Arbitration clauses in the fine print of credit-card and checking-account agreements harm consumers by limiting the compensation they can receive in disputes with financial firms, the nation’s top consumer financial guardian said.
More than 75 percent of consumers didn’t know if they were subject to the clauses, many of which limit the ability to go to court to settle disputes, according to a study released Tuesday by the Consumer Financial Protection Bureau.
Fewer than 7 percent of those covered by arbitration provisions knew that the terms restricted the ability to sue or participate in class-action cases, the study found.
Those class-action suits often produce larger payments to consumers than arbitration proceedings, the consumer bureau said.
The provisions allow either the financial firm or the consumer to require that any dispute be settled by a private arbitrator instead of in court.
The study’s findings are a prelude to the next step the bureau will take, which could be new regulations limiting the use of arbitration clauses, which have become more prevalent over the past 20 years.
“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” said Richard Cordray, the bureau’s director.
“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,” he said.
The agency was mandated by the 2010 Dodd-Frank financial-reform law to study the use of arbitration clauses.
The Financial Services Roundtable, a trade group representing large firms, defended the use of those clauses, saying they help keep down the costs of credit cards and other products.
“Arbitration makes it possible for American consumers to resolve disputes in a cost-effective, fair and timely manner that often benefits all parties involved,” said Richard Foster, the group’s senior vice president of legal and regulatory affairs.
But the National Consumer Law Center urged regulators to “act quickly to ban forced arbitration in consumer financial contracts.”
“The findings of the CFPB’s study are crystal clear. These clauses are written by corporations to set up a secret and lawless process that prevents consumers from holding corporations accountable for unlawful conduct,” said David Seligman, an attorney with the center.
The study found that about 16 percent of credit-card issuers included arbitration clauses in their consumer agreements. But many of those are large banks with big customer bases, so a little more than 50 percent of all outstanding credit-card debt is covered by arbitration clauses.
About 8 percent of banks, covering 44 percent of federally insured deposits, have arbitration clauses in their checking-account contracts.
In 1,060 arbitration cases filed in 2010 and 2011, arbitrators awarded consumers a total of about $175,000 in damages and $190,000 in debt forgiveness, the study said. Companies fared better, with arbitrators ordering consumers to pay $2.8 million, mostly for disputed debts.
At the same time, 419 class-action settlements from 2008-12 yielded a total of $2.7 billion in consumer relief. About 18 percent of that went to attorneys who filed the suits.