Arbitration in Consumer Financial Contracts

When someone obtains a consumer financial product such as a credit card, a checking account, or a payday loan, he or she typically gets the company's standard form written legal contract.  There is no negotiating the terms of these type of contracts.  The terms are generally offered on a take-it-or-leave-it basis.  And these contracts now commonly contain what is called an arbitration clause, according to a preliminary study on arbitration by the Consumer Financial Protection Bureau.

Arbitration refers to an alternative means of resolving any disputes that arise between the consumer and the company.  Generally, it eliminates the consumer's right to file a lawsuit and go to the courthouse to have the dispute settled.  It replaces a civil jury and judge with a privately-appointed individual--an arbitrator--who is empowered to resolve claims that arise between the parties.

The CFPB has been tasked by Congress with studying the impact of these arbitration clauses in consumer financial contracts.  The CFPB released preliminary study results today that focus on who files these disputes, in what numbers, against whom, and about what.  In later work, the CFPB will address what happens in these formal disputes and at what cost.

Some of the more interesting findings of today's report include:

--When it comes to the credit card market, size matters.  The larger bank issuers are more likely to include arbitration clauses than smaller bank issuers and credit unions.  As a result, just over 50% of credit card loans outstanding are subject to arbitration.

--The same is true for the checking account market.  Larger banks tend to include arbitration clauses in consumer checking contracts, while mid-sized and smaller banks and credit unions do not.

--Arbitration clauses are more complex than the rest of the contract.  In credit card contracts, the arbitration clause section of the contract was almost always more complex and written at a higher grade level than the rest of the contract.

--Nearly all the arbitration clauses the CFPB studied expressly bar consumers from filing class arbitration.  About 90% of the contracts with arbitration clauses - covering close to 100% of credit card loans outstanding, insured deposits, or prepaid card loads subject to arbitration - include such no-class arbitration provisions.  Although these terms effectively preclude all class actions, in court or in arbitrations, some arbitration clauses also expressly take away the consumer's ability to participate in class actions in court.

--Consumers do not choose arbitration over class action settlements.  The CFPB identified a number of class actions involving credit cards, deposit accounts or payday loans in which the contract allowed for arbitration before the AAA.  More than 13 million class members made claims or received payments under these settlements, while 3,605 individuals opted out of participating in the settlements, which gave them the right to bring their own cases.  At most, only a handful of these individuals chose instead to file an arbitration case.

--Consumers do not file arbitrations for small-dollar disputes.  The CFPB found that almost no consumers filed arbitrations about disputes under $1,000.  For arbitration filings, involving debt disputes, the average amount of debt at issue was over$13,000.  For other arbitration filings, the average consumer claim was for over $38,000.

--Few consumers file small claims court actions.  A number of arbitration clauses allow a consumer, and sometimes the company, to use small claims courts rather than arbitration for dispute resolution.  CFPB's preliminary analysis indicates that not many consumers start small claims court cases in credit card disputes.  Instead, small claims court cases are much more likely to be brought by banks than by consumers.

To access the CFPB's full study click here.

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