Dispute Resolution Provisions in Credit Card Agreements
Pew Comments to the Consumer Financial Protection Bureau
Mr. Ashwin Vasan
Chief Information Officer
Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20552
RE: Telephone Survey Exploring Consumer Awareness of and Perceptions Regarding Dispute Resolution Provisions in Credit Card Agreements; CFPB Docket No. CFPB-2014-0011
Dear Mr. Vasan,
The Pew Charitable Trusts is dedicated to data-driven research on consumer financial products. Pew raises awareness, builds partnerships with industry, and advocates for policies that reduce risks and allow Americans to responsibly manage their financial activities.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Consumer Financial Protection Bureau (CFPB) to complete a study of the effect on consumers and financial markets of predispute mandatory arbitration agreements and allows the Bureau to limit or prohibit these clauses based on the findings of this study, if it chooses to do so.1 Pew research has shown that the use of these contracts is nearly universal in a number of financial service markets and that consumers are opposed to having their legal options limited through the "take it or leave it" contracts they are required to approve to obtain financial products from many providers.
Predispute mandatory arbitration agreements require that consumers and companies forgo litigation of claims in court, and instead submit disputes to a non-judicial third-party for adjudication. The process is generally less formal than court proceedings. Many agreements identify specific requirements of or constraints on the dispute resolution process, such as the fees and costs that each party must pay, what rights of appeal—if any—exist, and which arbitration companies can be selected.
Pew research has shown that a large majority of checking account agreements offered by the largest banks and general purpose reloadable (GPR) prepaid cards offered online contain predispute mandatory arbitration agreements. The use of these clauses has grown in the past few years to the point that it is increasingly difficult to find a transaction account agreement that does not prevent a consumer from taking a dispute to court, if a consumer were inclined to attempt to avoid these agreements. Further, it is standard practice for financial contracts to contain clauses allowing the provider to change the terms of the agreement at any time, so a company that does not initially include a mandatory arbitration clause could add one at any time. Pew also conducted a nationally representative survey of checking account holders that showed that consumers are concerned about mandatory arbitration requirements and want the option of going to court if a dispute arises between them and their financial institution. Pew’s report outlining this survey data is attached.
Pew’s research on the incidence of and requirements in checking account predispute mandatory arbitration agreements of the largest banks is extensive, reaching back to 2010.2 For example, in analyzing data collected from June to August 2012 for a report examining checking account dispute resolution limitations, Pew found that 43 percent of the 100 largest financial institutions (including credit unions) that made account information available used predispute mandatory arbitration agreements.3 For the top 50 institutions, the proportion was much higher, at 56 percent. This data analysis also revealed a close connection between predispute mandatory arbitration agreements and bans on class action lawsuits. This followed an April 2011 Supreme Court decision that insulated class action bans from state laws that might deem them unconscionable if they were used in conjunction with an arbitration agreement.4
In October and November 2012, Pew again collected account information for the 50 largest banks for a report on checking account best practices.5 Of the 36 banks that made information available, 58 percent contained predispute mandatory arbitration agreements. Looking only at the 35 institutions where data were available in both the early and late 2012 data collections, the proportion of banks that had arbitration clauses grew from 54 to 57 percent.
Pew’s most recent data collection took place in October and November of 2013. The methodology for this collection was exactly the same as in late 2012. However, the number of agreements that we obtained increased to 44 of the 50 largest banks with consumer checking accounts. Looking only at banks that were common to both the late 2012 and 2013 studies, the proportion that contained arbitration agreements grew from 60 to 69 percent.
Pew’s research on GPR prepaid cards shows a similar increase in the use of mandatory arbitration agreements. In a data collection from December 2011 to January 2012, Pew found that 65 percent of the 52 GPR prepaid cards studied contained predispute mandatory arbitration agreements.6 Pew again collected GPR prepaid card account information from March to May 2013.7 The proportion of cards that contained arbitration agreements in the 2013 study increased to 77 percent.8 Pew’s research on both checking accounts and prepaid cards closely mirrors the results of the CFPB’s study of predispute mandatory arbitration that was released in December 2013, reflecting the growing trend of using predispute mandatory arbitration in consumer financial contracts.
In 2012, Pew conducted a nationally representative survey of 603 checking account holders concerning their attitudes about mandatory arbitration agreements and other dispute resolution issues. The results of this survey formed the basis for Pew’s policy recommendation that the CFPB prohibit mandatory arbitration agreements for checking accounts. Pew has also recommended that these agreements be banned for credit cards and GPR prepaid cards.
Our findings show that consumers are not against the idea of going through arbitration instead of going to court. Rather, they are concerned with how arbitration proceedings are often conducted and believe that they should be able to choose to go through arbitration – or not – after a dispute arises.
The areas of concern for consumers with mandatory arbitration involve the deprivation of rights that are afforded in a court of law and the process by which arbitrators are selected. The aspects of arbitrationthat were of concern to consumers in the survey included: arbitrators do not necessarily have legal training; the right to appeal is generally very limited, even when the arbitrator fails to correctly apply the law; and, in some cases, arbitration agreements require consumers to pay court costs, regardless of which party wins the case.
One of the biggest concerns with mandatory arbitration that consumers expressed relates to a structural flaw with the process that would be very difficult fix. This is sometimes referred to as the “repeat player” problem: because consumer financial companies select the arbitration firms that will resolve disputes, arbitrators appear to have a financial incentive to act in a manner that provides them with more business in the future from the companies that mandate arbitration. This appearance of bias was a concern to an overwhelming number of respondents in Pew’s survey. A full 94 percent believed that if they were to participate in an arbitration proceeding, both parties should choose the arbitrator who resolves the dispute. Further, 68 percent of respondents believed that they should be able to choose whether to go to court or participate in arbitration after a dispute arises.
Pew’s research has shown that the use of mandatory arbitration agreements is an increasingly common practice that affects the vast majority of consumers who have disputes with financial services providers in a number of markets, including those for checking accounts, prepaid cards, and credit cards. The result has been the creation of an adjudication process that is not subject to public oversight and that lacks court rules that are designed to make proceedings transparent and fair, such as discovery or the right to appeal. Since arbitrations are not a matter of public record, scrutiny of how decisions are made and any possible biases will not be open, circumventing one of the foundations of the American justice system – that decisions are made for all to see. In fact, a settlement between the National Arbitration Forum and the State of Minnesota raised concerns about the objectivity of arbitration companies.9
This is likely a problem that market forces alone cannot address. These agreements are often buried in dense contracts, contain legalese that is difficult for most consumers to understand, and only become relevant after a dispute has arisen when the consumer no longer has an opportunity to choose between products with different features. In addition, there are fewer opportunities for consumers to choose financial products without arbitration requirements because the small number of institutions that don’t mandate arbitration is shrinking, and Pew’s research shows that it is the norm for consumer financial contracts to allow the company to alter agreements at any time.
Finally, most disputes that a consumer might have with a financial institution are for small amounts, so it is not surprising that few arbitration proceedings have occurred concerning transaction accounts over the past several years.10 This serves as a disincentive to financial institutions to end practices that are unsafe and non-transparent, such as transaction reordering of checking accounts, but that don’t impose very large costs on each consumer who is affected. In fact, Pew’s research shows that restraints that are imposed on consumers through the mandatory arbitration process make it unlikely that these consumers would be able to succeed in challenging a deceptive or unfair practice such as transaction reordering through the arbitration process, which allows such practices to continue without restriction.
We thank the CFPB for this opportunity to comment on the telephone questionnaire for the arbitration study and look forward to continuing to work with you as you complete the study. As always, we are available to discuss these comments or any other aspect of our work at any time.
Consumer Banking Project
Attachment: Banking on Arbitration
- Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. § 5518 (2014).
- In Pew’s earlier research, which was conducted in 2010 and 2011, only the largest 10 or 12 banks were studied. In those studies, it was found that most of these institutions included mandatory arbitration agreements. However, the reduced depth of these studies makes trend data much less meaningful and therefore they are not discussed at length here.
- Pew attempted to obtain the account agreement of each of the top 100 financial institutions first by going online, then by calling customer service, and finally by visiting a branch if that was feasible. Pew was able to collect 85 account agreements by these methods.
- AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011) (The Supreme Court ruled that the Federal Arbitration Act preempted state laws that made class action bans illegal).
- See The Pew Charitable Trusts, Checks and Balances: Measuring Checking Accounts Safety and Transparency, May 2013. This data collection, unlike the 2011 collection, did not include credit unions. Three of the largest 50 institutions that offer consumer checking accounts are credit unions. In this collection Pew also did not attempt to retrieve account agreements in person if attempts to obtain them online or by phone were unsuccessful.
- See The Pew Charitable Trusts, Consumers Continue to Load Up on Prepaid Cards, February, 2014. Pew collected GPR prepaid card agreements that were available through the websites of Visa, MasterCard or American Express. For this collection, any card that allowed the consumer to reload funds, withdraw money from an ATM, and make purchases at unaffiliated merchants was included in the study.
- See The Pew Charitable Trusts, Loaded with Uncertainty: Are Prepaid Cards a Smart Alternative to Checking Accounts, September, 2012.
- Pew changed its methodology for collecting prepaid card agreements from 2012 to 2013. The first collection included all cards that were available on the websites of Visa, MasterCard and American Express. For the second collection, the cards that were available on the websites of Visa, MasterCard and American Express were included if they allowed consumers to open an account online, they allowed for direct deposit, and they were generally available to the public. In addition, cards offered by any of the 50 largest retail banks were included (there were 10 cards offered by these banks).
- Press Release, “National Arbitration Forum Barred From Credit Card and Consumer Arbitrations Under Agreement with Attorney General Swanson” (July 19, 2009), available at http://pubcit.typepad.com/files/nafconsentdecree.pdf.
- Consumer Financial Protection Bureau, “Arbitration Study Preliminary Results: Section 1028(a) Study Results To Date” (2013), p. 64, available at http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf.