The majority of borrowers who accept the terms of a mortgage or a new credit card or auto loan don’t realize they are signing away their right to sue the lender.
And few realize they can seek relief through an arbitration process pre-determined by the financial product provider.
In a new report, the U.S. Consumer Financial Protection Bureau (CFPB) sheds light on the issue of arbitration agreements, finding that such clauses in lending terms restrict the borrower’s ability to sue in court.
Very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements, the CFPB said.
The CFPB found that arbitration clauses were present in 53 percent of credit cards studied, 92 percent of prepaid cards and 86 percent of private student loan lenders.
“Over three quarters of those who said they understood what arbitration is acknowledged they did not know whether their credit card agreement contained an arbitration clause,” the CFPB said in a summary of the findings. “Among consumers whose contract included an arbitration clause, fewer than 7 percent recognized that they could not sue their credit card issuer in court.”
Arbitration is a method of resolving disputes outside the court system. In recent years, many contracts for consumer financial products and services have included a “pre-dispute arbitration clause.” They state that either party can require that disputes be resolved through arbitration, instead of the court system.
Where such a clause exists, either side can generally block lawsuits, including class actions, from proceeding in court.
“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” said CFPB Director Richard Cordray. “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 2010 Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to study these pre-dispute arbitration clauses in financial markets. Dodd-Frank also the agency to come up with rules regulating their use to protect consumers.
Tens of Millions Affected
The CFPB found that tens of millions of consumers are covered by arbitration clauses. In the credit card market, card issuers representing more than half of all credit card debt have arbitration clauses – affecting as many as 80 million consumers. In the checking account market, banks representing 44 percent of insured deposits have arbitration clauses.
The CFPB’s review of case data from the leading arbitration administrator found that between 2010 and 2012, across six different consumer finance markets, 1,847 arbitration disputes were filed. Here are the highlights:
- More than 20 percent of these cases may have been filed by companies, rather than consumers.
- In the 1,060 cases that were filed in 2010 and 2011, arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance.
- Arbitrators also ordered consumers to pay $2.8 million to companies, predominantly for debts that were disputed.
- Between 2010 and 2012, consumers filed 3,462 individual lawsuits in federal court about consumer finance disputes in five of these markets.
- The CFPB analyzed all individual cases filed in four of these markets and a random sample of the credit card cases and found that of the relatively few cases that were decided by a judge, consumers were awarded just under $1 million.
Here is a fact sheet on the CFPB’s findings.