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For years, consumer advocates have claimed that binding arbitration clauses have quietly but dramatically limited consumers’ ability to seek justice and have their day in court. On Tuesday, the Consumer Financial Protection Bureau released results of a broad study that appears to support those claims. While a majority of banking customers are subject to arbitration agreements that restrict their ability to join class-action lawsuits, three-quarters of consumers are unaware of the agreements, and only 7% realize a clause in the agreements restricts their ability to sue in court.
“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” said CFPB Director Richard Cordray. “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. Now that our study has been completed, we will consider what next steps are appropriate.”
Arbitration is intended to provide dispute resolution outside the traditional court system. In recent years, many consumer contracts have included a “pre-dispute arbitration clause” — where such a clause exists, either side can generally block lawsuits, including class actions, from proceeding in court. Instead, disputes are heard by an arbitration panel. Industry groups argue that arbitration saves money, which in turn lowers consumers’ costs for services; but opponents say the process unfairly favors corporations over consumers.
The Dodd-Frank financial reform bill banned arbitration clauses in mortgage contracts and enabled the CFPB to make more rules about their use. The study, released in advance of a hearing to be held Tuesday in Newark on arbitration clauses, is the first step in potential rule-making. Here are a few of the study’s most important findings:
“Many consumers have no idea that they have been stripped of their rights – until it is too late,” said Theresa Amato, executive director of consumer advocacy organization Citizen Works. “It’s time for the CFPB to use its power to ban these unfair forced arbitrations and class action waivers to correct the widespread problems their own research reveals.”
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