New arbitration rules could be forthcoming
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by Carol Thompson
Proponents say arbitration is a cheaper alternative to court. Opponents say arbitration takes away their rights. The Consumer Financial Protection Bureau leans with the opponents.
Yesterday, the agency director Richard Cordray released a long-awaited report on mandatory arbitration clauses following a two-year study.
The study was mandated by the Dodd-Frank Act, and the CFPB has the authority to issue regulations regarding arbitration clauses.
Arbitration is preferred by financial institutions because of the lower cost of legal fees. Consumers who lose an arbitration, however, can get hit with exorbitant legal costs when they are mandated to pay for the opposing party’s attorney fees. Consumers who lose an arbitration have little recourse, unlike court where a case can be appealed and sent before a higher court.
The study found that of the 1,060 arbitration cases filed with the American Arbitration Association in 2010 and 2011, consumers received less than $400,000 in relief and debt forbearance, compared to the $2.8 million companies received.
The CFPB studied arbitration clauses in checking accounts, credit cards, prepaid cards, payday and private student loans, and mobile wireless services, and found that tens of millions of consumers were under arbitration agreements, but few knew about them or knew that they had waived the ability to take their dispute to court.
By design, arbitration clauses can be used to block class actions in court. The CFPB found that it is rare for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to block class actions. For example, in cases where credit card issuers with an arbitration clause were sued in a class action, companies invoked the arbitration clause to block class actions 65 percent of the time.
“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” Cordray said. “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. Now that our study has been completed, we will consider what next steps are appropriate.”
The CFPB looked at whether companies that include arbitration clauses in their contracts offer lower prices because they are not subject to class action lawsuits. The CFPB analyzed changes in the total cost of credit paid by consumers of some credit card companies that eliminated their arbitration clauses and of other companies that made no change in their use of arbitration provisions. The CFPB found no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses.
The Bureau looked at nearly 850 consumer-finance agreements to examine the prevalence of arbitration clauses and their terms. The CFPB also reviewed more than 1,800 consumer finance arbitration disputes filed over a period of three years and more than 3,400 individual federal court lawsuits. The Bureau also looked at 42,000 credit card cases filed in selected small claims court in 2012.
The Bureau supplemented this research by assembling and analyzing a set of roughly 420 consumer financial class action settlements in federal courts over a period of five years and over 1,100 state and federal public enforcement actions in the consumer finance area. The CFPB also conducted a national survey of 1,000 consumers with credit cards concerning their knowledge and understanding of arbitration and other dispute resolution mechanisms.