November 29, 2012

Are Banks Making You Sign Away Your Rights?

by John Kiernan on November 27, 2012

Signing away rights - Prepare to be astonished: Banks aren’t the most consumer-friendly businesses out there. I know, I know, you’re flabbergasted, right? After the excessive fees, bait-and-switch pricing, lawsuits, and sketchy customer service issues we’ve seen over the years, that news must come as an absolute shock.

At the risk of surprising you into cardiac arrest (or, you know, killing you with sarcasm), allow me to fill you in on some new research that adds another contentious chapter to the financial institution-consumer saga and will likely fuel distrust of big banks even further. The Pew Charitable Trusts today released a study on the dispute resolution policies employed by the nation’s largest banks and credit unions, aptly titled “Banking on Arbitration: Big Banks, Consumers, and Checking Account Dispute Resolution.”

The study found that banks generally try to limit the manner in which consumers can dispute disagreements related to their checking accounts with clauses buried in fine print. More specifically,

56% of the nation’s 50 largest banks include mandatory arbitration clauses in their checking account agreements, and 30% of the next 50 biggest do so. In other words, the bigger the bank, the more likely it will be that arbitration is your only option when it comes to dispute resolution.

While 28% of the financial institutions that require arbitration allow customers to opt-out of it, they must do so within a median of 38 days from account opening. 48% also give customers the option of filing disputes in small claims court instead, but this avenue is only available to people with claims below a certain amount.

81% of the big banks with mandatory arbitration clauses also ban customers from participating in class-action lawsuits (62% of the following 50).

70% of the banks using mandatory arbitration clauses hold that the decisions of arbitrators are final, 45% limit discovery – the exchange of information between representatives of both parties in a legal dispute, and 60% don’t require the arbitrator to have a law degree.

59% of the checking account agreements that Pew analyzed contain language whereby the customer waives his or her right to a jury trial. That’s just a right conferred upon all citizens by the Constitution that they sneakily make you sign away.

A third of all checking account agreement’s limit the financial institution’s liability and another 13% shorten the statute of limitations for bringing disputes.

I don’t really know how much analysis you need because those statistics speak for themselves and it’s obvious that making consumers sign away their rights is a legally-dubious practice, but I can add a bit of context. First of all, mandatory arbitration is so problematic because arbitrators overwhelmingly side with financial institutions, as they have a natural conflict of interest in that they’re inclined to act in a way that promotes getting repeat business. That’s why you can’t have consumers pick the arbitrators either because they’d end up ruling against banks the majority of the time. So, where does that leave us? A government-run arbitration system? That’s called the courts. An arbitrator-certification program? That’s a start, but someone still has to decide who oversees each particular case? You could do it at random, but then you have no accountability or inherent rewards for a pattern of good work. Anyone out there have any other ideas?

Secondly, we can expect the CFPB to have a field day with this information and to make banks answer for their policies, especially considering the fact that it established an already-popular credit card dispute resolution database not too long ago and has seemed eager to make a name for itself during its still-brief tenure as the central personal finance regulator. We can also expect a lot of consumer outrage and attention from media outlets, though none will be as compelling or well-written as Wallet Blog’s, of course. What’s more, a number of banks will undoubtedly try to distance themselves from these anti-consumer practices. It’s your job not to let them off the hook.

Finally, these findings should simply impress upon you the importance of carefully reading any contract before signing it. You never really know what you’ll fine in the bowels of its fine print, so brew a cup of coffee, pull out those glasses and get to work. Your wallet and potentially much more depend on it.

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