Let’s say you order a credit report from Equifax.
You find a mistake on it. You dispute the mistake – an essential step in the credit repair process – but it’s not corrected. You know the information being reported by Equifax is wrong so you decide to take them to court. Only you can’t because you signed that right away when you agreed to the terms required to see your credit report through their website. If you have a dispute with them, you are limited by the mandatory arbitration clause that negates your right to a day in court (or the participation in a class action lawsuit).
It’s not just credit bureaus that include mandatory arbitration clauses. It’s companies providing all sorts of financial products and services that you probably use. Here’s what you need to know about them.
What is mandatory arbitration?
Mandatory arbitration is a form of alternative dispute resolution (ADR). You may also see it referred to as forced arbitration, binding arbitration, or mandatory binding arbitration.
Under normal circumstances, if a company violates the terms of an agreement, you have the right to sue them for it or join a class action lawsuit if there are others whose rights have been similarly violated. A mandatory arbitration clause included in an agreement – be it a signed physical contract or terms of service you click agreement to on a website – can prevent this from happening.
As explained by the Consumer Financial Protection Bureau:
“These clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for cases brought in small claims court. Where these clauses exist, either side can generally block lawsuits from proceeding in court. These clauses also typically bar consumers from bringing group claims through the arbitration process. As a result, no matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company.”
So instead of a judge or jury deciding the outcome of your dispute, the decision is left to an arbitrator.
What types of companies use mandatory arbitration clauses?
Many types of companies in the financial space use these clauses. You may be subject to mandatory arbitration for any of the following consumer products or services, including:
- Credit cards
- Prepaid cards
- Checking accounts
- Investing accounts
- Insurance policies
- Cell phone accounts
- Auto CPN loans and leases
- Private student loans
- Payday loans
- Credit reports
- Credit monitoring
You may also find mandatory arbitration clauses in employment contracts and doctor’s agreements.
(Per the Dodd-Frank Act, mandatory arbitration clauses are prohibited in mortgage agreements.)
Can you opt out of a mandatory arbitration clause?
It depends on the company. Some allow you to opt out; others don’t. But if you have the option, The Consumerist says you should.
When you’re asked to sign or agree to anything, look for the inclusion of a mandatory arbitration clause. If you don’t see language explaining how to opt out, search for it (e.g., “how to opt out of [name of credit card company, lender, service provider] mandatory arbitration”). If nothing turns up, you can always contact the company and ask.
What is an example of a mandatory arbitration clause?
On binding arbitration…
“Any Claim (as defined below) raised by either You or Equifax against the other shall be subject to mandatory, binding arbitration. As used in this arbitration provision, the term ‘Claim’ or ‘Claims’ means any claim, dispute, or controversy between You and Us relating in any way to Your relationship with Equifax, including but not limited to any Claim arising from or relating to this Agreement, the Products or this Site, or any information You receive from Us, whether based on contract, statute, common law, regulation, ordinance, tort, or any other legal or equitable theory, regardless of what remedy is sought. This arbitration obligation extends to claims You may assert against Equifax’s parents, subsidiaries, affiliates, successors, assigns, employees, and agents.”
However, Equifax also makes clear that mandatory arbitration does not apply if you believe they are in violation of the Fair Credit Reporting Act:
“The term ‘Claim’ shall have the broadest possible construction, except that it does not include any claim, dispute or controversy in which You contend that EIS violated the FCRA. Any claim, dispute, or controversy in which You contend that EIS violated the FCRA is not subject to this provision and shall not be resolved by arbitration.”
On class action lawsuits…
“By consenting to submit Your Claims to arbitration, You will be forfeiting Your right to bring or participate in any class action (whether as a named plaintiff or a class member) or to share in any class action awards, including class claims where a class has not yet been certified, even if the facts and circumstances upon which the Claims are based already occurred or existed.”
On opting out of mandatory arbitration…
“IF YOU DO NOT WISH TO BE BOUND BY THE ARBITRATION PROVISION, YOU HAVE THE RIGHT TO EXCLUDE YOURSELF…. In order to exclude Yourself from the arbitration provision, You must notify Equifax in writing within 30 days of the date that You first accept this Agreement on the Site (for Products purchased from Equifax on the Site).
“If You purchased Your Product other than on the Site, and thus this Agreement was mailed, emailed or otherwise delivered to You, then You must notify Equifax in writing within 30 days of the date that You receive this Agreement. To be effective, timely written notice of opt out must be delivered to Equifax Consumer Services LLC, Attn.: Arbitration Opt-Out, P.O. Box 105496, Atlanta, GA 30348, and must include Your name, address, and Equifax User ID, as well as a clear statement that You do not wish to resolve disputes with Equifax through arbitration.”
On the initiation of arbitration…
“Arbitration shall be administered by the American Arbitration Association (“AAA”) under its Consumer Arbitration Rules in effect at the time the arbitration is filed unless any portion of those rules is inconsistent with any specific terms of this arbitration provision or this Agreement, in which case the terms of this arbitration provision and this Agreement will govern. The AAA’s rules may be obtained at www.adr.org, or by calling the AAA at 1-888-778-7879.
“To commence an arbitration, you must file a copy of your written arbitration demand with the AAA…. The arbitration shall be before a single arbitrator. The arbitrator will have the power to award a party any relief or remedy that the party could have received in court in accordance with the law or laws that apply to the dispute, subject to any limitations of liability or damages that exist under this Agreement.”
On payment of arbitration fees and costs…
“In the event You file a Claim in arbitration in accordance with these provisions, We will advance all arbitration filing fees if You ask that We do so, in writing, prior to the commencement of the arbitration. The payment of any such fees will be made directly by Us to the AAA. Such requests should be mailed to Equifax Consumer Services LLC…. We will also pay all arbitrator fees.
“If Equifax prevails in the arbitration, then the arbitrator shall have the authority to require that You reimburse Equifax for the filing fees advanced, but only to the extent such fees would be recoverable by Us in a judicial action. You are responsible for all other fees and costs You incur in the arbitration, including attorney’s fees and expert witness fees, except that the arbitrator shall have the authority to award attorney’s fees and costs to the prevailing party.”
On small claims court…
“Notwithstanding anything in this Section, either You or Equifax may bring an individual action in small claims court as long as (i) the claim is not aggregated with the claim of any other person, and (ii) the small claims court is located in the same county and state as Your address that You most recently provided to Equifax according to Equifax’s records in connection with this Agreement.”
What are the pros and cons of mandatory arbitration?
- Shortens the dispute process, as the two parties are not bogged down in the court system
- Reduces cost, as the two parties aren’t dealing with expensive legal fees for a lengthy court case
- Cuts down on costs for companies, savings that (theoretically) can be passed on to consumers in the form of lower prices
Mandatory arbitration can:
- Allow companies to select the arbitration association, raising doubts about impartiality
- Strip consumers of the right to join class-action lawsuits, a big con, as a 2015 study by the Consumer Financial Protection Bureau (CFPB) found that “arbitration agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions”
- Strip consumers of the right to appeal the results of arbitration, with exceptions: 1) it was previously agreed that the decision could be repealed or 2) it is suspected the arbitrator is guilty of fraud or collusion with the company
- Surprise consumers, as they did not know they had agreed to mandatory arbitration or that it stripped them of their right to sue; the CFPB study revealed that 3 out of 4 of consumers didn’t know whether any contracts they’d signed included mandatory arbitration clauses and 93 percent of credit card holders didn’t realize such a clause would mean they couldn’t sue their credit card issuer
- It’s possible that the language of the clause would allow the company to sue the consumer even though the consumer cannot sue the company
The cons also include a point that negates the argument of one of the pros. The CFPB study found no proof that money saved by companies as a result of mandatory arbitration (versus expensive court costs) results in lower prices passed on to consumers.
What happens during the arbitration process?
NOLO provides a good breakdown of the arbitration process. Here’s the gist of it:
- You initiate arbitration. Likely, the arbitration clause specifies an arbitration association that must be used for this process. (Keep in mind that this works both ways. If you are in violation of the agreement, the company can initiate arbitration against you.)
- The arbitration association in charge of the process assigns the arbitrator (who is usually a retired judge or attorney). The rules followed by the arbitrator are dictated by the rules of the arbitration association.
- The arbitrator holds pre-hearing conferences.
- The arbitrator holds the arbitration hearing, during which each party presents their evidence.
- The arbitrator makes a decision, which could take anywhere from 10 days to 6 months.
Once the decision is made, it stands as is; the appeals process does not apply (with limited exceptions).
How is mandatory arbitration enforced?
The Federal Arbitration Act of 1925 and state arbitration laws provide the framework for enforcing mandatory arbitration decisions.
What is the Arbitration Fairness Act?
The Arbitration Fairness Act is legislation proposed by Minnesota Senator Al Franken. If passed, this legislation “invalidates agreements that require the arbitration of employment, consumer, antitrust, or civil rights disputes made before the dispute arises” and “restores the rights of workers and consumers to seek justice in our courts.”
Is the CFPB really going to ban mandatory arbitration clauses that prohibit class action lawsuits?
Maybe. This is a possibility that’s been in the works for a number of years:
Dodd-Frank is enacted, 1) mandating that the CFPB conduct a study of the use of pre-dispute arbitration clauses in the consumer finance space and 2) giving the CFPB the power to issue new arbitration regulations
The CFPB launches a public inquiry into arbitration.
The CFPB releases preliminary results of its research on arbitration clauses.
The CFPB releases a detailed report on the impact of arbitration clauses on consumers.
The CFPB announces its consideration of proposed regulations that would prohibit the use of clauses that prevent consumers from joining class action lawsuits.
The CFPB seeks public comment on its proposed regulations to ban arbitration clauses that prohibit class action lawsuits.
The L.A. Times reports that the CFPB could impose the new regulations anytime, but with much expected push-back: “The financial services industry has been screaming bloody murder about the CFPB’s plan. You can expect the Republican majorities in Congress, and President Trump, to see things their way and block the proposed rule. You can also expect consumer advocates not to roll over quietly.”
How is mandatory arbitration different from non-binding arbitration?
In general, the decision reached in mandatory arbitration must stand; there is no appeals process (with limited exceptions). In contrast, the decision in a non-binding arbitration decision is little more than advice that both parties can agree to follow, or not.
How is arbitration different from mediation?
Mediation is another form of alternative dispute resolution. But while an arbitrator decides the outcome of a dispute, a mediator serves only as a facilitator of the process, helping the two parties decide together how the dispute should be resolved.
What should you do if you have a dispute?
Your best bet is to exhaust every possibility for resolving the issue with the company before it reaches the arbitration stage.
For instance, the 2015 CFPB study found that 40 percent of the arbitration filings it looked at involved disputes over the amount of debt owed by a consumer to a creditor.
If you have a similar issue – meaning the amount the creditor says you owe is incorrect – submit a credit dispute to the credit bureaus. If that doesn’t resolved the issue, dispute directly with the data furnisher. If neither of them resolve the problem, submit a complaint to the CFPB and the FTC. Note, the same process should be followed for any type of inaccuracy you discover in a listing on your credit report. (Have you looked for these errors?)
Should none of this resolve the issue, then it’s time to take more drastic measures. If a mandatory arbitration clause applies, submit a demand for arbitration to the appropriate association (if applicable). If you are not bound by arbitration, consult an attorney and consider a lawsuit.