More on Debt Collection and Arbitration

by Jeff Sovern

Richard posted a link last week to the Times article about how debt collectors first sue in court and then when consumers sue them, use arbitration clauses to block the consumer law suit.  Today the Times published four letters responding to the article, including mine. I want to comment on two of the other letters. Joseph H. Weber wrote:

Class-action litigation is certainly not the answer. The only people who benefit from class-action litigation are the lawyers.

One problem with this assertion is that it overlooks that class actions deter misconduct.  To the extent that they do so, consumers of the product benefit even if they do not obtain redress themselves. Weber also wrote:

There are other options for people who believe they are being cheated by debt collectors in addition to arbitration, such as disputing the original claim in small claims court.

Except that consumers don't always know that they have been sued in the first place, as was reportedly true of the consumer described in the article's lead. It's hard to defend against a claim that you don't know about.

Another letter-writer, Eric Hodson, urged Congress to "pass legislation requiring that any consumer credit agreement include a prominent warning that the consumer will be confined to arbitration of any disputes, and that arbitration can be expensive and the outcomes usually favor the business over the consumer."

But our arbitration study found that consumers generally did not understand arbitration clauses and many did not think they could take away their right to sue.  In fact, considerable empirical evidence indicates that consumer disclosures are ineffective.  Perhaps it is possible to write an effective disclosure along the lines Hodson suggests, but no evidence suggests that it is, and a fair amount of empirical evidence suggests that it is not.

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