The Consumer Financial Protection Bureau has released some preliminary results of its study of consumer arbitration as mandated by Section 1028 of the Dodd-Frank Act. Section 1028 provides that the CFPB, “by regulation, may prohibit or impose conditions or limitations on the use of” pre-dispute arbitration agreements concerning consumer financial products or services if it finds doing so “is in the public interest and for the protection of consumers.”  

The CFPB disclosed the following preliminary results, among others, to which we have added some observations of our own:

  • The CFPB found a low number of arbitration filings by consumers. Based on filings with the American Arbitration Association (AAA) from 2010 to 2012, there were 1,241 arbitration filings concerning credit cards, checking accounts, and payday loans. (There were also four filings about prepaid cards.) Of these filings, 343 were by companies or mutual submissions. During the same period, 3,054 credit card cases were filed in federal court, of which 418 were putative class actions.

    These statistics may be explained largely by the vociferous, albeit erroneous, anti-arbitration crusade undertaken by many consumer advocates and plaintiffs’ class action lawyers during the past 15 years. It is hardly surprising that their clients initiate cases in court. It is also likely that many consumers have been dissuaded by these arguments from choosing arbitration as a means of resolving disputes.

  • Larger banks are more likely than community banks or credit unions to use arbitration clauses for credit cards and deposit accounts while use of such clauses for prepaid cards is more uniform across small and larger market players. 

    As a possible reason for this disparity, we note that because they typically operate on an interstate basis, larger banks are more frequently parties to litigation and more likely than smaller institutions to seek to reduce their dispute resolution costs through the use of arbitration programs.  

  • Credit card arbitration clauses were typically more complex than the rest of the credit card agreement and tended to be longer for larger issuers than for smaller issuers. We note that the length of many arbitration clauses is likely attributable to the issuer’s desire to include a plethora of features that are favorable for consumers.

    Such features, which we have advocated for years, include a small claims carve-out; a choice of arbitration administrators; a right to opt out; a requirement for the company to pay the consumer’s arbitration fees; a bump-up or premium feature for consumers who are awarded more by the arbitrator than the company’s last settlement offer; and language requiring the company to pay attorneys’ fees and expert costs to the extent the consumer prevails. 

  • More than 90 percent of the arbitration clauses reviewed by the CFPB for credit and prepaid cards and 88.5 percent of the checking account arbitration clauses reviewed contained class action waivers precluding class proceedings in court and in arbitration. We note that the U.S. Supreme Court held that such class waivers are valid and enforceable as a matter of preemptive federal arbitration law in AT&T Mobility, LLC v Concepcion and American Express Co. v. Italian Colors Restaurant.
     
  • The CFPB stated that a future component of its arbitration study will be an attempt to examine the relative benefits of class action and arbitration. It specifically agreed with the suggestion our clients made in submitting comments to the CFPB’s earlier request for information “that an informed assessment of arbitration requires some consideration of the alternative forms of formal dispute resolution, especially class and non-class resolution.”

    Although the CFPB cited a preliminary statistic suggesting that more than 13 million class members made claims or received payments in a select number of class actions, it acknowledged the countervailing argument (advocated by our clients) that many class actions are “meritless, inefficient, and provide…little benefit to consumers” especially when compared to individual arbitration. 

    Moreover, these class actions apparently involved settlements which, as numerous courts and commentators have observed, result from the intense pressure on defendants created by even a completely unmeritorious class action and frequently benefit the plaintiffs’ attorneys exponentially more than the individual class members. 

  • Based on AAA filings from 2010 to 2012, almost none of the filings had less than $1,000 at issue. The average alleged debt amount in dispute was $13,418 and, in filings that did not identify a disputed debt amount, the average amount was $38,726.

    Elsewhere in its report, the CFPB noted the prevalence of carve-outs for claims that could be brought in small claims court. We find it curious that the CFPB did not identify such carve-outs as the likely explanation for the number of arbitrations involving small claims.

The CFPB emphasized that its preliminary results are subject to revision. It also identified several “additional analyses that the Bureau is planning to conduct but for which the Bureau does not yet have even preliminary results.” These include, among other things, the previously announced telephone survey of consumers regarding their awareness of and perceptions concerning arbitration. 

In addition, according to the report, the CFPB will undertake, or consider the feasibility of undertaking, many areas of empirical research advocated by our clients. Specifically, it “will consider how—if at all—we might meaningfully compare the disposition of cases across arbitration and litigation (including class litigation), both in terms of substantive outcome and in terms of procedural variables like speed to resolution.”  

The CFPB intends “to assess the possible impact of arbitration clauses on the price of consumer financial products” and is examining “the interrelationship between public enforcement and private aggregate enforcement.” We encourage the CFPB to proceed with these future areas of study because they are critical to a proper understanding of the benefits of consumer arbitration compared to class and individual litigation.

Ballard Spahr’s Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or Mark J. Levin at 215.864.8235 or levinmj@ballardspahr.com.


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