Access Denied: Citi’s Arbitration Clauses Head Off Threat of Jury Verdicts

A day in court is supposed to be a basic American right. But for customers who’ve borrowed from Citigroup’s subprime units, that right is fast disappearing.

That’s because, along with insurance and fees and interest, there’s another provision tucked into CitiFinancial’s loan contracts: an arbitration agreement.

The provision gives Citi the right to divert lawsuits into binding arbitration. Consumer attorneys say it’s an end run around the jury system—a way for Citi to shield itself from verdicts that might force it to change its predatory conduct.

“Arbitration favors the powerful over the poor,” says Tom Methvin, a Montgomery, Ala., attorney whose firm represents nearly 1,500 clients who had problems with loans from Citigroup-affiliated lenders. “Arbitration is not fair to consumers because the lender has so much say in who the arbitrator is.”

Because it’s the lenders that bring them business, critics say, arbitration services have a financial incentive to keep the companies happy with favorable rulings. “The big companies that spread a lot of money around on arbitration institutions, they control them,” says Tuscaloosa, Ala., consumer attorney Eason Mitchell. “They’re the big customers.”

CitiFinancial is one of many subprime lenders that include mandatory arbitration in their loan contracts. The industry argues that arbitration spares both lenders and borrowers from long, contentious court battles that only benefit plaintiffs’ attorneys looking for big paydays.

Richard Naimark, a senior vice president with the American Arbitration Association, says that all consumers “need some kind of, quote unquote, day in court.” But arbitration “can be a mechanism to do that because it is relatively fast, relatively inexpensive, and relatively accessible.” He says his organization has “extensive safeguards” to ensure the fairness of its arbitration proceedings.

Citigroup says it follows standards recommended by regulators and the arbitration industry, and that its arbitrators are free to grant the same relief any judge could give.

The company lists a number of provisions that it offers for customers’ benefit: arbitration is held in the borrower’s home county, the first day’s expenses are covered by CitiFinancial, and customers have clear notice of the arbitration provision and how the process works.

Methvin and Mitchell counter that arbitration can still cost consumers thousands of dollars, whereas courts are public forums available for a filing fee of about $100 in most cases. And they say consumers rarely are aware they’re signing away their rights to sue when they sign a loan contract.

Most courts have upheld CitiFinancial’s arbitration policies, citing the Federal Arbitration Act, which gives companies wide latitude to compel arbitration when customers or employees file lawsuits. Citi did suffer a setback in the case of a Pennsylvania couple seeking class-action status for their claim the company gouged them with prepayment penalties and other add-ons when they refinanced with another lender.

The company required Robert and Judith Lytle to pay $18,579 on top of the $124,554 they owed in principal. A judge ordered the couple into arbitration. In October, Justice Stephen McEwen of the Pennsylvania Superior Court threw out the lower-court ruling, evoking in his decision images of “pinstriped exploiters” and bankers stuffing “ever larger vaults” as they use arbitration to thwart “every state consumer statue enacted to balance the economic disparity” between lender and borrower.