Are You Trading in Your Constitutional Rights for a Loan?

Should it be OK to waive your right to sue your lender for wrongdoing? The CFPB is considering next steps for arbitration agreements in the fine print.

This post comes from Mitchell D. Weiss at partner site

How would you feel about a physician who requires that you first agree not to sue if he were to botch your treatment? What about promising to never report the food poisoning you may end up contracting before the waiter agrees to take your order?

Ridiculous demands? Sure. So why is it OK to surrender these same rights to your lenders and the loan servicing companies that administer the contracts?

Take a close look at the terms and conditions of your credit card, auto and student loan agreements, and focus on the section entitled “Arbitration.” There you’ll read how disputes between you and the firms that lend you money (and service the ensuing contracts) are resolved — not in a court of law, but privately, quietly and without your ability to involve anyone else who may have been harmed in the same way by the same companies.

Jury trials are expensive and time-consuming. That’s why many firms — not just those within the financial services industry — have taken to requiring their customers to agree to these so-called pre-dispute waivers.

Unsurprisingly, here again the chips are stacked against consumers. Studies show that a majority of the arbitration decisions favor the defendant companies. (It’s also a big reason why mistreated education borrowers have thus far been unable to initiate class-action suits.)

Help may be on the way, though.

The future of arbitration with lenders

The Dodd-Frank Act directs the Consumer Financial Protection Bureau to evaluate this type of recourse-limiting contractual provision to determine whether it should be continued, curtailed or outlawed altogether (which the CFPB has already done for mortgage lenders). The bureau issued a preliminary report a few months ago and is expected to finalize its findings later this year.

Whether or not concern for the agency’s pending action is the animating motive, a handful of financial services companies have begun to relax this requirement in the face of increasingly negative press. Others, however, appear to be doubling down on their bets.

Take for example the mortgage industry. According to Reuters, certain lenders and loan servicers now require those customers who petition for payment relief to agree not to disparage their creditors after the fact (such as through various social media outlets) — and in some cases not to sue them either, even if the companies are at fault.

I can understand the emotion that drives that kind thinking — How dare the borrower insult us after we bent over backward to accommodate him! — but the only reason to worry about that would be if the lender or its agents had mistreated the borrower along the way. I can also rationalize the time and cost-saving attributes of arbitration versus a jury trial, but not as a means for blocking legitimate complaints about abusive practices.

Perhaps the financial services industry will realize that while all these constitutional infringements may indeed shut the door on certain types of risks (expensive lawsuits, for example), they open the windows for many others, not the least of which are reputational (brand) harm and regulatory backlash.

Then again, the likelier outcome is that the industry will do what it’s always done in the past: expend a lot of effort concocting workarounds for the tough new regulations its own actions have wrought, and attempt to pass along the added cost to future borrowers.

That’s too bad, because what’s the point of wringing out every last dollar from borrowers, only to spend it all (and sometimes more) in defending the egregious tactics that yielded those tainted profits in the first place?

This story is an Op/Ed contribution to and does not necessarily represent the views of the company or its affiliates.

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Stacy Johnson

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  • Cherry

    I totally disagree with the arbitration clauses AND just recently had a medical doctor ask me to sign an agreement in order to be treated. I didn’t.

  • Joseph Freitas

    Forced arbitration should be banned altogeher. That is why we have courts in the first place. The so-called impartial arbitrators are in bed with the corporations. It is basically their own courtroom with their rules.
    I mean what kind of catch 22 is this thing. How is forced arbitration even possible? Essentially you using a document backed by the force of law and the court system to prevent people from using said law and court system. I mean don’t they void each other out?

  • Gars

    Just don’t sign the agreements. It’s that simple.

    You sign much more restrictive agreements to get cable and phones. Why be concerned about this spreading to professionals? When was the last time you actually read the fine print in a contract you signed for a phone, cable, internet, or car purchase?

  • Subramaniam Balaraman

    Any clause restricting the legal remedy is illegal even if agreed by both parties of agreement . The contract is signed under coercion and avoiding legal remedy is against constitution . you cannot have a process generated to settle disputes parallel to the law .

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