CFPB Goes After Mandatory Credit Card Arbitration

Mandatory arbitration can make it difficult for consumers to sue their credit card companies when those companies are at fault. The Consumer Financial Protection Bureau wants to change that.

According to The Washington Post, the CFPB is expected to issue a comprehensive report next week — issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act — that consumer advocates predict will lay the groundwork for new regulations restricting how companies can implement mandatory arbitration clauses.

Credit card companies, as the article points out, regularly include details in the fine print of their agreements, prohibiting consumers from filing class action lawsuits should an instance arise. Inherently protected from being sued, credit card companies instead force the disenfranchised consumer into a process that consumer advocates deem as being unreasonably biased toward the company. These advocates say that the average consumer, in fact, isn’t even aware they have agreed to such clauses.

“The unfairness…is incredibly widespread,” David Seligman, staff attorney at the National Consumer Law Center, told The Washington Post. “You either agree to give up your right to hold these companies accountable, or you don’t use a credit card.”

Financial firms, on the other hand, argue that the cost saved on legal fees carries over to the consumer.

“If the card issuers’ costs go up, so does the consumer’s price,” Nessa Feddis, a senior vice president with the American Bankers Association, told the Post.

Should a consumer dispute enter the arbitration process, however, there is little record of the outcome because most disputes are kept private. Such secrecy, according to Post author Jonnelle Marte, keeps other consumers who may otherwise be motivated to take similar action in the dark (unlike the case with lawsuits, which are a matter of public record).

“Companies are controlling the system,” Ellen Taverna, legislative director for the National Association of Consumer Advocates, told the Post. “They’re writing the clauses, they decide where the arbitrator will be and they decide the payment terms.”

In conjunction with the release of its report on mandatory arbitration, the CFPB will also hold a field hearing on the topic next week (March 10) in Newark, where the agency’s director Richard Cordray is scheduled to speak. Cordray, in fact, already touched on the issue in his remarks at the President’s Advisory Council yesterday (March 3), particularly as it applied to student loans:

“The Consumer Bureau is also accepting complaints from students who run into problems with student loans and other financial products and services, such as credit cards, debit cards, prepaid cards, and auto loans. We encourage students who believe they have been mistreated (and all other consumers, for that matter) to visit our website at consumerfinance.gov to submit a complaint. So far, we have received over 540,000 complaints on consumer financial products from people all over the country. These complaints have led to a great deal of monetary and other relief. We also consider them carefully to inform our work to identify and root out bad actors in the financial marketplace.”

Cordray also spent his day yesterday speaking with the House Committee on Financial Services, where he referenced what the CFPB has done to help consumers shield themselves from company’s deceptive practices that have put them into financial debt.

“To date, we have helped secure orders through enforcement actions for more than $5.3 billion in relief to more than 15 million consumers who fell victim to various violations of federal consumer financial laws. During the period of the Semi-Annual Report, we brought enforcement actions that secured $1.6 billion in relief for consumers,” he said. “Those actions included $727 million in relief to consumers who were harmed by a company’s deceptive marketing of credit card add-on products. They included $92 million in debt relief for 17,000 service members and other consumers who were harmed by a predatory lending scheme. And they included $225 million in relief for consumers who were harmed by other deceptive and discriminatory credit card practices. …The premise at the heart of our mission is that consumers deserve to be treated fairly in the financial marketplace, and they should have someone stand on their side when that does not happen.”