By Andrew A. Turner, J.D.
With the Consumer Financial Protection Bureau announcing that it will hold a field hearing on arbitration in Newark, N.J., on March 10, 2015, speculation is growing that this may be the occasion for release of a completed arbitration study, as the prospect of regulatory action looms on the horizon. The CFPB released preliminary findings in December 2013, and the debate over the pros and cons of mandatory arbitration has accelerated in recent months while waiting for the study to be finished.
Report to Congress. Section 1028 of the Dodd-Frank Act required the CFPB to conduct a study and report its finding to Congress on the use of mandatory pre-dispute arbitration agreements in providing consumer financial products or services. The Dodd-Frank Act authorizes the CFPB to issue regulations restricting the use of these types of agreements to protect consumers in accord with study findings.
Arbitration study preliminary results. Preliminary research found that arbitration clauses are commonly used by large banks in credit card and checking account agreements and that roughly 9 out of 10 clauses allow banks to prevent consumers from participating in class actions. The research also showed that “while tens of millions of consumers are subject to arbitration clauses in the markets the CFPB studied, on average, consumers filed 300 disputes in these markets each year between 2010 and 2012 with the leading arbitration association.” The CFPB said that the second phase of the study would include a look at whether consumers are aware of the terms of arbitration clauses and whether arbitration clauses influence consumers’ decisions about which consumer products to purchase.
Public reaction. In a November 19, 2014, letter, attorneys general from 16 states asked CFPB Director Richard Cordray to prohibit the use of pre-dispute mandatory arbitration clauses in consumer agreements for financial products and services. Noting that a number of consumer protection laws permit a private right of action for violations, the attorneys general expressed particular concern with the class action waiver. They argued that this deterred consumers from pursuing their rights, particularly when the per-consumer cost of redress exceeds the damages alleged by an individual.
In response, the American Financial Services Association, a 350-member consumer credit industry trade group, wrote to Director Cordray on Dec. 4, 2014, to defend mandatory arbitration. The association noted that the U.S. Supreme Court has found that the Federal Arbitration Act was intended to apply to individual consumers. The AFSA further argued arbitration actually benefits consumers because courts already are overburdened. In addition, the AFSA argued the fact that consumers cannot bring class actions in arbitration is of little import, given the CFPB's broad restitution powers which are shared with state attorneys general under the Consumer Financial Protection Act.
There has also been some academic research thrown into the mix, with a study from a group of professors from St. John’s University School of Law finding “a profound lack of understanding about the existence and effect” of pre-dispute consumer arbitration agreements. The study, Whimsy Little Contracts’ with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, indicates that citizens are giving up the right to sue unknowingly, either because they do not realize they have entered into an arbitration agreement or because they do not understand the legal consequences of doing so.
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