Some small and regional U.S. banks are prohibiting unhappy customers from taking their complaints to court or joining class-action lawsuits, instead requiring them to resolve disputes through arbitration.
The banks are emboldened by a U.S. Supreme Court ruling in April that said state laws can't supersede private contracts that require customers to present their complaints individually to an arbitrator.
The decision attracted attention from financial firms and other companies like cellphone providers that embrace mandatory third-party arbitration for customer gripes, saying it helps them resolve disputes fairly for customers and more cleanly than getting tied up in lengthy and costly court cases.
Consumer advocates say they don't like arbitration because it restricts the ways in which a customer can resolve a dispute, and that consumers are less likely to go through the arbitration process than to sue.
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Another complaint: Arbitration provisions often are written in legalese and buried deep within documents that consumers get but don't read when they open a bank account.
"I get all these 'we've changed the terms of your agreement' letters, but they make it very difficult to understand what was changed," said Vic Bullara, who runs an executive-coaching company in Lake Forest, Calif.
Regions also simplified the language in the provision and moved it to the beginning of the 43-page agreement.
The July 21 agreement includes a boldface box that tells customers they "will not have the right to pursue [a] claim in court or have a jury decide the claim and you will not have the right to bring or participate in any class action or similar proceeding in court or in arbitration."
At the same time, Regions eliminated a provision that permitted some court actions even while a case was going through arbitration. The bank also extended the mandatory arbitration provision to heirs of a deceased customer.
A spokeswoman for Regions declined to comment.
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First Tennessee Bank, which has nearly 200 branches, is "looking at the mandatory-arbitration-clause issue and will probably adopt whatever becomes the industry standard practice," said a spokesman for the bank, a unit of First Horizon National Corp. (NYSE: FHN - News) , of Memphis, Tenn.
Alan Kaplinsky, a partner at law firm Ballard Spahr LLP in Philadelphia, said he has received "a ton of requests" from banks and other companies to help them put together mandatory arbitration provisions for consumer contracts. He declined to identify those banks, citing client confidentiality.
"The Supreme Court opinion has been a wake-up call for a lot of these companies to at least consider" mandatory-arbitration clauses, he said.
The nation's largest banks have long included such provisions in credit-card agreements and consumer-deposit products like checking and savings accounts.
According to a recent survey by Pew Charitable Trusts, nearly three-quarters of 265 accounts offered by the 10 largest U.S. banks included mandatory arbitration provisions.
Still, the practice is scattered. Wells Fargo & Co. (NYSE: WFC - News) and J.P. Morgan Chase & Co. (NYSE: JPM - News) both include mandatory-arbitration clauses in their deposit accounts, according to the companies.
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Bank of America Corp. (NYSE: BAC - News), of Charlotte, N.C., eliminated mandatory arbitration from its consumer accounts in 2009 after the practice came under attack in debt-collection proceedings. Capital One Financial Corp. (NYSE: COF - News) doesn't have mandatory-arbitration provisions on any of its products, said a spokeswoman for the McLean, Va., company.
Mr. Bullara, the executive coach, said he didn't realize that his multiple accounts with J.P. Morgan's Chase unit require disputes to go through an arbitration process. "I don't know if that's a good or bad thing," he said.
The practice has been less common among smaller institutions, which tend to highlight consumer-friendly policies.
"Consumer protection and fairness suggest it's not a good provision," said Steve Zuckerman, president of Self-Help Federal Credit Union.
The Durham, N.C., credit union mostly serves women and rural and minority communities in North Carolina, California and other U.S. states. Self-Help doesn't require arbitration and doesn't plan to change its policy, he said.
Mandatory arbitration was thrown into disarray two years ago when big arbitration firms backed away from participating in consumer debt-collection disputes. As a result, many large banks stopped using the process to chase down debtors. It remained in place for other consumer products.
April's Supreme Court decision is making more banks comfortable with the practice. In that case, California consumers sued AT&T Inc. (NYSE: T - News) , saying they were defrauded because the company charged them $30.22 apiece in sales tax on cellphones that were advertised as free. AT&T invoked its arbitration clause, but California courts later concluded that such provisions were so unfair that they were void. The Supreme Court overturned the state ruling.
"Most of our community-bank clients believe that having the arbitration clause would be beneficial," says Joseph Porter, chairman of the financial-institutions practice at law firm Polsinelli Shughart in St. Louis.
The Dodd-Frank financial-overhaul law requires the newly formed Consumer Financial Protection Bureau to examine mandatory-arbitration agreements, but doesn't set a specific time frame for the agency to do so.
"We need more scrutiny over these things and make sure they are fair to consumers," said Susan Weinstock, a project director at Pew.
The arbitration issue is creeping up in other court cases. Nearly three dozen banks are facing lawsuits over overdraft fees in cases that were initiated before the April ruling.
Some of those banks had mandatory arbitration clauses for their customers. The cases still are pending.
"What the banks have done with these arbitration programs is buy themselves immunity with respect to complaints about their consumer practices," said Bruce Rogow, a lawyer at Alters Boldt Brown Rash & Culmo in Miami, which is involved in the overdraft cases.
Write to Robin Sidel at email@example.com