Consumer bureau probes arbitration clauses in financial products

WASHINGTON -- The government’s new consumer watchdog is launching an inquiry into the use of arbitration clauses in financial contracts, which keep disputes over credit cards and other products out of the court system.

Consumer advocates long have complained that so-called “pre-dispute arbitration clauses” gave too much of an advantage to financial firms over average Americans, who often don’t realize they’ve signed away their right to sue.

But companies said third-party arbitration is fair and saves money because it’s faster and less-expensive than going to court. The Supreme Court has backed the use of arbitration clauses in contracts over a consumers’ right to go to court.

In creating the Consumer Financial Protection Bureau in 2010, Congress directed the agency to study the use of arbitration clauses by the industry and issue regulations that could limit or prohibit the practice if such regulations would be in the public interest.

“Arbitration clauses are found in many contracts for consumer financial products,” said Richard Cordray, the bureau’s director. “We want to learn how arbitration clauses affect consumers, and how effective arbitration is in resolving consumers’ issues. This inquiry will help the bureau assess whether rules are needed to protect consumers.”

The bureau is asking for public comment as part of its inquiry. Among the questions the agency will study are the prevalence of arbitration clauses in agreements for consumer financial products, the types of claims that consumers bring in arbitration cases and how arbitration affects consumers and companies.

A 2007 report by Public Citizen found that California consumers with disputes with credit card issuers lost 94% of the time over a four-year period in cases decided by a major arbitration firm.

Last year, Sens. Richard Blumenthal (D-Conn.) and Al Franken (D-Minn.), with Rep. Hank Johnson (D-Ga.), introduced legislation to eliminate forced arbitration clauses in consumer, employment and civil rights cases.

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