Consumers angry with a bank, payday lender or credit card issuer may soon get their day in court, courtesy of a new Consumer Financial Protection Bureau proposal on forced arbitration.
"Arbitration" is one of those common fine-print terms that people gloss over, but that should give them pause.
"Consumers are signing away their rights," said Lauren Saunders, associate director of the National Consumer Law Center.
By entering a contract with an arbitration clause included — or just clicking "I agree to the terms and conditions" — consumers acknowledge that either they or the company they are doing business with can block court disputes in favor of having the problem handled by a nongovernmental third party (i.e., an arbitrator). In other words, arbitration clauses can prevent you from taking the company to court or joining a class-action lawsuit.
According to the CFPB, its proposal would not stop companies from using arbitration clauses. But new contracts for consumer financial services would have to explicitly state that such clauses cannot be used to stop consumers from participating in class-action lawsuits.
"Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing," CFPB Director Richard Cordray said in a prepared statement.
The arbitration process would also be subject to increased scrutiny, with the CFPB proposing requirements for companies to submit details on claims awards and materials filed in arbitration cases. "This would allow the Bureau to monitor consumer finance arbitration to ensure that the arbitration process is fair for consumers," according to a CFPB news release.
Banks have said the arbitration process can be cheaper and more efficient than going to court.
"Attempts to ban pre-dispute arbitration are potentially harmful to consumers and may result in increased costs to consumers and unnecessary delay in deciding controversies arising from disputes," said a position statement from the Consumer Bankers Association.
Advocates counter that arbitration rarely works in consumers' favor. "It's a biased, secretive, lawless system," Saunders said.
Arbiters aren't required to follow the law or facts of preceding cases when making decisions, she said, and because companies are the ones hiring arbiters, there's an incentive to rule in their favor. Consumers have little opportunity to appeal decisions, or see how other cases were handled.
The net effect is that bad practices are allowed to continue, F. Paul Bland, executive director of Public Justice, said on a press call Wednesday. Class-action lawsuits are often the only way for consumers to see change on systematic problems like phony fees or misleading rates, so restoring consumers' right to go to court as a group is significant.
"Some cases are just too complicated or involve sums of money that are too small for anybody to go forward on an individual basis," he said.
Still, the proposed ban isn't a total win for consumers. Implementation could take upward of a year, and the comment period may influence the final rule.
"We expect this to be a big fight," Saunders said.
The proposed CFPB rule also only covers consumer financial products. So you might still be forced into arbitration with say, an auto dealership if the issue isn't related to your car loan. Arbitration clauses are also common in employment contracts, and for sign-ups for cellphone and cable service, among other sectors.
"This rule won't impact any of those areas," Saunders said.
Until the CFPB's rule is enacted, consumers' ability to sidestep arbitration clauses in financial products varies.
The Dodd-Frank Act, which mandated the CFPB's analysis of arbitration clauses and gave the bureau the power to issue regulations on them, prohibited the use of arbitration clauses in most mortgage contracts. The Military Lending Act prohibits creditors from subjecting service members to mandatory arbitration.
Some banks don't use arbitration — Bank of America, for example, dropped the practice in 2009 — while the CFPB's 2015 report found that more than a quarter of credit card arbitration agreements let individuals opt out. (Yet another reason to read the terms and conditions.)
But the prevalence of such clauses means there's not much consumers can do to avoid arbitration agreements altogether.
"You want a bank account?" said Saunders. "You want a student loan? You want a payday loan? You have no choice. You have to go with the fine print they give you."