Binding arbitration under scrutiny

Consumer Financial Protection Bureau suggests new limits

Customers who have disputes with banks or credit card companies often can be forced to go to arbitration before a private lawyer to try to resolve the problem, rather than before a judge in court.

That’s because many financial accounts come with built-in contracts containing “pre-dispute” arbitration clauses — so-called because consumers agree to them when they sign up for the account, before they actually have a disagreement.

The federal Consumer Financial Protection Bureau on Tuesday released a study critical of such arbitration clauses, and suggested the agency may consider new rules to limit them.

The agency found that the clauses restrict consumers’ ability to file class-action lawsuits, in which many people with similar complaints file suit as a group, instead of individually.

“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,” Richard Cordray, the bureau’s director, said in prepared remarks.

The study was required by the Dodd-Frank financial-overhaul law, which bans such clauses in mortgage agreements.

The bureau has been collecting information on the issue for about three years, and held a public hearing Tuesday in Newark, N.J.

Industry groups defend the use of arbitration clauses in financial contracts, saying they offer a faster and less costly way to resolve disputes.

“This is an important tool for the customers of financial institutions that helps keep costs down,” said Richard Foster, senior vice president of legal and regulatory affairs for the Financial Services Roundtable.

However, the bureau report found “no statistically significant” evidence that companies that have eliminated arbitration clauses increased their prices.

The agency’s report, based on an examination of more than 850 financial contracts, found that use of the clauses is widespread, especially in credit card and checking accounts.

It also found the clauses in private student loans, payday loans and mobile wireless contracts. Credit card issuers accounting for more than half of all card debt, for instance, have arbitration clauses affecting as many as 80 million people.

Banks representing 44 percent of insured deposits have such clauses in their checking account agreements.