Consumer bureau: Forced arbitration a bad deal for consumers

Consumers are being unfairly limited in their legal options by mandatory arbitration clauses that accompany a host of financial products, according to a new government study.

Tuesday’s report from the Consumer Financial Protection Bureau (CFPB) found that mandatory clauses that require consumers to enter arbitration with a company rather than file a class-action lawsuit were common in many financial products, applying to millions of Americans.


But the study also found that those clauses may let the financial industry significantly trim its legal bills. On average, consumers received roughly $175,000 from arbitrators in 2010 and 2011, compared to just under $1 million won by taking companies to court.

The new report received quick criticism from industry groups. The U.S. Chamber of Commerce called arbitration a “simple, inexpensive and modern system” and accused the bureau of “an unfair and biased approach.”

However, the CFPB said there was no evidence that mandatory arbitration lowered prices for consumers.

Meanwhile, consumer advocates urged the CFPB to use those new findings to justify tough new rules barring forced arbitration clauses.

The study, mandated by the Dodd-Frank financial reform law, found that mandatory arbitration clauses were common throughout the consumer finance marketplace. Ninety-two percent of all prepaid cards come with an arbitration requirement, and 53 percent of all credit cards issued come with the clause as well. While only 8 percent of banks and credit unions pair arbitration clauses with checking accounts, those that do account for 44 percent of insured deposits. Ninety-nine percent of payday loans, and 86 percent of student loans also come with mandatory arbitration language.

The CFPB also found that three-quarters of Americans did not even realize they were subject to arbitration restrictions when they signed up for credit cards and other financial products. And even if consumers knew they were subject to an arbitration clause, fewer than 7 percent knew that barred them from seeking redress in court.

The CFPB first launched a public inquiry on arbitration language in 2012, releasing preliminary findings at the end of 2013.