.8 million to companies, predominantly for debts that were disputed.
Arbitration clauses can act as a barrier to class actions. By design, arbitration clauses can be used to block class actions in court. The CFPB found that it is rare for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to block class actions. For example, in cases where credit card issuers with an arbitration clause were sued in a class action, companies invoked the arbitration clause to block class actions 65% of the time.
No evidence of arbitration clauses leading to lower prices for consumers. The CFPB looked at whether companies that include arbitration clauses in their contracts offer lower prices because they are not subject to class action lawsuits. The CFPB analyzed changes in the total cost of credit paid by consumers of some credit card companies that eliminated their arbitration clauses and of other companies that made no change in their use of arbitration provisions. The CFPB found no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses.
There’s plenty of consumer confusion. The CFPB surveyed credit card consumers to analyze the extent to which they were aware, and understood the implications, of arbitration agreements. Among those who said they understood what arbitration is, over three-quarters acknowledged they did not know whether their credit card agreement contained an arbitration clause. Of those who thought they did know, more than half were incorrect about whether their agreement actually contained an arbitration clause. Among consumers whose contract included an arbitration clause, fewer than 7% recognized that they could not sue their credit card issuer in court.

“Many consumers have no idea that they have been stripped of their rights – until it is too late,” said Theresa Amato, executive director of consumer advocacy organization Citizen Works. “It’s time for the CFPB to use its power to ban these unfair forced arbitrations and class action waivers to correct the widespread problems their own research reveals.”