Arbitration Clauses 101

Giving up your Right to Sue

Arbitration Clauses 101
March 3, 2016

Do you know how any disputes that you have with your bank or credit card company must be settled? You may assume that you could take your dispute to court, but the odds are decent that you signed away that right in practical terms when you accepted the terms and conditions of opening the account. According to a report by the Consumer Financial Protection Bureau (CFPB), survey results showed that over 75% of consumers did not know whether their credit cards contained an arbitration clause.

Arbitration clauses are often buried in the fine print of your agreement — one of the reasons why you really should read that fine print before signing up for any financial service. The CFPB refers to them as "free pass" arbitration clauses, because they allow either the consumer or the institution to require arbitration (which the institution will always prefer to do) while blocking or hindering the consumer from pursuing forms of group arbitration or class action lawsuits. The Supreme Court has held that such clauses can preempt state consumer laws allowing for resolution in the court system.

In essence, this tilts the field away from consumers for all but the most egregious complaints. Wronged consumers may not even try to seek a resolution, deciding that it's not worth the effort even to challenge through the arbitration process. The CFPB is considering rule changes to produce a more level playing field, including the possibility of being able to sue your bank.

When the CFPB was formed by the Dodd-Frank financial reform legislation in 2011, one of its directions was to review the arbitration clause and its use (or misuse) in the financial markets. CFPB sent a report to Congress in March that summarized a three-year study on the topic including information on the prevalence of such clauses, consumer understanding, results of disputes filed with the American Arbitration Association (AAA), and other consumer claims and settlements. Here are some of their findings.

  • Clauses – Credit cards issued by larger banks are more likely to include arbitration clauses, and these clauses could affect "tens of millions" of consumers. Over half of outstanding credit card loans are subject to these clauses. Almost all clauses studied included provisions to prevent class actions. Small claims court is usually the one exception. If you want more credit, check out MoneyTips' list of credit card offers.
  • Consumer Awareness – Summed up in two words, very little. Consumers do not generally know what dispute resolution methods they are bound to, what is available, and do not seem interested in pursuing resolutions beyond what they can get from customer service.
  • Arbitration Results – Records were spotty but companies tended to file more cases for arbitration than consumers did, and companies fared much better. In 244 cases where the CFPB could determine the results of arbitration, companies found relief in 227 of them, totaling over $2.8 million.

Recently, the CFPB followed up in addressing these concerns by publishing an outline of proposals. They do not outlaw arbitration clauses as some consumer advocates would like, but they would allow provisions for class action lawsuits and improve transparency of the arbitration process by requiring that companies report arbitration claims and outcomes with the CFPB. The CFPB would then publish the results and awards.

Needless to say, financial companies oppose this action, claiming "increased costs to consumers for financial products and services" in a joint letter to the CFPB from several financial associations. The CFPB's report suggests cost increases are minimal at best.

It seems likely that the CFPB will take some action regarding arbitration clauses. In the meantime, evaluate your own situation and at least take the time to find out what dispute resolution method covers your credit cards, bank accounts, and other financial services. We hope that you will not need them, but you should at least know what options are available to you, and how any future CFPB changes may affect them. If you believe there is a mistake on your credit report, you can resolve it with a single click using our credit correction service.

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Steffanie | 03.03.16 @ 16:18
Wow I didn't know most of this. Thanks for the heads up!
Carla | 03.03.16 @ 16:20
I hope they put these rule changes in motion. I know all too well how the excitement of a purchase can lead to signing without reading the fine print.
irene | 03.03.16 @ 16:20
I didn't realize I had signed my rights away this is scary news. I only ever had a dispute with a credit charge once but it was settled in my favor
Daniel | 03.03.16 @ 16:21
Way too often people do not take the time to fully understand agreements they sign into solely because they do not want to take the time to read and understand them. Education, research, and professional advice are key
Sarah | 03.03.16 @ 16:21
Sneaky little blood suckers... I overread to the point I lose the point of it... sad really
Erin | 03.03.16 @ 16:22
This is really good to know. Luckily, the couple of times we've had a dispute with charges on our credit card have been handled professionally and without really any extra effort on our part. I'm glad to hear that there may be something done to help protect the consumer some more.
Nancy B | 03.03.16 @ 16:22
Each time credit card companies are cracked down upon by the govt, they find sneakier ways to gouge the consumer. It's a vicious cycle.
Selena | 03.03.16 @ 16:24
Actually didn't know a lot of this. I had one problem with my account once, but the bank was very helpful in taking care of it.
trish | 03.03.16 @ 16:27
Wow. So much I didn't know about my rights. Great source of information to find out about all the things you miss in the fine print
$commenter.renderDisplayableName() | 12.02.20 @ 15:19