CFPB Proposing Restrictions On Mandatory Arbitration Clauses

The Consumer Financial Protection Bureau is getting ready to limit the ability of banks to prevent individuals from joining class action lawsuits. Most of the largest issuers in the United States have used mandatory arbitration clauses, hidden away in cardmember agreements, to restrict their customers from doing so.

The Consumer Financial Protection Bureau (CFPB) is getting ready to file a formal proposal to limit the practice of mandatory arbitration, a clause that is present in credit card agreements of over 53% of Americans. The CFPB is soliciting comments from the public, and has already attracted criticism from different groups -- most notably the American Bankers Association (ABA).

Under the proposed rule, consumers would regain the ability to join class action lawsuits against their credit card issuers. Prior to this, a majority of customers signed this right away when applying for credit cards. This is due to so-called “mandatory arbitration” clauses that can be found in cardmember agreements of most big banks. The clauses prevent individuals from suing their issuer, and instead force any disputes to be resolved by a third-party arbitrators. As part of this clause, consumers were also giving up their ability to join class action lawsuits.

While the CFPB is proposing removing the restriction of class-action lawsuits, it has not yet reached a ruling on the arbitration clauses themselves.

The other major component of the proposal would require banks to submit detailed data to the Bureau any time they engage in arbitration with their customers. This is done to let the CFPB study the actual results of these clauses, specifically, whether the clauses unfairly benefit banks over consumers.

Arbitration clauses are found in 15.8% of credit card contract types, but these contracts cover the more popular and widely issued cards by the nation’s largest companies (which affect roughly 53% of the market). In their 2015 report on the topic, the CFPB found that that number could be as high as 94%, were it not for private settlements of an antitrust lawsuit that prevented several issuers from including them in their contracts – among these were Bank of America, JPMorgan Chase, Capital One, and HSBC.

Account TypeArbitration ClauseNo Arbitration Clause

Credit Cards

53.0%47.0%

Checking Accounts

44.4%55.6%

Prepaid Cards

82.9%17.1%

Rob Nichols, CEO and President of the ABA, has released a statement speaking out against the proposal. Nichols argues that such changes will result in increased costs to consumers. “Consumers will get less and pay more,” he writes, “When needed, arbitration is an efficient, fair and low-cost method of resolving disputes.” The ABA points to the CFPB’s own study on the topic, which acknowledged the benefits of arbitration to consumers.

Ever since it was founded in 2011, critics have argued the organization has too much power and control over financial institutions. Senator Ted Cruz called the organization "a runaway agency" that "does little to protect consumers." By contrast, Democrats have largely supported the CFPB. Hillary Clinton, the leading democratic presidential candidate, supported this latest proposal saying, "mandatory arbitration clauses buried deep in contracts for credit cards, student loans, and more prevent American consumers from having their day in court when they've been harmed."

Few consumers actually know whether they are subject to these clauses, and even fewer understand what they mean. The CFPB’s study revealed that 75% of individuals surveyed weren’t sure if such a clause existed in any of their credit card contracts. Just 7% of those who did have an arbitration clause in their cardmember agreement understood it limited their ability to sue in court.

Robert Harrow

Robert is the head of the Credit Card vertical at ValuePenguin and has been covering the card industry since 2014. His work has been featured in Reuters, Marketwatch, the New York Times and more.

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