Are You Trading In Your Constitutional Rights for a Loan?

How would you feel about a physician who requires that you first agree not to sue if he were to botch your treatment? What about promising to never report the food poisoning you may end up contracting before the waiter agrees to take your order?

Ridiculous demands? Sure. So why is it OK to surrender these same rights to your lenders and the loan servicing companies that administer the contracts?

Take a close look at the terms and conditions of your credit card, auto and student-loan agreements, and focus on the section entitled Arbitration. There you’ll read how disputes between you and the firms that lend you money (and service the ensuing contracts) are resolved—not in a court of law, but privately, quietly and without your ability to involve anyone else who may have been harmed in the same way by the same companies.

Jury trials are expensive and time-consuming. That’s why many firms—not just those within the financial services industry—have taken to requiring their customers to agree to these so-called pre-dispute waivers.

Unsurprisingly, here again the chips are stacked against consumers. Studies show that a majority of the arbitration decisions favor the defendant companies. (It’s also a big reason why mistreated education borrowers have thus far been unable to initiate class-action suits.)

Help may be on the way, though.

The Future of Arbitration With Lenders

The Dodd-Frank Act directs the Consumer Financial Protection Bureau to evaluate this type of recourse-limiting contractual provision to determine whether it should be continued, curtailed or outlawed altogether (which the CFPB has already done for mortgage lenders). The bureau issued a preliminary report a few months ago and is expected to finalize its findings later this year.

Whether or not concern for the agency’s pending action is the animating motive, a handful of financial services companies have begun to relax this requirement in the face of increasingly negative press. Others, however, appear to be doubling down on their bets.

Take for example the mortgage industry. According to Reuters, certain lenders and loan servicers now require those customers who petition for payment relief to agree not to disparage their creditors after the fact (such as through various social media outlets)—and in some cases not to sue them either, even if the companies are at fault.

I can understand the emotion that drives that kind thinking—How dare the borrower insult us after we bent over backwards to accommodate him!—but the only reason to worry about that would be if the lender or its agents had mistreated the borrower along the way. I can also rationalize the time and cost-saving attributes of arbitration versus a jury trial, but not as a means for blocking legitimate complaints about abusive practices.

Perhaps the financial services industry will realize that while all these constitutional infringements may indeed shut the door on certain types of risks (expensive lawsuits, for example), they open the windows for many others, not the least of which reputational (brand) harm and regulatory backlash.

Then again, the likelier outcome is that the industry will do what it’s always done in the past: expend a lot of effort concocting workarounds for the tough new regulations its own actions have wrought, and attempt to pass along the added cost to future borrowers.

That’s too bad, because what’s the point of wringing out every last dollar from borrowers, only to spend it all (and sometimes more) in defending the egregious tactics that yielded those tainted profits in the first place?

More on Managing Debt:

• How to Pay Off Credit Card Debt
• Understanding Your Debt Collection Rights
• The Best Way to Loan Money to Friends & Family

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

Image: zimmytws