Mandatory Arbitration and Credit Card Companies

The Washington Post ran an article today entitled, "Why it's nearly impossible for you to sue your credit card company." It discusses the prevalence of mandatory arbitration in credit agreements.

The Federal Arbitration Act (FAA) has long stated that arbitration clauses in contracts are to be upheld. After the U.S. Supreme Court's ruling in Concepcion, many companies moved to add mandatory arbitration language to their customer agreements. In Concepcion, the SCOTUS ruled that the FAA trumps state laws that prohibit contracts from forcing arbitration for class action claims.

The CFPB is expected to issue findings about mandatory arbitration clauses soon. In the meantime, the Washington Post article does a great job of explaining both sides of the issue. Mandatory arbitration tends to hurt the consumer and benefit the creditor because the arbitration process often is slanted in the favor of the creditor. The banking industry says that arbitration keeps costs down by minimizing litigation costs. In turn, the story goes, the cost of credit is cheaper for consumers.

However, it's worth noting that the confidential nature of many arbitration proceedings means that other consumers may be unaware that they have claims against a company. When a lawsuit is filed, it is part of the public record. Even if the matter later ends in a confidential settlement, the complaint and any other documents associated with the case generally remain public record. This gives other consumers (and consumer defense attorneys) the opportunity to identify claims. Additionally, a large number of cases filed against the same defendant may indicate a pattern and practice of bad behavior.

The CFPB is expected to issue rules regarding the use of mandatory arbitration clauses. In the meantime, consumers seeking to pursue their creditors may be left without much legal recourse.

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