CFPB: Arbitration hurts consumers

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  • Banks often force customers to agree to settle disputes in private arbitration rather than in public courts.
  • A new Consumer Financial Protection Bureau study finds the practice is harmful to consumers.
  • The CFPB may soon place limits on how and when banks can require arbitration.

Why should you care?

Not a lot of people know this, but if you have a dispute with your bank, there’s a good chance your account agreement prevents you from suing it or joining a class-action lawsuit against it. Instead, you’ll have to plead your case to an arbitrator chosen by the bank.

The gist

This week, the CFPB released new research showing that banks’ practice of forcing customers into binding arbitration has a wide range of downsides for consumers. The next step for the CFPB may be to use the findings to come up with new rules for banks that restrict how and when they can require customers to use arbitration.

The rest of the story

Snippets of legalese known as arbitration clauses that restrict consumers from suing companies, and instead direct disputes to private arbitrators have become an increasingly standard part of the legal agreements that consumers have to agree to, to get credit cards, checking accounts, prepaid cards and other financial products.

The exhaustive 700+ page CFPB report shows that arbitration clauses have a broad range of negative consequences for consumers.

They discourage individual consumers from pursuing claims. The CFPB found that the number of arbitrations filed by individual consumers was much lower than one would expect given the number federal lawsuits filed by those who still have that option.

“(Arbitration) is, effectively in many cases, a way to squelch claims,” says David Seligman, staff attorney at the National Consumer Law Center. Looking at the CFPB data, the number of arbitration claims filed is “shockingly small” when you consider that the industries in question affect tens of millions of people, Seligman says.

In fact, in the period the CFPB studied, there was an average of only 33 cases per year involving amounts of $1,000 or less nationwide.

The squelch legitimate class-action lawsuits. Arbitration clauses generally prevent customers from joining together in class-action lawsuits. That’s bad for two big reasons.

  • A lot of banking misdeeds bilk a lot of customers out of a relatively small amounts of money rather than the other way around. That means that individuals are less likely to go after the bank, because filing a lawsuit over tens or even hundreds of dollars isn’t something a lot of people do.
  • It creates an especially big barrier for lower- and middle-income consumers to pursue claims.

“The consumers in those industries, often very low-income consumers, who are the victims of predatory action, don’t have the resources and the time to go and pursue a claim individually, they’re never going to get relief,” Seligman says.

They reduce consumer protections. The way that many consumer protection laws are enforced is through civil litigation. By blocking civil suits brought by customers, financial institutions effectively give themselves an end-around against these protections.

“For a lot of these companies, class action wavers and arbitration clauses are a way of rewriting the law on your own, without going through Congress, without going through a legislature,” Seligman says. “You prevent yourself from ever being held accountable.”

They confuse consumers. In surveys conducted by the CFPB for the report, relatively few customers understood what arbitration was, whether they were subject to it and how it works in practice.

They don’t lead to lower prices. The big selling point for arbitration has always been that reducing legal costs by blocking customer lawsuits would result in lower prices for consumers. But that hasn’t been the case, according to the report.

Action ahead?

The results of the study may set the stage for the CFPB putting limitations on when banks and other financial institutions can shunt customers into binding arbitration.

“In our governing statute, Congress specified that the results of this arbitration study are to provide the basis for important policy decisions that the Consumer Bureau will have to make in this area,” CFPB director Richard Cordray said in a statement, coinciding with the release of the report. “So people are right to be interested in digesting these results and considering how we intend to fulfill the objectives established by Congress. ”

What do you think? Do you like the idea of going to a private arbitrator to resolve a dispute with your bank or would you rather be able to file a lawsuit in court or join a class action?

Follow me on Twitter: @claesbell.