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About 90% of arbitration clauses in credit card and checking account agreements prevent consumers from participating in class actions, according to a report released today by the Consumer Financial Protection Bureau.

Companies and consumers use arbitration to settle disputes outside the court system, and financial service contracts often include “pre-dispute arbitration clauses” — which state that either party can require disputes to be resolved through arbitration, and which were the subject of the CFPB’s study. After reviewing hundreds of consumer contracts and filings from the American Arbitration Association — the main administrator of consumer financial arbitrations in payday loan, credit card, checking account and prepaid card disputes — the CFPB found that fewer than 1,250 consumer arbitrations regarding those four products had been filed. About 900 of them were filed by consumers.

“Today’s preliminary results help us better understand how these clauses are affecting consumers’ financial lives so that we can ultimately determine whether action should be taken for their greater protection,” said CFPB Director Richard Cordray in a news release about the study.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandated the CFPB look into the clauses and allowed the bureau to issue regulation on such clauses if it is in the public interest or will help protect consumers. Of those roughly 1,250 filings, many of them concerned payday loans, a product the CFPB started monitoring in 2012.

In the study, the CFPB found that larger financial institutions were much more likely to use arbitration clauses than smaller businesses, like community banks. Based on the CFPB’s preliminary findings, it seems the method does not appeal to consumers, considering how many contracts include pre-dispute arbitration clauses and how few consumers file arbitration cases.

The CFPB is conducting an ongoing study of class actions, but based on its research so far, more than 13 million class members have made claims or received payments through class action settlements. Compare that with the 3,605 people who opted out of the settlements and “handful” who chose to file an arbitration case instead.

When consumers do file arbitration cases, there tends to be a significant amount of cash at stake. The CFPB found almost no cases regarding disputes over less than $1,000. In debt disputes, the average debt in question surpassed $13,000, and other disputes involved claims in excess of $38,000.

The bureau is taking the study into a second phase, in which it will analyze consumers’ awareness of arbitration clauses and how such clauses impact their financial decisions.

Image: Tom Schmucker

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