Arbitration Bad for Consumers (But You Don't Have a Choice)

The Consumer Financial Protection Bureau (CFPB) just released a study regarding arbitration clauses in contracts. A mandatory arbitration clause requires that, if you as the consumer have a beef with a product or service, you must go to arbitration rather than sue.  No matter how bad the grievance or how serious the injury.  Even better, guess who gets to pick the arbitrator. (Hint: not you!) There are a lot of contracts that require arbitration.  Just a few examples: credit cards, auto loans, payday loans, cell phone contracts.  The list goes on and on.  Just in case that doesn't disturb you enough, the company also gets to pick the location of the arbitration.  It doesn't matter that you applied for, used, and paid all of your bills for that credit card from New Mexico because you will be arbitrating in Delaware.  So, what did the CFPB find? Consumers in this process get screwed.   The arbitrators have incentive to rule in favor of the company because the company will continue to send them cases if they get favorable rulings.  Most consumers don't even know that there is a mandatory arbitration clause in their contract until they have a complaint.  Mandatory arbitration clauses also keep consumers from banding together as a group to get issues resolved.  We commonly refer to that process as class action lawsuits.

As a consumer bankruptcy attorney, what worries me about this process is the snowball effect that debt to tends to have on consumers.  It can be one credit card or one car repair that should but won't be covered under the warranty, or one payday lender that misplaces a payment, and the problems just get bigger, and bigger and bigger.  The arbitration process instead of being a fair process, that at least has the hope of turning out well for the consumer, ends up being a process that is hopelessly stacked against them, leaving them disillusioned and, sometimes, broke.

I travel whenever I get the chance. Well, take a look at your ticket that came from the airline, cruise ship or travel agency.  They all have mandatory arbitration clauses. You may hear about hundreds of passengers getting sick on a cruise ship, but you won't hear about them suing because of it.  The moment they purchased that ticket, they had waived their right to have any grievance they may have heard in front of a court of law.

In light of the report, it is likely that there will be a push for the CFPB to take action to force some lenders to get rid of these mandatory arbitration clauses or at the very least set up some oversight that requires the process be fair for the lender and the consumer. Let's keep our fingers crossed that we see some positive change.