The lengthy, often complicated terms of use for more than half of all credit cards — and nearly half of all federally insured bank deposits — include clauses that force customers into arbitration, taking away their right to sue these companies in a court of law and usually blocking them from joining together in a class action. Critics argue that these forced-arbitration clauses allow banks and other businesses to break the law with impunity. Heeding the call of lawmakers and consumer advocates, the federal Consumer Financial Protection Bureau has decided to consider rules that would ban this practice among financial institutions.
For those unfamiliar with arbitration clauses, here’s how it works: Somewhere in the contract or user agreement with a company (it’s not just banks; cable companies, telecom providers, tech manufacturers, and others are increasingly doing this), you might find a paragraph or two, usually under the heading of “dispute resolution.”
You can’t change these terms and rarely have the choice to opt out, meaning you have no choice but to accept the full contract or use another product.
But if you ever have a legal dispute with that company, you’ll find that these few sentences prevent you from going to court. Instead, you’re forced to enter into a process of mandatory binding arbitration that heavily favors the business. They understand the process, know the arbitrators (sometimes a little too well), and any damages that can be awarded are very limited so the customer is unlikely to find anyone willing to represent them in their case.
Additionally, many arbitration clauses explicitly bar customers from joining together as an affected class. Since many corporate legal disputes involve expensive experts and research, the award for an individual case (or even a few individual cases) is rarely enough to make it worthwhile for the customer or their attorney.
In 2011, the Supreme Court upheld the legality of these class-action bans in the case of AT&T Mobility v. Concepcion. Since then, the number of businesses using arbitration has increased.
Then in 2013, the nation’s highest court went even further in affirming the difficulty of challenging arbitration clauses. In the matter of American Express v. Italian Colors Restaurant, a group of AmEx-accepting merchants claimed that the only way they could afford to mount an antitrust lawsuit against the credit card giant was to pool their resources in a class action. On an individual basis, the costs would be too high and the rewards too little to justify the expense. But the SCOTUS majority held there was no “effective vindication” exemption to these arbitration agreements, even if they allowed companies to break the law.
The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the CFPB to study arbitration, and earlier this year, the Bureau released its first report on arbitration in the financial products sector.
It found that while the clauses are incredibly prevalent — 92% of prepaid debit cards and 88% of cellphone contracts use them — most consumers are completely unaware if they are affected. According to the CFPB, of those Americans constrained by arbitration agreements, fewer than 7% understood that this meant they had given up their right to file a lawsuit.
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray in statement. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”
Congress also gave the CFPB the authority to issue regulations in the public interest. But the rulemaking process is not an expedient one. So the first step is today’s release of an outline of the proposals under consideration. This is being done in advance of convening a Small Business Review Panel to gather feedback from industry stakeholders.
The proposals being considered would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts. While the CFPB can’t issue an outright ban on all arbitration clauses, the Bureau believes it has the authority to regulate these clauses on a variety of products, including: credit cards, checking accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.
And the proposed ban would not be an outright prohibition on arbitration clauses. Instead, it would require these terms to explicitly state that forced arbitration does not apply to class actions.
This is particularly important because many consumers don’t know when a company they do business with has broken the law. And even those who are aware may not have the time or inclination to pursue an individual claim, especially if the rewards are limited.
CFPB research found that only around 2% of U.S. consumers would consult an attorney to pursue an individual lawsuit as a means of resolving a small-dollar dispute. But if they are part of a class action, these consumers don’t need to pursue that individual claim.
“Group lawsuits depend on a group,” explains CFPB Director Cordray in his prepared remarks for today’s announcement in Colorado.
Even in cases where companies allow users to opt out — thus retaining their right to file lawsuits, Cordray says “The few consumers who opt out of arbitration find that very few others are still available to join their lawsuits. It is simply impossible to have an effective group claim where the vast majority of consumers have all lost their right to have their day in court.”
It’s also hoped that by taking away arbitration as a way to avoid class actions, companies will be more concerned about complying with the law.
Companies, most notoriously AT&T, have argued that mandatory binding arbitration is a pro-consumer practice that helps expedite disputes, and that the lower costs of arbitrating disputes is passed on to customers. Cordray says this doesn’t jive with the data.
“Our study was able to examine this claim closely by comparing large credit card companies that did and did not have arbitration clauses in their contracts, including some companies that previously had such clauses but had stopped using them in the wake of adverse litigation,” he explains. “Our analysis did not find evidence that credit card companies either increased prices or reduced access to credit when they eliminated their arbitration clauses.”
The CFPB proposals are being applauded by consumer advocates who have long called for an end to forced arbitration.
“The CFPB proposal would stop a company that has harmed millions of Americans from avoiding accountability for widespread wrongdoing,” says Lauren Saunders, associate director of the National Consumer Law Center. “If a company violates the law, a judge should be able to order the company to repay all of its victims and not force each person to hire their own attorney. Class action bans are a corporate get-out-of-jail-free card.”
