The Arbitration Clause: Who Decides a Dispute Over Your Loan

What the clause says, line by line

The clause is usually near the end of the loan agreement, under a heading such as "Arbitration", "Dispute resolution" or "Waiver of jury trial". It is not part of the Truth in Lending box, so you have to read the contract itself. Most such clauses contain the same parts.

Look also for an exception for small claims. Some clauses let either side take a claim to small-claims court instead, which can be a simpler route for a modest dispute.

What you give up, with a worked number

Under section 2 of the Federal Arbitration Act, a written agreement to arbitrate is valid and enforceable except on the grounds that would let you undo any contract. After an award, section 10 lets a court set it aside only for narrow reasons such as fraud, a corrupt or partial arbitrator, serious misconduct, or an arbitrator who went beyond his or her powers. A judge cannot overturn an award simply because it got the law or the facts wrong in your view.

The class-action waiver matters most for small, widespread charges. Suppose a lender adds a $150 fee that its contract does not allow to 20,000 loans. That is $3 million in all, but only $150 for you. A claim that size is rarely worth bringing alone, while a group case can be. The figures are a made-up example, not a real case.

The opt-out window

Some loan agreements let you reject the arbitration clause after you sign by sending the lender a written notice within a set number of days. Nothing in federal law requires the window, so read your own clause. If it has one, it will tell you the deadline, the address and what the notice must contain.

1. 1 Find the deadline in the clause, and count it from the date the clause names, often the signing date.
2. 2 Write the notice with your name, address, account or loan number and a plain statement that you reject the arbitration provision.
3. 3 Send it the way the clause requires, by mail or email, and keep proof of the date sent.
4. 4 Keep a copy with your loan papers. The clause should also say whether rejecting it changes any other term; if it is silent, ask.

The best time to raise it is before signing, when you can still choose another offer. The signing and funding step covers what to read in the final documents.

What federal law says

• Military Lending Act. 10 U.S.C. 987(e)(3) and 32 CFR 232.8 make it unlawful to require a covered borrower to submit to arbitration, and 987(f)(4) makes an agreement to arbitrate a consumer credit dispute unenforceable against a covered member or dependent, including someone who was covered when the agreement was made. See military and veteran borrowers.
• The CFPB arbitration rule of 2017. Published July 19, 2017, it would have barred covered providers from using pre-dispute arbitration agreements to block class actions and required them to send arbitration records to the Bureau. Congress disapproved it in H.J. Res. 111, Public Law 115-74, approved November 1, 2017, which says the rule has no force or effect.
• Ordinary contract law. Because the Federal Arbitration Act lets courts refuse a clause on general contract grounds, state law on unfair contracts still applies case by case.

Questions to ask before you sign

• Does the agreement have an arbitration clause and a class-action waiver?
• Can I reject the clause, and by what date and method?
• Who pays the filing and arbitrator fees if I bring a claim?
• Is there a small-claims exception, and where would a hearing take place?
• Am I a covered borrower under the Military Lending Act?

Get the answers by email or in writing and keep them with your copy of the agreement. If an answer does not match the contract, ask the lender to correct the document before you sign. The signed agreement is what you will be held to, not what a representative said on the phone. If the lender will not change a clause you cannot accept, compare it with other offers.

Questions people ask