PEMBROKE PARK, Fla. – A recent study conducted by the Consumer Financial Protection Bureau found arbitration agreements in financial service contracts restrict consumers' relief by limiting class action settlements.
The report released earlier this month stated more than 75 percent of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers.
READ: CFPB fact sheet on arbitration agreements study
"Arbitration means you're giving up your legal rights," said former Circuit judge, David Young.
The CFPB defines arbitration as "a way to resolve disputes outside the court system."
Many contracts for consumer financial products and services have "pre-dispute arbitration clauses" hidden in the fine print, which waive the consumer's right to take the company to court.
These forced arbitration clauses are raising red flags with consumer groups.
"Forced arbitration is probably the single biggest problem in all of consumer law in America today," said Paul Bland, director of a Washington D.C.-based public interest law firm called Public Justice. "Tons of corporations use forced arbitration clauses to essential excuse them from the most basic consumer protection laws."
WEB EXTRA: Paul Bland on why consumer advocates are raising the red flag over forced arbitration.
Consumer advocates say they dislike the sneakiness involved, from the arbitration clauses many consumers do not realize they signed, to the system of private negotiations which hamper class action suits. They argue the system is stacked against the consumer.
"Arbitration providers know the companies are repeat customers, so they have an economic incentive to rule in favor of the company," said Stephanie Hines of Public Citizen, a non-profit consumer rights advocacy group.
"There is no judicial review, so even if the arbitrator makes a completely whacky ruling of law you can't go to a court and do an appeal of it," Bland said. "One of the things that happen a lot in forced arbitration is that the consumer ends up having to pay the company's attorney's fees, which is something that almost never happens in the court system."
Chad Husby, a Local 10 News viewer and South Florida botanist, had an issue with a car he purchased from Miami Auto Wholesale. Husby did not realize his contract with the dealership included an arbitration cause.
"Not all of us can become versed in this area of law. I mean, I don't think we should be," Husby said. "I was kind of horrified at what I learned about arbitration."
"The people who end up being arbitrators are almost always lawyers who work for the same type of company that you're suing," Bland said. "Instead of having a jury decide your case against a car dealer, the people who decide the case are going to end up being lawyers for other car dealers."
Husby filed a complaint against Miami Auto Wholesale and Export and BMW Financial services. In November, the arbitrator denied his claims and ordered Husby to pay for the dealership's attorney fees totaling more than $20,000, which Husby's lawyer Dana Manner pointed out is more than the price of the car.
READ: CFPB Arbitration Study: Report to Congress 2015
What is the CFPB?
The Consumer Financial Protection Bureau defines itself as "a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives."
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) orders the CFPB to conduct a study on pre-dispute arbitration clauses in consumer financial markets. The act specifically prohibits these clauses in mortgage contracts and allows the CFPB to issue regulations on the use of these clauses in other markets if the Bureau finds it to be in the public's interest to do so.
"If it figures out that (forced arbitration) cheats consumers and is bad for them, it can simply ban forced arbitration for all lenders, which amounts to almost a fifth of the American economy," Bland said.
Findings of the 2015 Study
The CFPB study focused on six different consumer finance markets: credit cards, checking accounts, prepaid cards, payday loans, private student loans, and cell phone contracts. The findings showed 55 percent of credit card issuers include arbitration clauses and among cell phone service providers who authorize third parties to charge consumers for services, 88 percent of the largest carriers include arbitration clauses.
"There are corporations that say (arbitration) is faster than the court system," Bland said explaining a common defense used to justify forced arbitration clauses. "One of the reasons it's faster than the court system is the vast majority of consumers simply drop their cases and walk away (because) they're reluctant to go into a corporate system where the judge is going to be rigged against them."
"Consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits on average each year in the markets studied," the Bureau said. Between 2010 and 2011, only 341 of the arbitration cases resulted in decisions.
Of these decisions, the CFPB reports "consumers obtained relief on affirmative claims in 32 cases and obtained debt forbearance in 46 cases. The total about of relief and debt forbearance consumers obtained in all of these cases combined was under $400,000. Companies obtained decisions requiring consumers to pay $2.8 million in cases filed during this same time period, predominantly for disputed debts."
"By contrast, on average, roughly 32 million consumers were eligible for relief through class action settlements in federal court each year," the Bureau said. "Research across consumer finance markets generally found that larger numbers of consumers are eligible for financial redress through class action settlements than through arbitration or individual lawsuits."
So what does this mean?
"Arbitration clauses can act as a barrier to class actions," said CFPB, summarizing the study results. "By design, arbitration clauses can be used to block class actions in court. The CFPB found that it is uncommon for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to block class actions."
Consumers who agree to these arbitration clauses are not aware of the implications, especially in contracts with credit card companies.
"Fewer than seven percent recognized they could not sue their credit card issuer in court," the CFPB said. Additionally, consumers do not consider arbitration when selecting their credit card company. Not a single consumer mentioned "arbitration" or "dispute resolution" as a factor when choosing their current credit card provider.
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