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A study released Thursday by the federal Consumer Financial Protection Bureau found that about half of the debt owed by consumers of financial products studied is subject to private arbitration, rather than the courts.
So-called “mandatory arbitration clauses,” which stipulate that consumers must take any complaints before a private arbitrator instead of a judge and jury, have become increasingly common in contracts for products like credit card loans, prepaid credit cards and even checking accounts, the study found.
And the report has some startling statistics for supporters of class action lawsuits. In the wake of a big 2011 Supreme Court decision that began in San Diego, AT&T v. Concepcion, “nearly all” the arbitration clauses studied by the agency bar consumers from bringing class action lawsuits against their lenders.
“Around 90 percent of the contracts with arbitration clauses — covering close to 100 percent of credit card loans outstanding, insured deposits, or prepaid card loads subject to arbitration — include such no-class arbitration provisions,” it found.
We drilled into the issue of consumer arbitration in this three-part series earlier this year.
We took a look at a local consumer, John Perz, who has spent years in what he calls “arbitration purgatory,” waiting for a fair hearing in his dispute with a local car dealership.
In California, arbitration firms are blatantly flouting a legal requirement to tell the public how many times their private judges find in favor of consumers and against corporations.
The Concepcion case is at the heart of a war on class actions by the Supreme Court.
The CFPB report doesn’t shed a whole lot of light on the fairness of consumer arbitration. Anti-arbitration campaigners argue that arbitration can often be biased against consumers and lacks the transparency of the courts.
Despite being hailed by anti-arbitration activists as a damning report, the study is really a cold, analytical look at how common mandatory arbitration clauses are, and what sort of language they typically contain.
There are a few interesting snippets, however:
• Larger, more sophisticated banks are more likely to include longer, more complicated arbitration clauses in their contracts with customers.
• While a majority of credit card companies and banks don’t use mandatory arbitration clauses, because the big ones do, the clauses actually affect about 50 percent of all credit card debt the CFPB studied and about 50 percent of all the money held in bank accounts studied by the agency.
• A far larger proportion, more than 80 percent, of prepaid credit cards are subject to mandatory arbitration clauses.
• The median length of the arbitration clauses studied by the CFPB was 1,074 words – about twice as long as this article.
• The clauses are also complicated and hard to read. Apparently, there’s a measure for “readability” of written material called the Flesch readability score. Here’s a snippet from the report:
Credit card arbitration clauses almost always were more complex and written at a higher grade level than the rest of the credit card contract. The mean Flesch readability score for credit card arbitration clauses — with a higher score indicating greater readability — was 34.5 and the median was 33.766. By comparison, the mean Flesch readability score for the remainder of the contract (i.e., excluding the arbitration clause) was 52.2 and the median was 51.6.
This is a really important consumer issue that’s only going to get bigger.