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Bank arbitration stymies consumers

By Marcie Geffner ·
Friday, December 20, 2013
Posted: 6 am ET

Arbitration clauses are a major barrier for consumers who have a grievance against a bank or other company that offers financial products or services.

That conclusion is based on preliminary research recently released by the Consumer Financial Protection Bureau, or CFPB, a federal agency that looks out for consumers' interests in the financial services sector.

In its research, the CFPB found that banks commonly use arbitration clauses in credit card and checking account agreements, and though tens of millions of consumers are subject to these clauses, they filed only 300 disputes with the leading arbitration association, on average, each year from 2010 to 2012.

Arbitration is a way to resolve disputes outside the judicial system. Many contracts for consumer financial products and services contain a clause that says the company can require that disputes be resolved through arbitration.

Other findings:

  • Large banks were more likely than community banks or credit unions to include an arbitration clause in their credit card or checking account agreements. The CFPB estimated that 7.7 percent of banks use arbitration clauses for checking accounts, yet 62 percent of the top 50 banks have arbitration clauses in their checking account contracts.
  • Arbitration clauses were almost always more complex and written in language at a higher grade level than the rest of the contract.
  • About 90 percent of arbitration clauses expressly barred consumers from filing for class arbitration.
  • Consumers don't file arbitrations for small-dollar disputes. Rather, the average amount of debt at issue in debt dispute arbitration filings was more than $13,000. For other arbitration filings, the average claim was more than $38,000.
  • Few consumers file small claims court actions. Rather, these cases are much more likely to be brought by banks.

In a statement, CFPB Director Richard Cordray noted that many contracts for consumer financial products and services contain arbitration clauses and that the preliminary findings will help the agency better understand how these clauses affect consumers.

Follow me on Twitter: @marciegeff.

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