An effort by the Consumer Financial Protection Bureau to limit the use of binding arbitration for resolving disputes associated with financial products has opened the floodgates of opposition. Even by its own standards, the Bureau’s proposed rule has proven to be extremely controversial, with nearly 13,000 comment letters filed by the end of August.
The rule, proposed in May, seeks to prohibit the widespread use of mandatory arbitration clauses in credit agreements, credit cards, bank accounts, loans, and other financial products and services. Many of those contractual clauses limit, if not outright remove, the ability to sue or take part in a class-action lawsuit when there is a dispute. Instead, in a forum of the firm’s choosing, with a hand-picked mediator, aggrieved customers are offered an arbitration hearing to resolve matters.
The Bureau’s contention, bolstered by a 2015 study of industry practices, is that arbitration agreements limit consumer options, especially when class-action lawsuits might be their most affordable and effective means of redress. Under the status quo, no matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company.
That CFPB study found that very few consumers ever bring—or even think about bringing—individual actions against financial service providers either in court or in arbitration. The Conclusion: class actions provide a more effective means for consumers to challenge problematic practices.
Financial firms, however, see arbitration as fair, fast, and effective for all involved, not to mention a cheaper alternative to the court system.
In a joint comment letter, the American Bankers Association, Consumer Bankers Association, and the Financial Services Roundtable blast the rule proposal as “not in the public interest” and say it would inflict serious financial harm on consumers, the federal and state court systems, and financial services providers. Regarding that last group, the Bureau estimates that the proposed rule will cause 53,000 providers who currently utilize arbitration agreements to incur between $2.62 billion and $5.23 billion on a continuing five-year basis in defending against upwards of 6,000 additional class actions that will be brought every five years after the proposed rule becomes final.
As for consumers, the banking groups say, they “lose access to a fast, efficient, less expensive, and more convenient dispute resolution system.”
“Arbitration will no longer be a viable option for those who have small-dollar ‘non-classable’ claims, those that are not amenable to class-action disposition because they do not implicate systemic conduct,” their letter argues. “Consumers wanting to pursue non-classable claims will have to endure the inconvenience and costs of going to court … Particularly for small-dollar claims, consumers are likely to conclude that prosecuting the claim in court is more trouble than it is worth.” Those who do litigate “will suffer increased court backlogs that long delay resolution of their cases” and customers will “be saddled with higher prices and/or reduced services, because the billions of dollars in additional class-action litigation costs will be passed through to them in whole or in part.”
While litigants are disadvantaged, “billions of dollars will be paid to the lawyers ‘representing’ them,” the letter says. “It is not in the public interest to have a judicial system that is overburdened with unproductive class actions that return little or nothing to consumers but generate billions of dollars for their lawyers.”
“The rule would also have a devastating effect on the new sharing economy and financial innovations like peer-to-peer lending.”
John Berlau, Senior Fellow, CEI
A comment letter from the Competitive Enterprise Institute, a conservative think tank, expresses a similar preference for arbitration agreements over class-action lawsuits.
“While statements from the CFPB refer to arbitration clauses in credit agreements as ‘gotcha’ clauses, implying that they deny consumers access to justice, this is far from the truth,” it says. “In fact, the Bureau’s preferred resolution mechanism, class-action lawsuits, would more often be the real gotcha for consumers. Many class actions are resolved by providing consumers a token item, such as a coupon or product voucher instead of monetary relief, while the attorneys purportedly representing them walk away with the bulk of a multimillion-dollar settlement.”
The group claims that 80 percent of class actions filed are never certified by the courts, either because they are withdrawn or because lawyers cannot meet the burden of proof showing common injuries to multiple plaintiffs. Of those that do proceed, the average class action takes more than three years to settle. In contrast, CEI says, the Searle Center for Civil Justice found that the average time from an arbitration filing to a final consumer award is 6.9 months. Another study, by the American Bar Association, found that 75 percent of the attorneys in its litigation section believe the outcomes of arbitration are equal to or better than those of litigation.
Of those class actions that did result in payment, CEI claims, the average award to class members who filed claims was $36.35. However, “given that the CFPB’s study found a mere 4 percent weighted average claims rate, the average payout when averaged out across all class members was only around $1.45.” Meanwhile, in the 419 class-action cases the Bureau reviewed in its study, attorneys’ fees comprised an average of 21 percent of consumer awards, and “attorneys walked away with an average of over $1 million per case.”
“The rule would also have a devastating effect on the new sharing economy and financial innovations like peer-to-peer lending,” says John Berlau, a CEI senior fellow. “Ordinary Americans are eager to lend to other consumers and participate in the new economy.”
As the growth of the peer-to-peer lending industry shows, many are eager to lend to other consumers, often at more favorable rates than those offered by traditional lenders, and sometimes without any interest charges, he says. Under the proposed CFPB rule, “peer-to-peer lending will slow and could grind to a halt, due to the prospect of an individual lender having to hire a lawyer if the person or entity to whom they lend has any type of grievance.” The result will be fewer choices and higher costs for consumers and peer-to-peer lenders, even those acting out of a charitable impulse, would face a much greater risk of being sued by borrowers if their lender agreements lacked arbitration clauses.
CEI’s proposal: providing an “opt-out” from arbitration agreements
“If the CFPB’s concern is that consumers are ‘forced’ into arbitration when they do not wish to be, a regulation that simply requires giving consumers the choice of whether to opt out of an arbitration clause will fix this problem,” its letter says, citing “real world experiences” that some consumers prefer to arbitration. When eBay permitted its customers to opt out of arbitration clauses, very few did so, “despite a campaign by the liberal advocacy group Public Citizen to encourage them to do so.” In New Jersey, when auto insurance consumers were offered the choice to waive certain litigation rights to higher noneconomic damages in exchange for lower insurance rates, “an overwhelming majority took that option.”
THE CFPB STUDY
The following is a selection from a study conducted by the Consumer Financial Protection Bureau on mandatory arbitration agreements.
The CFPB looked at American Arbitration Association filings about credit cards, checking accounts, payday loans and prepaid cards between 2010 and 2012. The research indicates that arbitration clauses are commonly used by large banks in credit card and checking account agreements.
Fewer than 1,250 consumer arbitrations about those four products were filed. Many of these concerned debt collection. Consumers filed around 900 of these disputes. Others are filed by companies or submitted by both sides together.
In comparison, in that same three-year time period, over 3,000 cases were filed by consumers in federal court about credit card issues alone. More than 400 of these federal court cases were filed as class actions, whereas CFPB's research found only two class filings in arbitration and neither was about credit cards.
Larger institutions are more likely than community banks or credit unions to include an arbitration clause in consumer contracts for credit cards or checking accounts. While the CFPB estimates that only 7.7 percent of banks use arbitration clauses for their checking accounts, 62 percent of the top 50 banks have arbitration clauses in their checking account contracts.
In credit card contracts, the arbitration clause section of the contract was almost always more complex and written at a higher grade level than the rest of the contract.
Roughly 9 out of 10 arbitration clauses expressly bar consumers from filing class arbitration.
Source: Consumer Financial Protection Bureau
A joint letter from more than a dozen organizations—among them the American Bankers Association, Consumer Bankers Association, Consumer Data Industry Association, Direct Marketing Association, National Black Chamber of Commerce, and Structured Finance Industry Group—argues that “decreasing access to arbitration and increasing the prevalence of class actions would diminish consumer welfare.”
“The Bureau should give serious consideration to a more tailored regulatory approach, developed in collaboration with stakeholders, to address any specific, clearly identified concerns it has with arbitration,” the groups wrote. “After all, even if the Bureau were to identify concerns with the arbitration system, replacing arbitration with the broken class-action system would not improve consumer welfare. The Bureau should also explore ways to deploy its financial literacy resources to educate more consumers about the benefits and availability of arbitration.”
It should come as no surprise that the U.S. Chamber of Commerce, through its Center for Capital Markets Competitiveness and Institute for Legal Reform, also voiced strong opposition to the proposal. “The Bureau has been driving this regulatory process to a predetermined conclusion—that class actions are worth any cost to consumers,” their comment letter says.
The letter accuses the CFPB’s 2015 study of exaggerating the benefits of attorney-driven class actions and ignoring “the significant role that government enforcement—including the CFPB’s own enforcement and supervision authority—plays in protecting consumers and deterring unlawful conduct.” The Bureau’s conclusions regarding class actions display a “serious undervaluing of arbitration’s benefits” that is “complemented by a rose-colored view of class actions.”
Instead of proceeding with its “misguided proposal,” the Bureau should re-open its arbitration study process, consider ways to improve its data collection and analysis, and hold a public discussion on whether rulemaking is needed.
There were, or course, numerous comment letters intended to cheer on the CFPB’s efforts. The Leadership Conference on Civil and Human Rights (LCCHR), a coalition of 200 national organizations, stressed “the critical role private class actions play in protecting civil rights, the inadequacy of individual private arbitration in vindicating rights, and the role that private enforcement plays in supplementing public enforcement.”
“In situations where individuals cannot pursue claims on their own, whether because of a lack of timely notice of discrimination, insufficient resources, low individual damages, or fear of retaliation, the class-action device provides a vehicle for relief,” the coalition’s letter says. “In cases where an individual victim’s damages are relatively low, it would not be economical for an attorney to take the case on an individual basis. The class action provides the solution to that problem.”
Class actions, the comment letter says, “helped expose and remedy redlining by businesses that refuse to provide loans within minority neighborhoods, deceptive practices by for-profit schools targeting African-American and low-income students for enrollment, and discriminatory policies and practices in home financing.”
“Individual private arbitration is a poor forum in which to vindicate civil rights claims, especially because victims of discriminatory lending often do not know they have been harmed,” it adds. “Individuals who suspect they have been discriminated against may not know the amount of damages they have suffered and may be discouraged from investing the time and resources to pursue individual claims in arbitration.”
The LCCHR also stressed procedural matters that are disadvantageous for consumers. “Arbitration does not allow for broad discovery, especially in individual cases,” it says. “Limited discovery presents a barrier for civil rights plaintiffs to have access to the very information that will allow them to vindicate their claims. Moreover, statistical analysis is often expensive. In private individual arbitration, the claimant must shoulder all of the cost, in contrast to spreading the costs over a class.”
Another argument: Civil rights class actions help expose wrongdoing and are a necessary supplement to public enforcement.
“Over the past decade, big corporations have converted the fine print in consumer contracts into a get-out-of-jail-free card,” says Robert Weissman, president of Public Citizen, a non-profit, consumer rights advocacy group. “Companies have discovered that rip-off clauses let them get away with egregious wrongs. The CFPB’s rule will end the worst elements of forced arbitration by restoring consumers’ right to band together to fight shared wrongs.”
Just as letter writers are attempting to support, shape, or kill the CFPB’s rulemaking, Congress is similarly attempting to wield influence. In the “kill” category, House Republicans are promoting legislation to block agency expenditures connected with finalizing the rule.
Across the aisle, Senate Democrats are urging the Bureau to proceed as planned. “Forced arbitration shields corporations from accountability for abusive, anti-consumer practices, which only encourages unscrupulous business practices by allowing violations of the law to go unchecked,” they wrote in an August letter to former CFPB Director Richard Cordray. “This comes at the expense of consumers, small businesses, and—just as importantly—law-abiding businesses.”