Living with credit

Mandatory pre-dispute arbitration: why you should care

Fred Williams

By signing this agreement you give up protection under  the Truth in Lending Act,  Servicemembers Civil Relief Act,  and any other Act you can name.  If you think our company has ripped you off, your complaint will be heard by a private organization that we do a lot of business with. The hearing will be closed, and the decision will be final.

Would you sign an agreement like this? You probably already have, although the wording was different. If you have a cellphone, took out a payday loan, use a checking account, bought a new-built home or carry a credit card, you have probably signed at least one contract with a pre-dispute arbitration clause.

Mandatory binding arbitration

Pre-dispute arbi-what? Yes, it’s a mouthful, but consumers ought to care. Signing away your constitutional right to go to court is a big deal. If consumer advocates are right, mandatory arbitration is the gotcha of all gotchas. A requirement to take disputes to a private, nonpublic venue instead of court can be a free pass for sharp business practices, wiping away protections that have been built into the legal system over decades.

Jennifer Almon of the Texas Catholic Conference of Bishops says small-dollar lenders hide their harsh collection tactics behind arbitration clauses. She told the story of one man whose truck was seized unfairly by an auto title lender while he was moving to a homeless shelter. He found a lawyer who helped him get the truck back, but the lender kept the contents — amounting to most of his worldly goods, since he was in the middle of moving. “There was an arbitration clause in the contract so he couldn’t really pursue it any further,” Almon said.

Almon made the remarks at a hearing on arbitration last week in Dallas held by the U.S. Consumer Financial Protection Bureau. She was one of a several people who voiced anger at companies that use arbitration to shield themselves from accountability. They told of a soldier whose home was illegally seized while he served in Iraq, and an elderly, disabled woman whose arbitration hearing was scheduled halfway across the country. Some of the attendees called for the consumer bureau to outlaw mandatory arbitration. Once it completes a study, the bureau will decide whether to make a rule protecting consumers. The first part of the CFPB’s arbitration study was released Dec. 11.

Jennifer Hartman, the former mayor of Cibolo, Texas, says that arbitration can cost you in ways you might not imagine. Her suburban boomtown near San Antonio has seen homebuilders use arbitration clauses to avoid repairing houses, as they promise to do in their warranties. The buyers may have sagging floors and crooked walls, but they don’t have a right to sue the builder in court. Consequently, these prematurely dilapidated structures get reduced tax assessments — increasing the tax burden on people whose builders are not shielded from shoddy workmanship.

Here’s where you usually read that supporters of arbitration say it can be better for consumers than court. They may say it, but the consumer protection bureau has undermined that argument with some new data. Its preliminary study found that consumers rarely bring arbitration against companies, even though tens of millions of them have no other recourse. If arbitration was so great for consumers, wouldn’t they be using it more often? Supporters of arbitration also say clauses are getting more consumer-friendly, but until consumers actually use arbitration, it is hard to see how refinements to the process make up for depriving you of your day in court.

Flawed as it is, the class-action lawsuit is a way for people to band together and get the legal help necessary to take on a big corporation. Sometimes there are over-aggressive class actions based on technicalities that don’t harm customers. Consumers sometimes get pennies while the lawyers get big bucks. That calls for reform, but it doesn’t justify an end-run around a body of consumer protections built up over decades, or bypassing a legal system based on transparency and accountability. Even when they don’t pay consumers much, class actions do halt abuses.

Supporters said much in favor of arbitration at the hearing, but one question was left unanswered: Why does arbitration have to be mandatory for it to work? Why not let it be an option to court, rather than a lock on the courthouse door?

“We believe there’s a mountain of evidence that forced arbitration is unfair,” said Christine Hines of Public Citizen. No one’s calling for a rule against arbitration, she noted, just the “forced” part. Some corporations are even moving that way, with opt-out language in their previously mandatory arbitration clauses. “Arbitration,” she said, “will still exist.”

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