Binding Arbitration: A Rewrite of Consumer Rights?
The vast majority of credit card companies have some form of a clause stating that in the event of a dispute, the matter is handled through arbitration. I don’t think the average consumer fully understands how such a clause impacts their rights.
What is arbitration?
Arbitration means that if there is a dispute between you and your credit card company, you cannot take the matter to court. Instead, the dispute is settled by a private panel of arbiters (who are usually chosen by the company) and, in most cases their decision is binding – meaning you do not have the right to appeal. Consumers are forced to give up their right to trial and the clause doesn’t stop there. Many credit card companies take it a step further by adding that the consumer cannot participate in any class action lawsuits brought against the company.
How do these types of clauses benefit or protect the consumer? What guarantee does the consumer get that arbitration will be fair to the full extent of the law?
The Consumer Action Organization conducted a survey on several of the major credit card companies to find out whether they required binding arbitration. Of those surveyed, 75% said they did require binding arbitration, and this number could potentially be higher as Consumer Action received a lot of ‘don’t knows’ and vague responses that didn’t answer the question. However, there were some cards that did not require binding arbitration. In the forefront of this crowd was Chase’s AARP card. My feelings of relief that someone had finally seen the error of their ways was effectively quashed when I discovered that the only reason the AARP card doesn’t have binding arbitration is because the 50-plus association specifically negotiated their contract to leave it out.
Laura MacCleery, Director of Public Citizen’s Congress Watch division, gave a compelling argument against binding mandatory arbitration before Congress. The meeting was held to discuss The Arbitration Fairness Act of 2007 that had been introduced to Congress. In MacCleery’s argument, she stated there were three reasons that they were against allowing binding arbitration to continue.
1.) It is imposed on consumers and is mandatory as opposed to voluntary.
2.) Proceedings and decisions are shrouded in secrecy.
3.) Proceedings lack due process and impartiality.
She further continues her case by saying that “secrecy is anathema to democracy” and that “unfettered power of any kind will become abuse.” To back these claims, MacCleery’s division conducted an eight-month investigation of 34,000 cases of binding arbitration. Her discoveries were as follows:
• California is the only state in the country that requires any public disclosure of arbitration.
• Out of 19,000 cases where an arbitrator was appointed, consumers LOST 94% of the time.
• Arbitrators decided more than 83% of the cases based entirely on documents provided by the companies making the claims without a hearing or any consumer involvement.
Along with these figures, MacCleery reported that many consumers either were not notified of arbitration proceedings until after the decision had already been made. With a lack of consumer response, arbitrators tend to decide in favor of the companies.
What can consumers do?
Unfortunately, there isn’t much a consumer can do about their existing clauses. You can choose to close your account with existing companies who have such a clause or you can continue forward and hope there isn’t an issue in the future. Going forward, make sure you read the fine print. Credit card companies and others that participate in binding mandatory arbitration write the clause in a ‘take it or leave it’ manner so the consumer feels as though they have little choice.
Most credit unions do not have arbitration clauses in their credit card and loan documents, so it may be a good idea to consider using a credit union for your loan and credit needs. Some of them will, so be sure that you check into it before choosing one. Most, if not all, banks will have arbitration clauses in their credit card and loan documents because they have been sued before and it cost them a lot of money. It comes down to being a preventative measure for them.
Arbitration is really to the benefit of the companies that impose it. Consumers need to be leery of signing contracts with such clauses and need to understand what they are giving up if they do sign them. No consumer should be deprived of their legal right to a trial or be forced into something that they don’t agree with, but until arbitration is regulated, it’s up to the consumer to watch out for their own interests.
Related posts:
- Arbitration Follow-UP: Banks May Pay the Price
- Credit Card Day of Reckoning This Thursday?
- An Arbitrator is Dismissed from the NAF for finding in favor of a Consumer
- The Credit Cardholders Bill of Rights
- Is Consumer Debt a Good Thing?
This is the sort of thing that just gives more fuel to the fire I have against credit card comapnies. I will never participate with credit card companies ever again. I’ve never gone delinquent and never will, but the thought of having rights basically stripped of you by clauses in your contract with the credit company just infuriates me, and it scares me, too – for all those people who will go through arbitration.
I know that you review credit cards here sometimes, and I don’t think you’re morally opposed to them, but I am. I argue over and over again that I will never use them, even in day-to-day life and pay off in full each month, and some people think I’m nuts. So be it – I hate credit card companies, and some of the things they do make me sick. Like arbitration.
I think some cities and states are finally starting to address this issue. I know here is San Francisco, there is a lawsuit that based on some of the shady practices that Jonathan mentions above. Still, I don’t think anything will change soon (at least in favor of the consumer).