banking

Beat the bank in mandatory arbitration?

Arbitration is rarely used

Few bank customers ever file cases with arbitrators.

The American Arbitration Association, a leading arbitrator used by many financial institutions, only sees consumers file around 500 cases per year nationwide, says Richard Naimark, an association senior vice president.

Naimark believes that while it's presently small, the number of arbitration cases filed by consumers will rise in the wake of the landmark Supreme Court case, AT&T Mobility LLC v. Concepcion.

That ruling, which made it almost impossible for consumers to get around arbitration clauses, has pushed more banks to adopt the practice, Naimark says.

Public Justice's Bland says that ruling also means that if an arbitration proceeding doesn't go the consumer's way, he or she is stuck with it.

"Once the arbitrator makes a decision, it is almost impossible to get an arbitrator's decision overturned in court," Bland says. "There was one case from the U.S. Court of Appeals from the Third Circuit that said 'glaring errors of law' are not grounds for a returning of the decision."

Data on consumers' chance of success in mandatory arbitration are hard to come by, in part because the results of arbitration claims are usually confidential, Bland says. A 2009 study sponsored by the Searle Civil Justice Institute found that consumers prevail in 53 percent of arbitration cases brought to the American Arbitration Association.

But a 2007 study by Public Citizen found that California credit card customers lost 94 percent of arbitration cases handled by the National Arbitration Forum, which has since been barred from handling consumer cases by a legal settlement with the state of Minnesota.

What to do if arbitration happens to you

If you have to go through arbitration, the proceeding is fairly straightforward, Bland and Naimark agree. You'll initiate the case by filling out a "demand form" on the arbitrator's website and pay a nonrefundable fee. For arbitration association cases involving less than $10,000, the fee is $125; for claims of more than $10,000, it's $375 or more, Naimark says.

Once an arbitrator is selected by the firm, you'll typically be asked to send in a letter arguing your side of the case, along with any evidence you may have. After that, you may have a telephone or in-person hearing that lasts at most a day, after which the arbitrator will rule.

Bland has a few tips for consumers who are thinking about filing a case.

  • Read the fine print. Look over your account's terms and conditions and on the arbitration firm's website before proceeding with any type of action. It's easy to make a mistake if you don't know the rules of engagement, Bland says.
  • Pick your battles. You may end up picking up the tab for the arbitration firm and the bank's defense if you lose, depending on the rules established by the account agreement. Those costs can far exceed the amount of money in dispute in many cases, Bland says.
  • Play for keeps. Once an arbitrator has decided a case, it's nearly impossible to overturn, so be sure you're ready to pursue a case properly before filing with an arbitrator.
  • Consider getting an attorney. Arbitration has sometimes been sold as beneficial to consumers because they don't require legal representation, but a lawyer can help you navigate the process more effectively and avoid missteps that could be fatal to your chances of winning.

Help on the way?

If you're considering arbitration, you may want to wait. Under a provision in the Dodd-Frank financial reform law, the Consumer Financial Protection Bureau is studying whether arbitration hurts consumers. If their inquiry turns up evidence that it does, the CFPB will decide whether to impose conditions on how arbitration clauses can be used, says CFPB spokeswoman Moira Vahey.

"After the Bureau completes its study, it will assess whether imposing conditions or prohibitions on arbitration clauses would better protect consumers and serve the public interest," she says.

Until then, you can try doing business with institutions that don't have arbitration clauses in their fine print. Not all banks have mandatory arbitration clauses, and some allow new customers to opt out of arbitration when you first sign up for an account by calling a number or speaking with a banker. Either way, if you have an option to avoid arbitration, you probably should, Bland says.

"I think nearly every person who represents consumers or advocates for consumers would recommend that they opt out. The only people who would tell them otherwise would be employees and representatives of banks," he says.

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