Forcing consumers into arbitration

Experts

Communications Director

By David Butler on Friday, November 6th, 2015

-The fine-print clause that can stack the deck against consumers

-Consumer watchdog moves forward to curb the use of forced arbitration clauses

When you apply for a credit card or buy a smart phone, you have to sign a contract with a lot of legal language 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 there’s often wording that says you’ve given up your right to take the company to court over any dispute you might have with it. This language is known as a forced arbitration clause.  It typically says that you “agree” that a company can insist that any dispute will be settled under the arbitration process.

So what does that really mean? It means, instead of going being able to sue the company and make your case in front of a judge, you have to see an arbitrator, who is often chosen by the company. 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.  The arbitrator’s decisions cannot be appealed, and are often kept secret. Disputes may be considered by an arbitrator in a city far away from where you live, at a location picked by the company.

Arbitration clauses may also restrict you from joining with other people who have been mistreated in the same way by the same company. The costs for pursuing a claim effectively are typically more than the amount of a single claim, so this restriction on class actions 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 a process that is stacked against the customer far too often.  The good news is that a consumer watchdog in Washington — the Consumer Financial Protection Bureau — is considering rules to stop banks and other lenders from forcing consumers to give up their legal rights and rely on private arbitration.

The CFPB report issued a tough report in March that found these restrictions on your ability to effectively pursue claims results in a windfall to financial service companies worth tens or hundreds of millions of dollars each year.  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.

In October the CFPB announced it was considering a proposal to prohibit companies from including arbitration clauses that block class action lawsuits in their consumer contracts. The bureau said this would apply to most products and services it oversees, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.

The proposal would not ban arbitration clauses completely, the CFPB says, but the clauses would have to say specifically that they “do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court.” The proposal would also require companies that choose to use arbitration clauses for individual disputes to submit to the CFPB the arbitration claims filed and awards issued, the bureau said.

The CFPB report clearly demonstrates why forced arbitration clauses are unfair to consumers and undermine the rule of law. We are working with the bureau as it moves forward in developing proposed rules, pressing for tough standards to help clean up the system.

Basic legal protections have no meaning if companies can’t be held accountable under the law. Companies may claim that arbitration is somehow better for consumers than going to court. But if that were really true, they wouldn’t need to force consumers to agree to it.

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Consumer Financial Protection Bureau 2015 report on arbitration

To file a complaint with the Consumer Financial Protection Bureau about an arbitration clause in a financial contract, visit the bureau’s website here or contact the Bureau’s help line at 1-855-411-2372.

 

15 responses to “Forcing consumers into arbitration”

  1. edna jarvis says:

    are we looked out of having a place to bank?

  2. robin says:

    since they think we are up for grabs by the small cajones, I have
    my sweet way of handling this. I have no need for fancy telephone connections…since I prefer talking face-face, #1 then, #2, I minimized my needs.. which is abs min text, no-frills telephones. It would be extraordinary if I get more than 3 calls a week…from my spouse or kid & other abs necessary calls9tennis partner or yoga folks) . Now,#3, YOU choose: no-contract provider, get abs min service.
    I do not need any gov laws to regulate my behavior. My options REGULATE provider behavior…if a lot of people let know of this minimalist choices, let us see how long they keep doin’ it!

  3. Pal says:

    Ms. Pusey, Please take your case up with the State Attorney General, immediately. There may be laws to break laws, but there are laws to make them too. Elder Abuse and Neglect is NOT tolerated.

  4. I believe the CFPB should be doing more for the average Joe than they are. What I mean by that statement is: Nearly 100% of all contracts now have arbitration clauses (not just bankers and money lenders) but also service providers of every description. Cell phone companies, Cable/Satellite and Software companies all demand arbitration or you will not be allowed to subscribe. Just try to get satellite from Direct TV for $19.95 a month like they advertise. IMPOSSIBLE. And you cannot take them to court when they raise the price on you.

  5. Vaibhav Jain says:

    Last year 2014, December, I did 2 transactions of money transfer to India for family maintenance to my father in law. Each transaction was $1000.
    The money was transferred using Moneygram, which took money from my US Bank NA account and I gave details of bank account in India.
    To our surprise, the money was not transferred to right bank account though correct details were given.
    I was given hard time by Moneygram and I received money physically at Moneygram center and that too after 20-25 days.

    I raised case with CFPB but nothing happened and I couldn’t get anything from Moneygram for playing with my money.

  6. Cathy Espitia says:

    Arbitration clauses are stacked in favor of businesses and corporations. If you don’t sign the contract, you don’t get the service. So you are “forced” into arbitration should any issue arise. Who is watching out for the little guy? The Consumer Financial Protection Bureau needs to stand up for citizens and remove forced arbitration clauses.

  7. Al Gauthier says:

    I recently retired and moved south. I attended an overview FED & state laws course at a local community college. I asked about the lock on business services with arbitration clauses and any alternatives customers may have. Lawyers clearly noted consumers have been railroaded by big business, business lobby, and congressmen changing laws against consumers in favor of big business. Lawyers admitted unless the arbitration clause of a contract is considered grievous/abusive by a local judge (that’s rare) there is no recourse for the abused consumer! Consumers have no alternatives when businesses have similar arbitration contracts. Most services today have arbitration clauses favoring big business allowing abuse without accountability, secret decisions, continued business abuse, arbitrators favored by business stacked against consumers. We truly need the Consumer Financial Protection Bureau’s (CFPB) help to make businesses responsible for their actions, and accountable for misdeeds. We certainly can not trust Congress to do what is right for Consumers!

  8. Mike Nunes says:

    Jan. print issue-p11-says “Find ou how to help…” by going to this site but I don’t see what action I can/should take here beyond leaving email address.

  9. Tom says:

    There is an arbitration clause that must be signed for Kaiser health coverage under “Covered California”. I actually called Covered California about this and I was told that all the insurers have such clauses. I have no choice.

    I took a business law class, long ago, and my professor told the class that you can’t have someone “forego” a right in a contract without direct compensation. In other words, it’s not good enough that the company comes back with, “It’s cheaper because of this”, it’s actually necessary for them to say, “You are offered this sum of money in return for giving up your right to sue or pursue other legal remedies”. But, as another reader commented, the law seems only to apply to those of us with no power… and no lobbyists.

  10. Jake Anderson says:

    A review of the summary of this issue in the January issue of ConsumerReports brought something puzzling to my attention: How can a company (maybe entire industries) provide a service/practice which possibly violates the law yet not be held accountable? Additionally, how can a company (or entire industry) provide a settlement to a dispute which may not follow established law? I am just a regular consumer but the above does not sound legal.I am sure brilliant minds have studied this matter but where I come from, I must obey the law or suffer the consequences. Does that principle only apply to the general public? How can I be forced to sign a document which may force me to participate in a process that breaks the law? If the service/product provider does not prevail, can it then sue me (as the consumer) for breaking the law? I laugh out loud here because all of our politicians proclaim that America functions under the rule of law. Is that a selective process?

  11. Pauline Christensen says:

    The nursing home example above is a disgraceful use of forced binding arbitration. There is no “free market” for nursing homes as nearly all nursing homes are owned and controlled by a handful of national corporations who reap a lucrative profit by paying their employees minimum wage, charging their “clients” a minimum base rate of $6,000/month for a SHARED 10 ft square room, and providing substandard medical care.

    Another disgraceful use of forced binding arbitration is in the construction and development community, where this is written into nearly all contracts now in an attempt to undermine the original Construction Defects laws that were part of the original Consumer Protection Act. In Colorado, ALEC and the real estate, construction, and development communities are leading this charge which will lower the amount of time to appeal from 6 years to 3 (although major foundation cracking due to Colorado’s expansive soils often do not show up until years later), eliminate class action suits, etc. leaving homeowners with nothing.

  12. Pauline Christensen says:

    The instance above concerning nursing homes is disgraceful and widespread. There is no “free market” for nursing homes as the majority of nursing homes are controlled by just a handful of national corporations that pay their employees minimum wage yet charge a lucrative minimum base of $6000 per shared room per month. Yet the care is often wildly substandard.
    Another disgraceful use

  13. Pauline Christensen says:

    The instance above concerning nursing homes is disgraceful and widespread. There is no “free market” for nursing homes as the majority of nursing homes are controlled by just a handful of national corporations that pay their employees minimum wage yet charge a lucrative minimum base of $6000 per shared room per month. Yet the care is often wildly substandard.
    Another disgraceful use

  14. Forced Arbitration doesn’t only exist in the financial world. My 89 year old mother with Alheimers fell more than 10 times in one year at a nursing home. The last two falls she had front teeth knocked out then 4 days later she fell breaking her right Femur. She had emergency surgery to rod and pin. I reported her falls to Florida Depart of,Children and Families, they told me it was considered Elder neglect for a nursing home to allow a patient to fall so often. I contacted an attourney to sue he asked me to send the nursing home contract I signed. Well, it turns out that hidden in that contract I signed was an agreement to Arbitration so now I can’t go before a judge. If I hadn’t signed that Arbitration agreement they wouldn’t have taken my mother.mnow I moved her to a nursing home closer to home so I can see her more often but I again was forced to sign an Arbitration agreement. This is just plain wrong and should not be legal. This gives businesses the open door to harm their customers and get away with it.

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