The Consumer Financial Protection Bureau (CFPB) has recently investigated mandatory arbitration clauses in contracts for credit cards, prepaid cards, payday loans, checking accounts and wireless contracts, among other types. Its conclusion: many consumers cede their rights to sue a credit card issuer or bank without even knowing it.

In contracts for credit cards, loans and other above-mentioned services, clauses integrated into your agreement state that either the company or the consumer can require any dispute to be settled via arbitration instead of through the public court system. Many financial institutions tend to force arbitration (and related class action waivers), which generally has the effect of chilling any class action lawsuits – which tend to be more costly for corporate defendants.

According to the CFPB, arbitration clauses appeared in 92% of prepaid cards investigated, and 53% of the market share of credit card issuers. Nearly three-quarters of consumers surveyed did not know whether they were subject to an arbitration clause. Arbitration is preferred by financial institutions because it generally reduces legal expenses, while class-action lawsuits tend to create much greater financial exposure for corporate defendants.

Also according to the CFPB’s findings, only about 1,200 individual federal lawsuits are filed by consumers per year in the markets studied by the CFPB, while more than 160 million consumers were eligible for some type of relief as members of class actions over a five-year period, which amounts to approximately 32 million per year.

What happens next: the CFPB has the authority under the Dodd-Frank Act to issue regulations regarding arbitration clauses. They will be meeting with stakeholders while the CFPB invites comments from consumer advocates and financial institutions alike to debate possible reformation to mandatory arbitration clauses. We will keep you posted as updates progress.

If you believe you are entitled to redress from your financial institution or are currently subject to arbitration, contact the attorneys at Dimond Kaplan & Rothstein, P.A. for a free consultation.

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