Study: Consumers unaware of fine print taking away right to sue lenders

Financial regulators released a comprehensive report Tuesday finding that arbitration clauses used by companies to avoid lawsuits take away consumers' rights to sue in court and do not provide much relief to them. The report is part of a years-long study that consumer advocates hope may spell the end of the practice.

Millions of consumers have signed documents in the process of applying for credit cards and loans that prevent them from suing companies, instead putting the task of negotiating compensation for unfair treatment on private arbitrators the lenders pay.

The 2010 Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to study these pre-dispute arbitration clauses in consumer financial markets and allows the agency to craft rules regulating their use to protect consumers.

The CFPB found that arbitration clauses were present in 53 percent of credit cards studied, 92 percent of prepaid cards and 86 percent of private student loan lenders. “Over three quarters of those who said they understood what arbitration is acknowledged they did not know whether their credit card agreement contained an arbitration clause,” the CFPB said in a summary of the findings. “Among consumers whose contract included an arbitration clause, fewer than 7 percent recognized that they could not sue their credit card issuer in court.”

“By design, arbitration clauses can be used to block class actions in court,” the study found. “Over 90 percent of the arbitration agreements the CFPB studied expressly prohibited class arbitrations.”

The CFPB study looked at “checking accounts, payday and other small dollar loans, general purpose reloadable prepaid cards and private student loans.” The White House agency was created in 2010 in the wake of the financial crisis to protect consumers from unfair financial industry practices.

The report found “no evidence that arbitration clauses lead to lower prices for consumers."

Paul Bland, a lawyer who has represented consumers in cases against financial companies, said the CFPB report represents a big step toward ending obligatory arbitration clauses, sometimes called “adhesion” clauses.

“This is important because lenders use this clause to completely screw over consumers and take away crucial rights,” Bland said. “Consumers end up with no remedy even when they’ve been badly cheated.”

Bland said that a common complaint by consumers is payday lenders charging more than the maximum amount of interest state law allows. Instead of being able to sue the company in court, consumers who feel they have been treated illegally can only rely on a private arbitrator, he said. 

“I’m very hopeful that they’ll ban arbitration,” Bland said of the CFPB’s next steps. “They clearly have to take some kind of significant action.”

Susan Weinstock, director of consumer banking at the Pew Charitable Trusts, said in a 2012 report criticizing the practice that many consumers don't know they have so few options. “We found that most consumers were not aware that their right to go to court is often limited if they have a dispute with their bank,” Weinstock said. She also noted that the results of arbitration are usually not public and cannot be appealed.

The financial industry defends arbitration as cheaper and more efficient than lengthy civil suits in courts. Arbitration clauses often prevent consumers from lodging class-action lawsuits, which means that even if thousands of people have been wronged, the company may deal with each customer individually. 

Responding to the report, Richard Hunt, president of the Consumer Banker’s Association, said it stands behind the arbitration process.

“For nearly 90 years, arbitration has allowed consumers quick and easy access to an affordable option for dispute resolution,” Hunt said in a statement. “As a last resort, if legal recourse is necessary, arbitration has proven to be the best path forward because it is mutually beneficial to all parties — both consumers and lenders.”

“We look forward to reviewing this study in its entirety, and we look forward to working with the CFPB to improve consumers’ understanding of the arbitration process and how it can benefit them,” Hunt added.

Al Jazeera America and Reuters. Wilson Dizard contributed reporting.