When you apply for a credit card or buy a smart phone, you have to sign what's usually a multipage contract with lots of legalese in tiny type. The contract is a take-it-or-leave-it deal: If you don’t sign it, you don’t get the card or the phone. So you sign it. No harm, no foul, right?
Wrong. Buried in the contract you signed there's often wording that says you’ve given up your right to sue the credit card or wireless company over any dispute you might have with it. That fine-print language is known as a forced arbitration clause, which typically says that you "agree" that a company can insist that any dispute that might arise between you and the company will be settled under the arbitration process.
That means, instead of going to court and making your case in front of a judge, you have to see an arbitrator, who is often chosen by the company. In an interesting—read: not consumer friendly—wrinkle, the company can keep choosing that arbitrator for repeat business, so there’s a huge incentive for the arbitrator to favor the company.
This arbitrator is typically not required to follow established law and procedure, and the arbitrator's decisions cannot be appealed, and are often kept secret. The fine print often says disputes will be considered by an arbitrator at a location chosen by the company, which could be far away from where you live.
Arbitration clauses also typically restrict you from joining with other consumers who have been mistreated in the same way by the same company. Because the costs for pursuing a claim effectively are typically more than the amount of a single claim, this restriction makes it far less likely that consumers will ever pursue claims. And that lets the company off the hook for its wrongdoing.
At Consumers Union, the policy and advocacy arm of Consumer Reports, we think forced arbitration is too often stacked against the consumer. The Consumer Financial Protection Bureau has issued a new report about this practice in consumer financial products, such as loans, cards and bank accounts.
The CFPB report finds that this restriction on consumers' ability to effectively pursue claims results in a windfall to financial service companies worth tens or hundreds of millions of dollars each year.
The report also found that more than 75 percent of consumers surveyed did not even know whether they were subject to a forced arbitration clause in their agreements with their financial service providers. And fewer than 7 percent of those covered by forced arbitration clauses realized that the clauses restricted their ability to sue in court.
“Basic legal protections have no meaning if companies can’t be held accountable under the law. The CFPB report clearly demonstrates why forced arbitration clauses are unfair to consumers and undermine the rule of law,” George Slover, senior policy counsel at Consumers Union, said.
The CFPB was created by the Dodd-Frank financial reform law to give a single agency authority to protect consumers in their dealings with banks and other lenders and financial-services companies. Dodd-Frank directed the CFPB to examine the prevalence of forced arbitration clauses in consumer financial contracts and the effect on consumers, and authorized it to regulate or ban the practice based on the findings.
Consumers Union is urging the CFPB to take action now to curb forced arbitration clauses so the consumer can freely choose how to resolve a dispute with a company.
“We hope the CFPB will now use its authority to prohibit forced arbitration from being a precondition for getting a credit card or a bank account,” Slover continued. “Banks and other financial services companies claim that arbitration is somehow better for consumers than going to court. But if that were really true, the banks and lenders wouldn’t need to force consumers to agree to it.”
This feature is part of a regular series by Consumers Union, the policy and advocacy arm of Consumer Reports. The nonprofit organization advocates for product safety, financial reform, safer food, health reform, and other consumer issues in Washington, D.C., the states, and in the marketplace.
Read other installments of our Policy & Action feature.
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