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What is an arbitration clause and what is its effect?

As is the case with just about any contract or terms of agreement document, many people don't fully read what they are signing. It isn't until later on that they realize that they have agreed to something that conflicts with what they are trying to do. This is certainly the case with arbitration clauses, which can create complex legal scenarios that typically require the help of an experienced attorney in order to reach a resolution.

But what is an arbitration clause you may ask? Typically found in contractual agreements with financial service providers, arbitration clauses put restrictions on how legal disputes between the company and its clients are resolved. Because arbitration is a "way to resolve disputes outside the court system," these types of clauses can actually block lawsuits, such as class actions, from going to court.

Many financial service providers believe that these types of clauses protect consumers because they keep the cost of litigation from transferring to consumers. Unfortunately, as was pointed out by a recent study conducted by the Consumer Financial Protection Bureau, the use of arbitration clauses may actually be detrimental to consumers because they make it more difficult for consumers to seek relief from a dispute.

Another problem with arbitration clauses is the fact that many consumers are not even aware of their existence. Fewer still understand what they do. This is a major problem the CFPB says it will need to address appropriately.

As some of our Florida readers know, both individual and class-action lawsuits can be costly for companies and consumers alike. But as the CFPB study points out, the cost of hindering litigation may be far worse. It's because of this that the CFPB will need to take a number of things into consideration before issuing new guidelines for the use of arbitration clauses, especially if it wants to create a better environment for dispute resolution down the road.

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