Tucked into most contracts you sign to buy a product or service these days is a short statement that says you sign away your right to sue the company for any reason. Instead, you can use arbitration to settle your differences.
A study released this week by the federal Consumer Financial Protection Bureau looked at how common these arbitration clauses are in the areas it oversees, including contracts for credit cards, checking accounts, private student loans, payday loans, auto loans and cellphones. The study also examined how often consumers use arbitration.
Turns out the clauses are widespread: About half of credit card contracts have arbitration clauses, as do checking accounts at banks representing 44 percent of all insured deposits.
And perhaps not surprisingly, few consumers use the arbitration process.
“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” Richard Cordray, the bureau’s director, said in a statement. “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.”
From 2010 to 2012, the bureau found that just 1,847 arbitration disputes were filed across six consumer finance markets. And 20 percent of those were filed by companies, not consumers. In the 1,060 cases filed in 2010 and 2011, arbiters awarded consumers less than $175,000 in damages and less than $190,000 in debt forbearance.
“Almost all of these disputes involved matters where more than $1,000 was at stake; that is, in this data, consumers seem to be indicating that it rarely makes sense for them to bring an individual claim with only a small amount at stake,” Cordray said at a field hearing this week.
Arbitration was rare partly because few consumers knew it was in their contract, according to the bureau. In a survey by the bureau, 3 in 4 consumers didn’t know whether their credit card agreement contained an arbitration clause.
Among those with such a clause, less than 7 percent recognized that they could not sue their credit card issuer.
Fort Worth attorney Jerry Jarzombek, who focuses on consumer credit and debt, said the study is a watershed moment in addressing the pitfalls of arbitration.
“It’s about time,” he said. “People in the industry say it’s more effective and a better deal for the consumer, but it’s not. If a company charges you an extra $100, the consumer is out the money. Now we have an opportunity for an agency to overhaul the system.”
Jarzombek said consumers would be hard-pressed to find companies that don’t use arbitration clauses.
“All of the major cellphone companies have them,” he said. “You can’t get a cellphone without it. It’s a take-it-or-leave-it proposition.”
Richard Alderman, director of the Center for Consumer Law at the University of Houston, said eliminating arbitration clauses would enable consumers to unite under a class action status.
“When we get dinged with an extra $20 charge, we get upset, but we’re busy people and we won’t take action,” he said. “Companies know that and can make a lot of money off those extra charges. A rule change would allow millions of Americans relief they don’t have now.”
The report highlights the difference between arbitration and class action lawsuits in the checking account industry.
From 2010 to 2012, 72 arbitration disputes were filed with the American Arbitration Association and 137 individual cases were filed in federal courts involving checking accounts. During that same time, six class settlements were approved involving the overdraft practices of five banks.
“The settlements totaled close to $600 million and covered more than 19 million consumers,” Cordray said. “The cases also resulted in changes to overdraft practices going forward — changes that brought material benefit to consumers.”
The consumer bureau’s study was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which eliminated the use of arbitration clauses in mortgage contracts. Congress empowered the bureau to issue regulations on the use of arbitration clauses in other finance markets if the study supported the need to protect consumers.
Cordray said the bureau will meet with stakeholders to discuss rulemaking. No timeline has been established.
Teresa McUsic’s column appears Saturdays. TMcUsic@SavvyConsumer.net