December 15, 2013

CFPB Studying Arbitration Clauses in Financial Services Agreements

New research from the Consumer Financial Protection Bureau shows that arbitration clauses are commonly used by large banks in credit card and checking account agreements, but almost 9 out of 10 clauses allow banks to prevent consumers from participating in class action lawsuits.

Banks use the arbitration clause to handle disputes without using the court system. Tens of millions of consumers are subject to arbitration clauses in the markets which the CFPB studied, yet very few use them. In fact, consumers filed only 300 disputes in these markets each year between 2010 and 2012.

“Many contracts for consumer financial products and services contain arbitration clauses,” said CFPB Director Richard Cordray. “[These] preliminary results help us better understand how these clauses are affecting consumers’ financial lives so that we can ultimately determine whether action should be taken for their greater protection.”

The CFPB's study on the use of pre-dispute arbitration clauses in consumer financial markets was required by Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB also has the power to issue regulations on the use of arbitration clauses.

The CFPB found that fewer than 1,250 consumer arbitrations were filed on credit cards, checking accounts, payday loans and prepaid cards between 2010 and 2012. Many of these concerned debt collection.

Other preliminary results include:

Larger institutions are more likely than community banks or credit unions to use arbitration clauses in consumer contracts for credit cards or checking accounts.
Arbitration clauses are more complex than the rest of the contract and written at a higher grade level than the rest of the contract.
Around 9 out of 10 arbitration clauses prevent consumers from filing class arbitration.
Consumers do not choose arbitration over class action settlements.
Consumers do not file arbitrations for disputes under $1,000. For debt disputes, the average amount of debt at issue was over $13,000.
Many arbitration clauses allow the consumer or the company to use small claims court, but few consumers file small claims court actions.

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