WASHINGTON—Pre-dispute forced arbitration clauses in consumer finance markets, including those in credit card contracts, are detrimental to consumers’ ability to seek legal relief when they are wronged, according to an Arbitration Study” released by the Consumer Financial Protection Bureau.
In addition, a vast majority of consumers are unaware of the clauses and do not fully understand how these prevalent clauses can be used to deny them access to relief in court, according to the CFPB.
The forced arbitration clauses, which are included in most financial contracts, direct consumers to settle disputes not in courts with judges and juries, noted the CFPB, but instead to private entities that the financial provider selects.
“When consumers purchase goods or services, they generally cannot negotiate the terms of the purchase contract and often must agree to forced arbitration, waiving their right to sue a company in court, if a dispute arises in the future or else forgo the good or service,” said the CFPB. “Arbitration clauses often include class action bans, which prohibit consumers from joining together to litigate claims involving common legal and factual issues.”
Among the findings in the CFPB’s Arbitration Study, which is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act:
- Arbitration agreements affect tens of millions of consumers. The CFPB said that credit card issuers representing more than 50% of credit card debt have arbitration clauses. Similarly, in the checking account market, banks representing 44% of insured deposits have arbitration clauses.
- Consumers don’t often bring claims against companies on their own. The CFPB’s analysis shows that from 2010 to 2012, consumers filed an average of just over 1,150 consumer financial cases relating to five product markets in federal court each year. Further, while most arbitration clauses that the CFPB reviewed contained small claims court carve-outs, consumers rarely file cases in small claims court against companies. For example, in 2012, consumers in jurisdictions with a combined total population of around 85 million filed fewer than 870 small claims court credit card claims, the CFPB found.
- When consumers do bring claims against companies, they are much more likely to do so in court instead of through arbitration. The CFPB’s analysis shows that from 2010 to 2012, consumers filed roughly 600 arbitration cases per year on average in the markets studied.
- Consumer finance class actions allow consumers an effective mechanism to collectively seek economic reimbursement when they are harmed by companies, and to remediate business practices. According to the CFPB, roughly 32-million consumers on average are eligible for relief through consumer finance class action settlements each year. In the class settlements the CFPB reviewed, the annual average of the aggregate amount of the settlements was around $540 million per year.
- Arbitration clauses can act as a barrier to class actions. The CFPB found that it is common for arbitration clauses to be invoked to block class actions.
- Consumers don’t know they are bound by arbitration clauses and don’t fully understand how these clauses can limit their rights. The CFPB said 75% of respondents did not know if they were subject to 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.