Mandatory arbitration clauses were created by corporate lawyers about 15 years ago and buried in the fine print of credit card contracts and checking account agreements. But they may not live much longer following the March 10 publication of a three-year study by the Consumer Financial Protection Bureau. The 728-page report confirmed what consumer advocacy groups have long argued: Mandatory arbitration doesn’t much help customers but does prevent expensive lawsuits against banks. The bureau was required to complete the report under the Dodd-Frank Act prior to issuing new regulations. “Now that our study has been completed, we will consider what next steps are appropriate,” said CFPB Director Richard Cordray in a statement.

In its report, the CFPB noted that there were just 52 arbitration claims under $1,000 in 2010 and 2011, and consumers won relief in just four of them. Says Gupta: “What this report shows is not that claims go to arbitration but that they simply go away.”

Alan Kaplinsky, an attorney with Ballard Spahr who helped pioneer the use of arbitration clauses in financial contracts, counters that consumers resolve claims in other ways. They call the company to complain. They go to the Better Business Bureau. “That’s why you don’t see a heck of a lot of arbitration or litigation when there’s a clause,” he says.

The CFPB study found that over a five-year period contracts not covered by arbitration resulted in $2.7 billion in class-action settlement payments to more than 160 million people. Kaplinsky says that since the vast majority of class-action cases go nowhere—a fact the CFPB noted in its report—this route to relief is overhyped. About 18 percent of that $2.7 billion went to attorney fees.

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Bank Regulation and Supervision
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