United States: Did You Hear That? CFPB Report To Congress Sounds Death Knell For Arbitration Clauses

As anticipated, yesterday the CFPB announced the release of its report to Congress following the CFPB's study of arbitration agreements in connection with offering or providing consumer financial products or services. According to the CFPB, the study's results "indicat[e] that arbitration agreements restrict consumers' relief for disputes with financial service providers by limiting class actions."

The CFPB's conclusions that there are problems with pre-dispute arbitration clauses in credit card, bank account and other consumer finance contracts comes as no surprise. This announcement coincided with the arbitration field hearing that included remarks from Director Cordray about this new study, including the CFPB's intention to meet with "stakeholders" after they have "digested" the results of this report as part of the CFPB's policy making in this area. While the Bureau has indicated it will listen to industry participants, many believe this report is the first ring of the death knell for arbitration clauses that prevent consumers from pursuing claims in court.

Three years in the making, this report found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for and obtain relief each year through class action settlements. The Bureau's report also found that more than 75 percent of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers, and fewer than 7 percent of those covered by arbitration clauses realized that the clauses restricted their ability to sue in court.

According to the CFPB, the report results indicate that:

  • Tens of millions of consumers are covered by arbitration clauses: For example, in the credit card market, card issuers representing more than half of all credit card debt have arbitration clauses – impacting as many as 80 million consumers. In the checking account market, banks representing 44 percent of insured deposits have arbitration clauses.
  • Consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits per year on average in the markets studied: The CFPB's review of case data from the leading arbitration administrator indicates that between 2010 and 2012, across six different consumer finance markets, 1,847 arbitration disputes were filed. More than 20 percent of these cases may have been filed by companies, rather than consumers. In the 1,060 cases that were filed in 2010 and 2011, arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance. Arbitrators also ordered consumers to pay $2.8 million to companies, predominantly for debts that were disputed. Between 2010 and 2012, consumers filed 3,462 individual lawsuits in federal court about consumer finance disputes in five of these markets. The Bureau analyzed all individual cases filed in four of these markets and a random sample of the credit card cases and found that of the relatively few cases that were decided by a judge, consumers were awarded just under $1 million.
  • Roughly 32 million consumers on average are eligible for relief through consumer finance class action settlements each year: Bureau research found that millions of consumers are eligible for financial redress through class action settlements. Across substantially all consumer finance markets, at least 160 million class members were eligible for relief over the five-year period studied. The settlements totaled $2.7 billion in cash, in-kind relief, and attorney's fees and expenses – with roughly 18 percent of that going to expenses and attorneys' fees. Further, the CFPB believes these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior. Based on available data, the Bureau estimates that the cash payments to class members alone were at least $1.1 billion and cover at least 34 million consumers.
  • Arbitration clauses can act as a barrier to class actions: The CFPB found that it is rare for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to defend class actions. For example, in cases where credit card issuers with an arbitration clause were sued in a class action, companies invoked the arbitration clause to defend class actions 65 percent of the time.
  • No evidence of arbitration clauses leading to lower prices for consumers: The CFPB looked at whether companies that include arbitration clauses in their contracts offer lower prices because they are not subject to class action lawsuits. The CFPB analyzed changes in the total cost of credit paid by consumers of some credit card companies that eliminated their arbitration clauses and of other companies that made no change in their use of arbitration provisions. The CFPB found no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses.
  • Three out of four consumers surveyed did not know if they were subject to an arbitration clause: The CFPB surveyed credit card consumers to analyze the extent to which they were aware of, and understood the implications of, arbitration agreements. Among those who said they understood what arbitration is, over three quarters acknowledged they did not know whether their credit card agreement contained an arbitration clause. Of those who thought they did know, more than half were incorrect about whether their agreement actually contained an arbitration clause. Among consumers whose contract included an arbitration clause, fewer than 7 percent recognized that they could not sue their credit card issuer in court.

Pursuant to Section 1028(b) of Dodd-Frank, the CFPB may prohibit, condition or limit the use of arbitration provisions in consumer financial services agreements if it finds that doing so is "in the public interest and for the protection of consumers." Given the conclusions of the CFPB, companies that currently use arbitration agreements are advised to read this report carefully and be prepared to take steps to ensure compliance with new regulations anticipated to be forthcoming from the CFPB.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
David N. Anthony
Ethan G. Ostroff
Alan D. Wingfield
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