For years, consumer advocates have fought for and won better protections for credit-card users. But a recent Supreme Court ruling raises concerns those rights may be more limited than many had thought.
Based on the ruling made last week, experts say consumers who sign up for a credit card with a so-called binding arbitration clause can't dispute charges or fees in courtroom. The 8-to-1 vote immediately drew criticism from consumer advocates, who claim the ruling will encourage more credit-card issuers and lenders to add clauses that restrict consumers to arbitration, where they say consumers are at a disadvantage to big companies. "What's sickening about this ruling is that any company thinking of the pushback from consumers has more reason now to say they're justified to have this clause in their contracts," says Linda Sherry, director of national priorities at Consumer Action, a consumer advocacy group.
Supporters of arbitration say it's more efficient than court proceedings and can result in quicker resolutions for consumers, says Robert Hockett, professor of financial law at Cornell University's Cornell Law School, who specializes in bank and consumer credit regulation. But when it comes to credit cards, many experts are concerned that "big banks have disproportionate power or influence in comparison to the little guy" in arbitration, says Hockett.
While data on arbitration cases is limited since most cases are kept private, what's available suggests few consumers win in arbitration. In California, for instance, credit card users won just 4% of cases that went to arbitration while card issuers won 94% from 2003 to early 2007, according to the latest report on the topic by Public Citizen, a nonprofit consumer advocacy group. (The report tracked arbitration cases overseen by one of the biggest arbitration firms at the time.) Nessa Feddis, vice president and senior counsel for regulatory compliance at the American Bankers Association, says consumers can "do very well" in arbitration, provided they're not there for unpaid debts that they owe.
Though still common, experts say binding arbitration clauses were declining in popularity. Following a lawsuit filed by Minnesota's attorney general in 2009 alleging a major arbitration firm of having close ties to credit-card issuers, several banks -- including Bank of America, Chase and Capital One -- dropped their binding arbitration clauses.
But experts say this latest ruling may reverse that trend. Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Groups, says he expects banks to start reintroducing binding arbitration as early as this summer. While Bank of America, Chase and Capital One say they're not currently considering going back to arbitration, an industry spokeswoman says an increase in adoption is possible. "To the degree that they may they have been removed, you might see them reinstated," says Feddis of the American Bankers Association.
Even the Credit CARD Act -- the sweeping credit-card law that went into effect in 2010 outlawing random interest rate hikes on personal credit cards, among other things -- can't protect cardholders from arbitration, says Lauren Saunders, managing attorney at the National Consumer Law Center -- even if the consumer believes a bank has violated one of the law's provisions. The ABA's Feddis says concerns that the CARD Act might not be upheld by arbitrators are unfounded.
Consumer setbacks don't end there, advocates say. The latest ruling also limits what consumers can do as a group: Many arbitration clauses restrict consumers from joining class action lawsuits against a company, and this ruling reaffirms that, says Sherry.
Experts say the final word on the matter will likely come down to the Consumer Financial Protection Bureau, which is tasked with providing disclosure rules for credit cards. Depending on what the CFPB's study on arbitration finds, the bureau could decide to ban or at least regulate forced arbitration, says Saunders.