The Consumer Financial Protection Bureau has released final 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.”

We will be reviewing the 728-page study carefully and will provide our reactions once we complete our review. While the CFPB did not reveal its next steps, its findings as described in its press release about the study seem to set the stage for a rulemaking that will not be favorable to the industry. According to the press release, the key findings are:

  • Tens of millions of consumers are covered by arbitration clauses in the consumer finance markets studied by the CFPB, which included the credit card and checking account markets.
     
  • Based on the CFPB’s review of case data for 2010 through 2012 for six consumer finance markets provided by the leading arbitration administrator, consumers filed approximately 600 arbitration cases and 1,200 individual federal lawsuits per year on average (although the CFPB notes that more than 20 percent of the 1,847 arbitration disputes filed during this period may have been filed by companies, rather than consumers). In the 1,060 arbitration cases that were filed in 2010 and 2011, arbitrators awarded consumers less than $175,000 in total damages and less than $190,000 in total debt forbearance while ordering consumers to pay $2.8 million to companies, predominantly for disputed debts. Between 2010 and 2012, consumers filed 3,462 individual lawsuits in federal court about consumer finance disputes in five of the markets studied. Based on an analysis of all individual cases filed in four markets and a random sample of the credit card cases, consumers were awarded just under $1 million in the “relatively few cases” decided by a judge.

  • Millions of consumers are eligible for financial redress through class action settlements (approximately 32 million on average each year). This finding was based on the CFPB’s review of about 420 consumer financial class action settlements in federal courts over a five-year period. The settlements reviewed totaled $2.7 billion in cash, in-kind relief, and attorneys’ fees and expenses, with approximately 18 percent going to expenses and attorneys’ fees. Cash payments to class members numbering “at least 34 million consumers” were estimated to be “at least $1.1 billion.” The CFPB noted that “these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior.”
     
  • While companies rarely force individual lawsuits into arbitration, they commonly invoke arbitration clauses to block class actions. As an example, credit card issuers with an arbitration clause that were sued in a class action invoked the clause to block class actions 65 percent of the time.

  • There was no statistically significant evidence indicating that companies that eliminated their arbitration clauses increased their prices or reduced access to credit, compared to those that made no change in their use of arbitration clauses. This finding was based on an analysis of changes in the total cost of credit paid by consumers of some credit card companies that eliminated their arbitration clauses and of others that made no change.

  • Over 75 percent of the consumers surveyed who indicated that they understood what arbitration is did not know whether their credit card agreement contained an arbitration clause. More than half of those who thought they did know were incorrect about whether their agreement actually contained an arbitration clause. Fewer than 7 percent of the consumers whose contracts included an arbitration clause were aware that they could not sue their credit card issuer in court. These findings were based on the CFPB’s national survey of 1,000 consumers with credit cards concerning their knowledge and understanding of arbitration and other dispute resolution mechanisms.

Based on the CFPB’s press release, the study appears to have ignored a fundamental question: what has been the experience of consumers who have actually participated in arbitration? Prior studies have overwhelmingly concluded that consumers do in fact like arbitration because it is faster, cheaper, and more efficient than litigation in court. And, unlike the millions of putative class members who get nothing or next to nothing from class actions, a consumer can be made whole in arbitration.

It also appears, based on the press release, that the study will not acknowledge Congress’s finding, when it passed the Class Action Fairness Act in 2005, that “[a] mounting stack of evidence” demonstrates that “a parade of abuses” has undermined “the rights of both plaintiffs and defendants” in class actions. A fair portrayal of actual consumer experience in arbitration, and a balanced discussion of both the downsides and the benefits of class actions, is essential to determining whether the regulation of consumer arbitration is “in the public interest.”

On March 18, 2015, Ballard Spahr attorneys will hold a webinar, "The CFPB's Arbitration Study: Where Do Things Go From Here?" from 12 p.m. to 1 p.m. ET. More information and the registration form are available here.

Alan S. Kaplinsky, Practice Leader of Ballard Spahr’s Consumer Financial Services Group, will be presenting the industry’s perspective on arbitration agreements at the CFPB’s field hearing which is being held today in conjunction with the study’s release. Mr. Kaplinsky’s prepared remarks are available here. The Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. It 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 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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