A report detailing the findings of a Consumer
Financial Protection Bureau study of pre-dispute arbitration clauses has become
the latest bureau hot topic. Trade groups and consumer groups have weighed in on
the subject of arbitration, and predictable lines have been drawn with banking
associations thus far backing arbitration and consumer organizations taking the
opposite stance.
CFPB report to Congress. The bureau’s report to Congress indicated that arbitration clauses restrict
consumers’ relief for disputes with financial service providers by limiting
class actions. The bureau found that in the consumer finance markets covered in
the study, very 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.
The report uses “a careful analysis of empirical evidence, including consumer contracts and court data, to understand the resolution of consumer finance disputes – both in arbitration and in the courts,” according to the bureau. The study was conducted in a number of consumer markets, including credit cards and checking accounts, which the CFPB said have the largest number of consumers. In addition to determining that millions of consumers are covered by arbitration clauses, the bureau found that:
- larger numbers of consumers are eligible for financial redress through class action settlements than through arbitration or individual lawsuits;
- arbitration clauses can act as a barrier to class actions. More than 90 percent of the arbitration agreements studied expressly prohibited class arbitrations;
- there is no evidence that arbitration clauses lead to lower prices for consumers; and
- three out of four consumers surveyed did not know if they were subject to an arbitration clause.
Cordray discussion of arbitration. In remarks prepared for a March 11 field hearing on arbitration, CFPB Director Richard Cordray discussed the different views on arbitration held by supporters and opponents. “Arbitration is often described by its supporters as a “better alternative” to the court system—more convenient, more efficient, and a faster, lower-cost way of resolving disputes,” he said. “Opponents argue that arbitration clauses deprive consumers of certain legal protections available in court, may not provide a neutral or fair process, and may in fact serve to quash disputes rather than provide an alternative way to resolve them.”
Consumer groups vs. banking trade groups. Consumer groups responding to the CFPB's findings supported the bureau's conclusion. These groups, which included the Americans for Financial Reform, Center for Responsible Lending, and the Consumer Federation of America, echoed the bureau's results, expressing their belief that forced arbitration limits consumers' rights to relief. The groups disputed the notion that arbitration reduces consumer costs, an argument put forth by various trade groups.
Trade groups, such as the Consumer Bankers Association, Financial Services Roundtable, U.S. Chamber of Commerce Center for Capital Markets Competitiveness, and U.S. Chamber Institute for Legal Reform say that arbitration is indeed beneficial for consumers. Arbitration provides a quick and easy way to resolve disputes, according to the trade organizations, and is beneficial not just for consumers but for lenders.
Next steps. The Dodd-Frank Act requires the bureau to study the use of pre-dispute arbitration clauses in consumer financial markets and gives the CFPB the authority to issue regulations on the use of arbitration clauses in other consumer finance markets if the bureau finds that doing so is in the public interest and for the protection of consumers, and if the rules are consistent with the results of the bureau’s study. Cordray hinted at future action aimed at arbitration clauses, saying that the bureau is pondering what, if any, should be taken to regulate the clauses. Given the responses thus far to the bureau's findings, future CFPB action will be of interest to both industry and consumers.
For more information about the CFPB and arbitration clauses, subscribe to the Banking and Finance Law Daily.
