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Business Money

Consumer agency to review mandatory arbitration in financial services

Finally, a spotlight will be shone on a widespread business practice that forces unhappy customers to settle disputes through binding arbitration — rather than by telling their story in court.

The Consumer Financial Protection Bureau now is seeking public input about mandatory arbitration clauses in the contracts of financial products and services. More important, the board has the power to limit or even eliminate the clauses if they hurt consumers.

For far too long, consumers have been forced to sign away their rights to sue a company should a problem arise. Arbitration clauses now are used in many areas, not just financial services. If you have bought a cellphone or car, opened a bank account, joined a gym or signed up for cable TV, you likely have agreed — knowingly or not — to arbitrate your beefs.

Of course, not every company inserts arbitration clauses in contracts, but it's nearly impossible for consumers to avoid them altogether.

"You would have to live in a cave somewhere," says Amalia Kessler, a professor of law and legal history at Stanford University. "You can opt out of society. That's how you can opt out of these things."

By accepting arbitration, you agree to let an outside party — generally chosen by the company — settle any dispute. This raises concerns that arbitrators may be biased in favor of the company that's awarding them the business.

The arbitrator's decision usually is final and confidential, which makes it hard to know if the process favors one side. Among the few states to do so, Maryland last year started to require certain groups performing binding consumer arbitrations to make the outcomes public.

Meanwhile, some arbitration clauses — with the blessing of the U.S. Supreme Court — go so far as to prohibit you from joining a class action with similarly aggrieved customers.

So, if a company overcharges thousands of its customers by $10, they can't band together to sue. A single person cheated out of a sawbuck isn't likely to bother to arbitrate to get the money back. As a result, the business has little incentive to change its ways.

That's why it's so important to consumers that the Consumer Financial Protection Bureau look into this.

The Wall Street Reform Act two years ago created the CFPB and required the new agency to report to Congress on arbitration agreements in financial products. At the same time, the law banned the arbitration clauses from residential mortgages.

The CFPB will be collecting public comment through June 23. Its review likely will cover credit cards, payday loans, auto loans, checking accounts and other bank services. And whatever action it ultimately takes will affect millions of consumers.

Some lawyers, though, say arbitration can be faster and less expensive for consumers than going to court.

"It can be more efficient," says Kristen Blankley, an assistant professor at the University of Nebraska College of Law.

Arbitrations generally last six months to a year, much less time than a case in backlogged courts, Blankley says.

In the past decade, more companies have started paying most of the arbitration tab and have moved hearings to locations that are convenient for customers, she says.

And though most results are confidential, this can work in the consumer's favor, Blankley adds. For instance, you might not want your neighbors to know you defaulted on a credit card bill, she says.

Douglas Worrall, a retired Baltimore lawyer and arbitrator, says fairness issues can arise in court cases. Juries and judges can be biased, he says. And in many class action lawsuits, the plaintiffs recover little money while the lawyers "get millions," he says.

But consumer advocates say arbitration is tilted in favor of businesses.

"If it's so great, why can't I voluntarily choose it when I need it?" says Peter Holland, who runs the Consumer Protection Clinic at the University of Maryland School of Law. "Why do [companies] need to force it, bury it in a contract?"

Continues Holland: "No judge. No jury. No right of appeal. Those are the things you are giving up" in forced arbitration.

Consumer advocates argue that the federal arbitration law, which dates to the 1920s, was never meant to resolve consumer complaints. Arbitration for years was a discreet, quick and cost-effective means to settle disputes between businesses.

In the mid-1990s, the Supreme Court ruled that the arbitration act applied to consumers, too, says Paul Bland, senior attorney with Washington-based Public Justice, a public-interest law firm. Arbitration clauses began popping up in all sorts of consumer contracts.

"In January of 1999, only two credit card companies had them," Bland says. "By the end of 1999, every credit card company had them."

Last year, the Supreme Court further strengthened companies' hand. It upheld arbitration clauses that bar customers from taking part in a class action, even if a state law gives them that right.

Since then, at least 76 potential class action cases were quashed by judges citing the Supreme Court ruling, according to a report released last week by Public Citizen, a Washington-based advocacy group.

"It's worse now," says Christine Hines, consumer and civil justice counsel for Public Citizen. "That decision … opened another can of worms."

Bland says courts aren't even looking at the merits of cases, but are throwing them out as soon as an arbitration clause is spotted.

You can try to do business with companies that don't require arbitration or allow you to opt out of it. But they're not easy to find.

Jack Fitzgerald, an auto dealer with stores and Maryland and other states, says he doesn't have arbitration clauses in his sales contracts, but he can't say the same for the dealership's banking partners.

"The customers should have their day in court," Fitzgerald says. "That's an old American custom."

Credit unions often don't have arbitration clauses. Bank of America says it voluntarily eliminated mandatory arbitration clauses for credit cards and deposit accounts years ago.

JPMorgan Chase dropped mandatory arbitration for credit cards and gives new bank customers up to 60 days to opt out of it on deposit accounts. Comcast gives new customers 30 days to opt out.

Public Citizen's Hines says many consumers don't take advantage of the opt-outs, though.

"If they know about the opt-out and find it within the fine print of the contract, they don't think they will need it," she says. "Most consumers don't think they are going to sue anyone."

Even consumer lawyers can't get around mandated arbitration.

Holland, for instance, says he crosses out arbitration clauses in his consumer contracts. Sometimes it works; other times the company insists on keeping the clause.

But consumers shouldn't have to work so hard to avoid arbitration. They should have a choice whether they want to arbitrate a complaint or get their day in court. Let's hope the CFPB gives them that.

eileen.ambrose@baltsun.com

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