The Corporate Giveaway Hidden in Your Credit Card Contract
Opinion

The Corporate Giveaway Hidden in Your Credit Card Contract

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Let’s say you’re charged a higher interest rate on your credit card than the terms of your contract specifies, perhaps even higher than state limits. Or you’re charged an obscure fee on your student loan or checking account. Or a payday lender raids your account without your permission. It’s hard enough to take a financial provider to court over such claims, even under normal circumstances. But in a growing number of cases, consumers are barred from even that possibility. 

Mandatory arbitration clauses hidden in the fine print of credit card, banking, cell phone and payday loan contracts prevent consumers from access to the judicial system when a dispute arises, and make class action lawsuits over pervasive injustices impossible. Instead, consumers who feel wronged must submit to an extra-judicial process with an arbitrator paid by their lenders — a playing field clearly tilted toward corporations. 

Related: You Can No Longer Take Your Company to Court 

Because the outcomes of arbitration cases are typically not public, we didn’t know a lot about the scope of this system until this week. The Consumer Financial Protection Bureau, acting under a mandate from the Dodd-Frank Act, released a report to Congress on mandatory arbitration, one of the first empirical analyses of the practice. While CFPB did not attempt to evaluate its findings, the reality plainly shows through: Arbitration benefits corporations at the expense of their customers. 

One problem for consumers in pursuing arbitration is that they have no idea it exists. CFPB found that three out of four consumers were unaware of whether their financial products included a mandatory arbitration clause. Those clauses are everywhere, though: 53 percent of credit cards, 86 percent of private student loans, 88 percent of cell phones, 92 percent of prepaid cards and 99 percent of payday loans have them in their contracts. This revelation only comes up when people consider their options after being ripped off, or when the company takes them to arbitration over a debt. 

Knowing about the arbitration clause may not help much, either. Despite the tens of millions of consumers why operate under those arbitration rules, only an average of 600 arbitration cases got filed annually between CFPB’s study years of 2010 to 2012, with one in five of those likely filed by corporations. Maybe consumers shy away from the option because corporations have the upper hand in arbitration: In a sample of 1,060 debt dispute cases, corporations were given seven times as much in financial awards as consumers. 

Related: The Sneaky Hidden Clause in Credit Card Agreements 

Of course, individual court cases are not such a boon for consumers either: Of 1,200 cases filed between 2010 and 2012, only two went to trial. The real reason corporations use mandatory arbitration is to prevent class action lawsuits. Those suits can cause real pain for corporations, including billions in damages. So they use the arbitration clause to block class action certification, given leeway to do this by a Supreme Court ruling, AT&T v. Concepcion. And 90 percent of all arbitration agreements studied by the CFPB prohibit even class action arbitration. 

In other words, financial services providers like their chances when going up against resource-starved individuals, but find themselves less advantaged when those individuals can band together as a group. It’s the same impulse that makes corporations hostile to unions. 

Some lawmakers hope that CFPB’s study is just a first step. Sen. Al Franken (D-MN), who has highlighted the arbitration issue in the past, reacted to the study by urging that CFPB establish rules to ban mandatory arbitration clauses. “A rule like that would go a long way toward keeping the big banks in line and making sure that justice is available to consumers who get swindled,” Franken said in at a briefing yesterday in Washington. The Senator plans to reintroduce the Arbitration Fairness Act to eliminate arbitration clauses in consumer contracts. Americans for Financial Reform, a labor/progressive coalition, is also mobilizing for a new CFPB rule. 

The industry argues that these arbitrations are cheaper and more efficient for everyone involved, implying that they return those savings from reducing civil suit costs to their customers. But CFPB compared costs between companies with no arbitration clause and those with them, and found “no statistically significant evidence” of cheaper prices. Financial services providers simply pocket the savings they get from lowering their risk of exposure to legal action from their contract violations. “If tens of millions of consumer’s rights are being trampled and it’s not lowering costs, why do we have these agreements?” Franken asked yesterday. “It’s so that big businesses can shield themselves from liability when they act against the consumer’s best interest and that is just wrong.” 

Related: The Hidden Risks in Your Credit Cards’ Fine Print 

In a way, there’s a parallel between corporations mandating arbitration cases and the investor-state dispute settlement (ISDS) process placed into international trade agreements. Under this process, corporations can sue sovereign governments if they believe regulations violate the terms of the trade agreement. Like arbitration, ISDS stays outside national courts, and corporations can win cash awards based on expectations of future profits lost through the regulatory changes. Private lawyers, not judges, hear the cases. 

So the lesson here is that corporations don’t respect the judicial system as much as they want to bend it to their advantage. As 100 law professors wrote in a letter to Congress and the U.S. Trade Representative this week, ISDS “grants foreign corporations a special legal privilege,” weakening the rule of law. You can say the same things about mandatory arbitration clauses. In both cases, corporations can step outside the legal system and into a process they feel they can control, whether to chill regulations or to stop individuals from suing for relief. 

Both ISDS and consumer arbitration have no appeals process. They feature no public oversight of the arbitrators. They create no precedent on corporations that they must follow. So there’s no accountability, no review and no fairness. The only difference is that ISDS exists as an option for corporations; consumers have no alternative but arbitration. 

The good news is we have a consumer agency now that has managed to study arbitration, with a focus on how it affects ordinary people, not the financial industry. I hope they finish the job. 

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