March 13, 2015

CFPB Releases Much Anticipated Arbitration Clause Study

Arnold & Porter Advisory

On March 10, 2015, the Consumer Financial Protection Bureau (CFPB) released a much anticipated report regarding the use of pre-dispute arbitration clauses (sometimes referred to as "mandatory" arbitration clauses).  The use of these clauses is fairly common in the consumer financial services sector.  The CFPB was tasked in Section 1028(a) of the Dodd-Frank Act with studying these clauses, making a report to Congress about their use, and - if the CFPB finds it to be in the public interest and protective of consumers - promulgating rules to prohibit or regulate their use.

The CFPB's 728-page report contains extensive data on the use and terms of arbitration clauses, as well as the outcomes in disputes governed by them.  The report looks at the use of arbitration clauses in several consumer financial products markets, including credit cards, checking accounts, general purpose reloadable prepaid accounts (prepaid cards), private student loans, storefront payday loans, wireless third-party billing, and auto loans. 

Because the executive summary of the report's findings alone spans nearly 10 pages, we have summarized a few highlights below:

  • Around half of credit card and checking accounts, and substantially all prepaid cards, payday loans, private student loans, and wireless third-party billing agreements are subject to an arbitration clause.
  • Nearly all arbitration clauses surveyed (between 85% and 100% of each type of product or service) contained a provision barring class actions. 
  • Consumers were generally unaware (i) of the arbitration clauses in their financial services contracts; and (ii) that some contracts permitted opt-outs from the arbitration clause.
  • Claims brought in arbitration averaged $16,000.  Very few cases were brought for $1,000 or less.
  • Consumers received relief of approximately $400,000 in just over 1,000 arbitration cases filed in 2010 and 2011.  By contrast, 32 million consumers were eligible for relief through class action settlements in each of those years, with average cash payouts to consumers totaling $220 million per year. 
  • Arbitration clauses did not result in lower prices for consumers. 

In addition to the above, the report also examines in-depth the various results achieved by consumers subject to arbitration clauses, and it contrasts those results to results achieved in class-actions or through individual litigation.  While the report does not explicitly draw conclusions based on this comparison, it suggests that consumers subjected to arbitration clauses obtain less favorable relief than those not bound by such clauses.  The CFPB highlights this finding in its press release, headline: "CFPB Study Finds That Arbitration Agreements Limit Relief for Consumers."

At a field hearing in Newark, New Jersey held to coincide with the report's release, consumer advocates lauded the CFPB's findings and criticized arbitration clauses.  Industry representatives, however, maintained that arbitration clauses reduced expense and burden for consumer litigants and provided better and faster relief for consumers.  A recording of the Newark field hearing should be available to the public soon.

In our view, the CFPB's report foreshadows potential regulation of arbitration clauses in contracts for consumer financial products and services.  The Dodd-Frank Act authorizes the CFPB to "prohibit or impose conditions on the use of agreements" between consumer financial service providers and consumers if it finds that such action "is in the public interest and for the protection of consumers."  In prepared remarks at the Newark field hearing, CFPB Director Richard Cordray noted that the report will "provide the basis for important policy decisions that the Bureau will have to make in this area."  Director Cordray also noted that the CFPB will meet with stakeholders as it considers further action.


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