Why it matters

The Consumer Financial Protection Bureau (CFPB) released its long-awaited study of arbitration clauses in consumer finance agreements, reporting that based on its research, such provisions have the effect of restricting consumer relief for disputes with financial service providers. “Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” Bureau Director Richard Cordray said. “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year.” The biggest question remains: what happens next? The Bureau noted in a press release about the study that the Dodd-Frank Wall Street Reform and Consumer Protection Act provides the CFPB with the power to issue regulations on the use of arbitration clauses in consumer finance markets (outside of mortgage contracts, which the statute specifically prohibits), “if the Bureau finds that doing so is in the public interest and for the protection of consumers, and if findings in such a rule are consistent with the results of the Bureau’s study.” Cordray revealed no specific plans, stating, “Now that our study has been completed, we will consider what next steps are appropriate,” but proposed rules that if adopted would severely restrict or possibly even prohibit arbitration clauses in connection with consumer financial products and services seem inevitable, and could potentially affect the use of arbitration clauses in other consumer contexts.

Detailed discussion

In 2012, the Consumer Financial Protection Bureau (CFPB) initiated a study of arbitration clauses in consumer contracts as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Bureau collected court data and agreements from six different markets: credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile wireless contracts to study the terms, conditions, and impact of the arbitration provisions on consumers.

Specifically, the report includes analysis of almost 850 consumer finance agreements and a review of more than 1,800 consumer finance arbitration disputes and over 3,400 individual federal court lawsuits over a three-year period, as well as 42,000 credit card cases filed in selected small claims courts in 2012.

In addition, researchers considered about 420 federal court settlements of consumer financial class action lawsuits over five years and greater than 1,100 state and federal public enforcement actions. To top it off, to evaluate the “knowledge and understanding” of consumers regarding arbitration and other dispute resolution mechanisms, the CFPB conducted a national survey of 1,000 credit card-holding consumers.

The Bureau’s conclusion: The arbitration clauses serve to inhibit consumers’ attempts to seek relief, at least in comparison to class action litigation. “[V]ery few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements,” according to the study. Other findings include:

• Scope. In the consumer finance markets studied, “tens of millions” of consumers are covered by arbitration clauses. In the credit card industry, issuers that use arbitration clauses make up 53 percent of the market share; examining checking accounts, the Bureau found that although just 8 percent of banks and credit unions feature such provisions, that accounts for 44 percent of insured deposits. In the other markets, 92 percent of prepaid card agreements are subject to arbitration clauses, 86 percent of private student loan agreements include an arbitration provision, 99 percent of payday loan agreements in California and Texas include them, and 88 percent of mobile wireless contracts feature arbitration.
• Arbitration results. A review of case data over a two-year period across six markets revealed that 1,847 arbitration disputes were filed, with consumers initiating about 600 of the cases. According to the CFPB, arbitrators awarded consumers a combined total of less than $175,000 in damages and under $190,000 in debt forbearance while consumers were ordered to pay $2.8 million to companies they did business with.
• Individual court actions. Turning to litigation, the study revealed that consumers filed 3,462 individual lawsuits between 2010 and 2012 about consumer finance disputes. After analyzing all the cases filed in four markets and “a random sample” of credit card cases, the study found consumers received just under $1 million. On average, 1,200 individual federal lawsuits were filed per year.
• Class actions. Based on its research, the Bureau reported that about 32 million consumers are eligible for relief from a consumer finance class action settlement. Over the five-year period studied, at least 160 million class members were eligible, with settlements totaling $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses. The study added that “these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior.”
• Arbitration = barrier. While the CFPB found it “rare” that a financial institution tried to force an individual lawsuit into arbitration, the more common efforts to block class action litigation means that arbitration clauses can “act as a barrier” to entry. When facing a consumer class action, credit card issuers that made use of an arbitration clause invoked the provision to block the suit 65 percent of the time, according to the Bureau’s research.
• Price impact. The study analyzed an industry claim that arbitration clauses lower prices for consumers because the company can avoid class actions. After looking at changes in the total cost of credit paid by consumers of some credit card companies that eliminated arbitration clauses—and other companies that continued to use their arbitration provisions—the CFPB said it “found no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit” in relation to companies that maintained their use of such clauses.
• Consumer awareness. According to the Bureau, more than 75 percent of consumers were unaware whether they were subject to an arbitration clause pursuant to an agreement with their financial service providers, and less than 7 percent understood that the clause limited their ability to sue in court.

Reaction to the report was decidedly mixed.

Consumer groups praised the study, which Public Justice Executive Director Paul Bland said “shows that corporate American has been lying to the public about forced arbitration.” “This study changes everything,” he added. “The CFPB can and should use its authority to turn things around.” David Seligman, a staff attorney at the National Consumer Law Center, agreed. “In my view, and in the view of consumer advocates, this study is incredibly thorough,” he said. “The CFPB has much of the information it needs to act, and to act quickly.”

Industry presented a different perspective on the study and arbitration clauses generally, which are “an important tool for the customers of financial institutions that helps keep costs down and keeps financial products, including credit cards and checking accounts, affordable,” Richard Foster, senior vice president of legal and regulatory affairs for the Financial Services Roundtable, said.

Richard Hunt, president and CEO of Consumers Bankers Association, agreed in a statement. “For nearly 90 years, arbitration has allowed consumers quick and easy access to an affordable option for dispute resolution,” he said. “As a last resort, if legal recourse is necessary, arbitration has proven to be the best path forward because it is mutually beneficial to all parties—both consumers and lenders.”

To read a fact sheet on the report, click here.

To read the full report, click here.