Financial companies routinely use mandatory arbitration to block class-action lawsuits, making it difficult for consumers to win big payouts in disputes over credit cards and other products, a U.S. regulator found.
When credit card issuers have faced suits seeking class- action status, companies invoked arbitration clauses to keep squabbles out of court almost two-thirds of the time, according to a Consumer Financial Protection Bureau study published today. The findings pave the way for the agency to propose a ban of forced arbitration or to severely restrict the practice.
“These arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year,” Richard Cordray, the CFPB’s director, said in an e-mailed statement. “Now that our study has been completed, we will consider what next steps are appropriate.”
The study, which the CFPB was required to complete under the Dodd-Frank Act before issuing new regulations, presages a battle with business groups, including the U.S. Chamber of Commerce. The groups argue that arbitration prevents unnecessary lawsuits and leads to lower consumer prices, because companies will charge less if they don’t face the risk of costly litigation.
“There is so much money and lawyer-power behind this that there will be a serious fight against any regulation,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.
The CFPB didn’t say what direction any rules might take. One option might be prohibiting class-action waivers, in which consumers relinquish their right to join group litigation. Another approach would be an outright ban on arbitration clauses, which companies frequently include in contracts for credit cards, checking accounts and mobile phones.
The regulator is holding a hearing on arbitration in Newark, New Jersey, on Tuesday. Speakers include Cordray and representatives from consumer groups and the financial industry.
Alan Kaplinsky, a lawyer with Ballard Spahr LLP in Philadelphia who advises banks, said eliminating class-action waivers would largely end arbitration in consumer finance.
“If they do that, most of my clients would have no interest in using arbitration,” Kaplinsky said. “It would be the death knell of arbitration even without an outright ban.”
Deepak Gupta, a former CFPB official who argued a U.S. Supreme Court case on arbitration, said prohibiting or restricting the practice would be “the single most transformative thing the bureau can do” for consumers.
Enforcement of consumer protection laws by state attorneys general and the federal government often flows from class-action lawsuits that uncover incriminating evidence, Gupta said. As a result, ending arbitration would lead to more aggressive policing by public and private parties, he said.
Bank lobbyists argue that eliminating arbitration would create new litigation costs for financial-services firms that would then be passed on to consumers. The industry also says that some people would lose access to credit.
“The CFPB’s study makes one wonder if the bureau is really trying to protect consumers or is instead trying to protect plaintiffs’ lawyers,” the chamber said in a statement. “Banning pre-dispute arbitration clauses will deprive consumers of the only realistic means of remedying most injuries, leaving them with lawyer-driven class-action lawsuits that provide millions in legal fees to lawyers, but little or no benefit to consumers.”
In its study, the CFPB rebutted the claim that arbitration saves consumers money.
For credit cards, there was “no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses,” the CFPB wrote.
Since not every financial services contract includes mandatory arbitration or class-action waivers, the bureau was able to analyze the benefits and pitfalls for consumers.
The 1,060 arbitration disputes that were filed in 2010 and 2011 over financial products resulted in consumers receiving a combined $175,000 of damages and $190,000 of debt forbearance, according to the CFPB study. The cases also resulted in consumers being ordered to pay $2.8 million to companies, mostly to cover disputed debt.
By contrast, about 32 million consumers were eligible for financial relief annually as a result of class-action lawsuits that the CFPB studied over a five-year period. The settlements, worth $2.7 billion in total, included cash, in-kind relief and attorneys’ fees –- with about 18 percent of that going to lawyers.
The CFPB also found that most consumers don’t know their accounts include arbitration clauses and were ignorant to the fact that the provisions restrict them from taking disputes to court.
The Pew Charitable Trusts, in a November 2012 study, found that big banks such as JPMorgan Chase & Co. and Wells Fargo & Co. use arbitration clauses more frequently than smaller lenders.
By financial product, the CFPB found in a December 2013 study that the prevalence of the clauses varies. More than 50 percent of credit-card loans fall under arbitration clauses. About 8 percent of banks, covering 44 percent of insured deposits, include them in checking-account contracts. Among prepaid-card contracts the CFPB examined, 81 percent have arbitration clauses.
U.S. law prohibits arbitration for mortgage contracts. The Securities and Exchange Commission has jurisdiction over arbitration and dispute resolution for consumers in the securities industry.
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