Article Image
Financial Arbitration Overturns 1996 Federal Credit Card Law

Wednesday, January, 18, 2012

In an 8 to 1 decision, the Supreme Court decided that financial arbitrationclauses in many credit-based contracts supersede a 1996 Federal law that enabled credit and loan customers to file litigation against their lenders if they were dissatisfied with them. Many consumer rights advocates are contesting this decision, asserting that this is unfair to customers.


What This Arbitration Ruling Affects

This arbitration ruling affects all credit cards, auto loans, student loans—every consumer credit or loan application except for mortgage loans, which are specifically prohibited from having arbitration clauses. Already, many loan and credit providers have placed arbitration clauses in their contracts. What this ultimately means is that in most cases, customers will only have arbitration as a recourse, and will no longer be able to file suit against their creditors for charges and fees.


Arbitration Clauses and Consumer Advocates

Consumer advocates believe that the ability to insert enforceable arbitration clauses into credit and loan application places an undue amount of power in the hands of credit lenders. The core of the argument is that they believe that an arbitration attorney is more likely to decide on behalf of the creditors due to financial incentive, whereas a trial judge would be immune. They also believe that this enables creditors to charge any fee they desire without any fair legal recourse for the customer.


The consumer groups involved are urging the newly formed Consumer Financial Protection Bureau to investigate the arbitration clauses being inserted into applications and contracts. If the CFPB finds that these clauses are unreasonable, they may be subject to stricter regulation and amendment, or they may be banned altogether.