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Limiting mandatory arbitration will benefit consumers

Fred Williams

What’s the biggest problem consumers have getting a fair break?

Many consumer advocates say it’s mandatory arbitration. That’s the fine print in millions of contracts that says you can’t take the company to court.

The advocates are applauding the federal consumer protection bureau for moving May 5 to roll back companies’ use of arbitration requirements.

At a hearing the Consumer Financial Protection Bureau held to unveil the proposal, consumer lawyer Deepak Gupta called it “the single most important thing the bureau can do to level the playing field for the consumer.”

The CFPB says tens of millions of consumer contracts contain the arbitration requirement. You’re probably covered by more than one such clause — if not by your credit card, then by a phone or cable company, or homebuilder. Maybe even your gym membership or private college enrollment has one.

It may not seem like a big problem. If you’re not in a dispute with a company, it’s tough to get worked up about arbitration. The clause is an especially opaque part of a dense contract that hardly anyone reads. So what if you can’t sue the company? Most of us are not itching to take a big corporation to court.

But that doesn’t mean being blocked from court doesn’t hurt you.

Stephanie Banks found that out when she tried to determine how a $300 auto title loan ballooned to a supposed debt of $40,000 over two years. Legally, the loan should have been erased by her bankruptcy filing, which stemmed from her battle with lung cancer.

She found a consumer lawyer and tried to get answers about the outsized amount the lender tried to collect. But the company’s arbitration clause cut her off from any court redress, either through her bankruptcy court proceeding or a separate action. After her story was published by The Oregonian, the loan company came forward and said its attempt to collect $40,000 was a mistake.

Banks’ story is a variation on a theme I’ve heard again and again, in interviews with consumer attorneys and at public hearings like the one May 5 in Albuquerque, New Mexico. When talking with a company about a dispute gets nowhere, people are rendered powerless by an arbitration clause in their contract — even people who have a lawyer’s help.

Arbitration does not have to consider consumer protection laws. It has no fact-finding process — called “discovery” in courts — to find out who is at fault. Its decisions can’t be appealed. And the whole proceeding is nonpublic, so even if you win, other consumers won’t benefit.

Unlike lawsuits in open court, arbitration provides little incentive for companies to do the right thing. Some big credit card issuers dropped arbitration after a scandal in 2009 found that a big arbitration provider was part-owned by owners of a debt collection company.

The rule that the CFPB proposed Thursday would stop financial companies from using arbitration clauses to block lawsuits brought by groups of customers. Companies could still require arbitration in individual disputes. But experts predict banks and other financial companies will drop arbitration altogether without the shield from class-action lawsuits.

At a public hearing May 5, business lobbyists and corporate lawyers tried to explain how mandatory arbitration was good for consumers. They tied the facts in knots, trying to portray the shield from accountability as a benefit for customers.

Businesses trying to avoid class-action lawsuits do have a point. The U.S. legal system is far from perfect. Lawyer-driven class-action lawsuits can make a big deal out of a minor, technical fault by a business. And it is true that class actions can result in big paychecks for the lawyers and negligible payouts for consumers. A small-business panel convened by the CFPB said in its report that one company faced a costly lawsuit because some of its materials were printed in the wrong type.

Reforming court rules to make class-action lawsuits fairer is not a bad idea. Letting companies duck the court system, and decades of consumer protection law passed by Congress, is not the way to do it.

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