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Although most cardholders are not aware of it, credit card companies require that you voluntarily give up some of your legal options as part of your card membership. By accepting the terms and conditions of virtually any credit card issued in the U.S., you automatically accept the use of 3rd-party arbitration of legal disputes.
The policy is highly controversial, which is why the Federal Office of Management and Budget just approved a request from the Consumer Financial Protection Bureau (CFPB) to conduct a national telephone survey of 1,000 credit card holders. The approval for the survey to go forward was despite vigorous opposition from credit card industry trade groups who fought against it for months.
What’s the Big Deal?
Since the 1990s, credit card companies have inserted arbitration clauses into their contracts. These basically say that the cardholder agrees to have any legal disputes settled in arbitration – not in court or in front of a jury.
To become a cardholder, you have to agree to the terms and conditions of your credit card contract. If you refuse to agree to an arbitration clause that is part of your cardholder agreement, your credit card company will refuse to extend any credit privileges or services to you.
Agreeing to mandatory arbitration may not sound like a big deal in practice; however, it usually means that cardholders cannot file a class action lawsuit. This type of restriction on your legal recourse can be a huge roadblock for any consumer trying to fight all by themselves against the well-financed, and extremely powerful, banking industry.
The CFPB Survey
The CFPB’s arbitration study was originally authorized by Congress in Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act authorizes that the CFPB may “prohibit or impose conditions or limitations on the use of” such agreements based on the results of the study. Consumers across the U.S. who are contacted for the survey will be asked questions about the use of mandatory arbitration agreements.
The CFPB wants to ensure transparency of information, so that when you sign up for a credit card you fully understand the legal ramifications. They also want to determine whether arbitration is actually in the best interest of the consumer. If the survey reveals issues that seem biased against consumers, it will likely take further action.
How Arbitration Works
At a typical arbitration hearing, each party has a chance to explain their side of the dispute to the arbitrator. The arbitrator considers each side's evidence and submissions and then makes a decision. The arbitrator's decision is legally binding, even if you don't participate in the process.
If you disagree with the outcome, your legal ability to raise a challenge may be severely limited. For example, you may need to prove arbitrator misconduct and may have only a short period of time to do so. The consumer action group Public Citizen analyzed nearly 34,000 arbitration cases filed between 2003 and 2007, and found that consumers lost and creditors won in about 94% of the cases.
The results of an arbitration proceeding can have a negative impact on your credit report and credit score. In turn, that can affect whether you can get a loan, and how much you will have to pay to borrow money.
The credit card industry argues that arbitration is a faster and more uniform way of settling cardholder disputes and that it offers lots of benefits to consumers. The Federal Trade Commission, on the other hand, recommends that if you want to keep your options open you should look for a contract that doesn't require arbitration or one that offers a provision that allows you to decide not to use arbitration if a dispute arises.
Good luck finding a credit card that offers that option, though, because these mandatory arbitration clauses are widely used across the entire industry. However, if the CFPB decides that arbitration clauses are much too arbitrary that could change. Meanwhile the agency expects to have the results of the survey around the end of the year so that it can begin to analyze them in 2015.