The following is a guest post by Lonnie Scott, Executive Director of Progress Michigan.
If you’ve ever opened up a credit card, taken out a student loan or signed up for a cell phone plan, you’re probably bound to arbitration through some version of a consumer financial contract you’ve consented to – whether you know it or not.
Buried in the fine print of take-it-or-leave-it contracts, forced arbitration terms rob consumers of their constitutional right to their day in court in the event of a dispute. Instead of being able to have their case heard by a judge and jury, consumers must instead go to private arbitration where a panel of adjudicators review their case and make a determination that is legally binding and enforceable in the courts.
Such proceedings are secretive, biased and usually more beneficial to the service provider than the consumer. Often, there are additional expenses like traveling out of state to have a complaint arbitrated – a cost easily absorbed by large corporations, but one that can prove prohibitive for the average consumer.
Worse yet, 90 percent of arbitration clauses also ban consumers from joining class-action lawsuits – the only real option when it comes to holding big corporations accountable for stealing small-dollar amounts from their customers. Even with the threat of expensive class-action lawsuits gone, however, there’s no evidence that financial institutions are charging consumers less for services. They’re getting a raw deal all around.
This grants corporate wrongdoers a get-out-of-jail-free card at the expense of hardworking people. Without the ability to appeal binding arbitration decisions, the public is truly stuck playing by the rigged rules of Wall Street.
Studies have shown that most individuals don’t know they’ve “agreed to” arbitration clauses when signing a contract for a financial product. In March, the Consumer Financial Protection Bureau (CFPB) released a three-year study on forced arbitration clauses that found three out of four consumers surveyed did not know they were subject to an arbitration clause. Of those who did, only seven percent understood it meant they could not take their credit card company to court.
The study also found that the prevalence of arbitration clauses in financial agreements was astounding. Such clauses were included in 99 percent of storefront payday loan agreements, 92 percent of prepaid card agreements, 88 percent of mobile wireless contracts, and 86 percent of private student loans agreements.
But consumers may soon have something to cheer about. The CFPB recently cleared the final hurdle necessary to have the opportunity to write a rule prohibiting the abusive and unfair practice of forced arbitration clauses in consumer financial contracts.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act that created the CFPB and required it to study the use of consumer financial products and services, laying the groundwork to revoke lenders’ and creditors’ virtual licenses to steal.
The completion of the CFPB’s study kicked off a nationwide call for action to end the use of forced arbitration in consumer financial contracts. I hope you’ll join me in urging CFPD Director Richard Cordray to take swift action now that they have the green light to put a stop to unfair and harmful arbitration clauses.