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From Banking and Finance Law Daily, March 10, 2015

Arbitration agreements limit consumers’ dispute options

By Katalina M. Bianco, J.D.

After studying arbitration clauses in nearly 850 consumer-finance agreements, the Consumer Financial Protection Bureau reported that these clauses restrict consumers’ relief for disputes with financial service providers by limiting class actions. In the consumer finance markets covered in the study, 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 bureau found.

“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” said CFPB Director Richard Cordray. “Now that our study has been completed, we will consider what next steps are appropriate.”

Bureau explains arbitration clauses. Many contracts for consumer financial products and services include a “pre-dispute arbitration clause” stating that either party can require that disputes that may arise about that product or service be resolved through arbitration instead of the court system, the bureau said. Where such a clause exists, either side can generally block lawsuits, including class actions, from proceeding in court.

Dodd-Frank Act. The CFPB noted that the Dodd-Frank Act requires the bureau to study the use of pre-dispute arbitration clauses in consumer financial markets and gives the CFPB the authority to issue regulations on the use of arbitration clauses in other consumer finance markets if the bureau finds that doing so is in the public interest and for the protection of consumers, and if the rules are consistent with the results of the bureau’s study. Notably, the Act also specifically forbids the use of arbitration clauses in mortgage contracts.

Study findings. The report uses “a careful analysis of empirical evidence, including consumer contracts and court data, to understand the resolution of consumer finance disputes – both in arbitration and in the courts,” according to the bureau. The study was conducted in a number of consumer markets, including credit cards and checking accounts, which the CFPB said have the largest number of consumers. In addition to determining that millions of consumers are covered by arbitration clauses, the bureau found that:

  • larger numbers of consumers are eligible for financial redress through class action settlements than through arbitration or individual lawsuits;
  • arbitration clauses can act as a barrier to class actions. More than 90 percent of the arbitration agreements studied expressly prohibited class arbitrations;
  • there is no evidence that arbitration clauses lead to lower prices for consumers; and
  • three out of four consumers surveyed did not know if they were subject to an arbitration clause.

CBA statement. Consumer Bankers Association President and CEO Richard Hunt made it clear that the CBA considers arbitration a positive for consumers by allowing them “quick and easy access to an affordable option for dispute resolution.” Hunt said that “as a last resort,” arbitration is the “best path forward because it is mutually beneficial” to both consumers and lenders.

Hunt said the CBA would work with the CFPB to help consumers understand arbitration and how it can benefit them.

Companies: Consumer Bankers Association

MainStory: TopStory CFPB CreditDebitGiftCards DoddFrankAct Mortgages

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