CFPB Releases Study Results on Consumer Arbitration Clauses

Yesterday, the Consumer Financial Protection Bureau (“CFPB”) released the results of its study on consumer arbitration clauses.  The results overwhelmingly demonstrated that these clauses are bad for consumers and limit the consumer’s right to sue.  Most importantly, it denies them the right to join their claims together, as class actions, which usually is the only way to resolve what are often relatively small, individual claims (but large in the aggregate).

Arbitration is an alternative to going to court.  When parties to an agreement agree in advance to arbitrate any disputes, they will then appear before an arbitrator (or a panel of arbitrators) who acts like a judge.  The arbitrator weighs the facts and arguments and makes a final decision.  Agreements to arbitrate can work well when the parties to the agreement have similar bargaining power.  In other words, when the decision to arbitrate is a true agreement among the parties.  However, such is not the case in many situations involving consumers, like signing up for cell phone service or acquiring a new credit card.  Most of the standard form contracts covering these consumer transactions contain mandatory arbitration agreements, and the consumer has no choice but to accept them.  Those mandatory provisions are inserted primarily to deter (as the evidence shows), not encourage consumers from bringing legitimate disputes, and their forced nature is the opposite of a true agreement.

According to CFPB Director Richard Cordray, “Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact. . .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 study found that more than 75% of the consumers surveyed did not realize that they signed agreements containing arbitration clauses.  Furthermore, the consumers did not understand the impact of the clauses, that is, what they were really giving up by agreeing to arbitration.  Less than 7% of those who signed agreements containing arbitration clauses knew that they signed away their right to sue.

The Study

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) required the CFPB to perform these studies.  It also gives the CFPB leeway to issue regulations to protect consumers.  The CFPB has, in fact, used this power to abolish arbitration clauses altogether in mortgage contracts.   That power has not yet been extended to consumer contracts.

For this study, the CFPB reviewed arbitration clauses in six consumer finance markets, including credit card and checking accounts.  These markets contained the largest number of consumers.  The CFPB reviewed almost 850 consumer-finance agreements, over 1,800 consumer finance arbitration disputes over three years, and 3,400 individual federal court lawsuits.  In addition, it reviewed 42,000 cases involving disputes with credit card cases from 2012 that were filed in small claims court.

The CFPB compared these findings with its review of approximately 420 consumer financial class action settlements from federal courts over a five year period, as well as, its review of numerous state and federal public enforcement actions.  Finally, the CFPB also reviewed results from its consumer survey on arbitration clauses in credit card agreements.

The Report Findings

  • Arbitration clauses can act as a barrier to class actions. Most arbitration agreements prohibit class arbitrations and class arbitrations were minimal.
  • Tens of millions of consumers are subject to arbitration clauses.
  • Consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits on average each year in the markets studied. While awards to consumers were low, awards to companies were much higher.  In 2010 and 2011, consumers received less than $175,000 in damages, while other consumers were forced to pay $2.8 million to companies through arbitration.  Few consumer lawsuits went to trial.
  • In contrast, roughly 32 million consumers (who were not subject to arbitration clauses) were eligible for relief through class action settlements in federal court each year. An average of at least $220 million per year was paid out to consumers from these Settlements.
  • There is no evidence of arbitration clauses leading to lower prices for consumers. On the other hand, class action litigation may lower prices, but more importantly, deter companies from financial wrongdoing.

To view a fact sheet on the report: http://files.consumerfinance.gov/f/201503_cfpb_factsheet_arbitration-study.pdf

To view the complete CFPB report:
http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/

To view more information on arbitration clauses:
https://lawgsp.com/arbitration-clause/

 

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