banking

Beat the bank in mandatory arbitration?

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Highlights
  • Pew study: 98 percent of banks have clauses waiving a jury trial.
  • Arbitration clauses save banks money by preventing costly class-action lawsuits.
  • Once an arbitrator is selected, you'll be asked to send in a letter to argue your case.

Just say "mandatory arbitration" a couple of times. It may make you feel a little drowsy. But if you ever find yourself in a dispute with your bank or other financial services provider, those two words could determine your chances of successfully resolving it.

Mandatory arbitration clauses are bits of legalese inserted into customer agreements for checking accounts and other financial products, requiring customers to settle disputes with the bank through an arbitrator rather than the courts.

A 2012 study by the Pew Charitable Trusts' Safe Checking in the Electronic Age Project found 66 percent of checking account agreements at the nation's largest banks had mandatory arbitration clauses tucked away inside. Even if the customer agreement allows you to use the court system to challenge your bank, you'll probably still find some restrictions. Of the banks surveyed, a whopping 98 percent had clauses waiving a jury trial; 32 percent had clauses requiring customers to pay some or all legal losses, costs and expenses.

"We found that all the banks restrict consumers from options to resolve their disputes," says Susan Weinstock, project director for Pew's Safe Checking in the Electronic Age Project.

If a majority of large banks forcing consumers into mandatory arbitration seems like a minor point, it's not. There are significant differences between arbitration and trials conducted in the court system, Weinstock says.

Lack of a discovery process means you won't be able to force banks to turn over records and answer questions to help you prove your case. And the results of arbitration are often confidential, so you can't draw any information or precedent from past arbitration cases involving the company or industry, she says.

Banks love arbitration

So why do banks love arbitration clauses so much? Mostly because it saves them money, says Paul Bland, a senior attorney with Public Justice, a public interest law firm in Washington, D.C.

Arbitration clauses save banks money primarily by preventing costly class-action lawsuits. Most clauses prohibit consumers from banding together to sue a financial institution. The downside for consumers is that such prohibitions make it easier for financial institutions to improperly extract cash from customers' pockets a few dollars at a time. Individually, those few dollars wouldn't merit filing an arbitration case, Bland says.

For example, Bland recently handled a case where American Express allegedly underpaid rebates promised to cardholders. Those rebates together probably add up to millions of dollars, but few of the customers who lost out on $100 or less would be willing to take the dispute to arbitration, he says.

"That is a case that can only really be done as a class action," Bland says.

Lack of consumer awareness and hard-to-understand arbitration clauses that vary drastically between banks also may keep consumers from filing complaints, Bland says.

"I talk to a lot of consumers who do not really know what arbitration is and do not really feel like they understand it," he says.

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