CFPB Data Show Companies Use Forced Arbitration to Disable Consumers’ Ability to Vindicate Their Rights

CFPB Data Show Companies Use Forced Arbitration to Disable Consumers’ Ability to Vindicate Their Rights

By Amy Radon, Staff Attorney

Credit CardsThe Consumer Financial Protection Bureau this morning released the preliminary results of its two-year study into how forced arbitration clauses impact consumers. The results confirm what consumer advocates have long held to be true given our experience, which is that forced arbitration clauses, more often than not, are used to extinguish legitimate consumer claims, not to provide a true alternative mechanism for resolving disputes.  

For three years (between 2010 and 2012), only 1,250 arbitrations nationwide were filed in the American Arbitration Association (AAA) involving consumer disputes about credit cards, checking accounts, prepaid cards, and payday loans according to the CFPB report. Of those, only 900 were filed by consumers.  By comparison, during that same period, over 3,000 cases were filed by consumers in federal court, with over 400 of those filed as class actions.  

It’s not surprising that consumers – if given the choice – would prefer to proceed in court: they get a more-level playing field.

As I explained in my last blog, arbitration clauses are often stuffed with language that has nothing to do with arbitration, but that is instead intended to limit consumers’ rights under the law and make it difficult (if not impossible) to bring claims in the first place.  For example, the corporate defendants in Newton v. American Debt Services wrote an arbitration clause that – if enforced – would have limited our client’s financial relief to about $100, but she would have otherwise been entitled to thousands of dollars in damages in court because of the defendants’ failure to provide the debt relief services that she paid for. As if this wasn’t bad enough, the defendants also wanted to make it nearly impossible for our client to even bring her claims in the first place, as their arbitration clause required our client (who lives in California) to file her claim in Tulsa, Okla.  

Provisions like these show that it’s not really arbitration these corporate defendants want—they want to get away with their wrongdoing.  They want a “get-out-of-jail-free” card, and they’re using arbitration clauses as a way to make that happen.

The CFPB report also found that more than 13 million consumers made claims or received payments in class actions brought by consumer advocates in arbitration against credit card companies, payday lenders, and other types of financial service providers. Of these 13 million consumers, only 3,605 opted out of the class actions that were studied, and, of those 3,605, “only a handful” filed individual arbitrations. This finding squarely refutes the contention that banks, financial product providers, and other big businesses have made for years, which is that consumers choose individual arbitration over class actions.

Why do consumers choose class actions over individual arbitrations?  A couple of reasons.  First, when a credit card company or other financial product provider scams all of its customers out of a relatively small amount of money (say, $30), this adds up to big profits for the company, but often isn’t worth the time, expense, and headache for each individual consumer to go after the company by filing an individual arbitration.  Class actions solve that problem by enabling all of the wronged consumers to join together to seek justice from the company in one lawsuit, rather than thousands of individual lawsuits.  Without class actions, the vast majority of legitimate claims will never be brought against wrongdoers because, in the words of one judge, “only a lunatic or fanatic sues for $30.”

Second, these companies often violate consumer protection laws in ways that don’t raise any red flags to consumers.  Say you notice one month that the terms and conditions of your credit card statement have changed—and perhaps your interest rates have gone up, or maybe you notice a finance charge that doesn’t seem quite right on your statement.  Most consumers react to these types of changes by ignoring them, not by calling up an attorney to see if the changes comport with the law.  Class actions protect all consumers—not just those who can find legal representation to bring an individual claim against the company.  And class actions get these wrongdoers to change their illegal business practices in ways that individual arbitrations cannot because consumers have power in numbers when they band together to hold a wrongdoer accountable.   

It’s therefore unsurprising that the CFPB report also found that 9 out of every 10 arbitration clauses now include a class action ban, which prohibits consumers from seeking class relief in arbitration or in court. Corporations know that if they can wipe out class actions, they’ll only have to face accountability for the “handful” of consumer claims filed against them, instead of having to make things right for all of their customers.  

I’m glad that consumer advocates now have concrete numbers to support what we’ve all known to be true: arbitration is not a genuine alternative for consumers–especially arbitration that bans class relief.  Consumers’ rights will not be vindicated so long as financial product providers are able to force consumers into arbitration on an individual basis before a dispute ever arises.

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