On December 12, 2013, the Consumer Financial Protection Bureau (CFPB) released its preliminary report on the use of arbitration clauses in consumer financial products and services. Click here for a copy of the CFPB’s preliminary report.
The preliminary report focuses on arbitration clauses in effect from 2010 to 2012 that were used in connection with consumer credit cards, checking accounts, reloadable prepaid cards, and payday loans. The major findings of the report are:
Between 2010 and 2012, arbitration clauses were most frequently included by large banks in connection with their credit card and checking account agreements. Approximately 90% of these arbitration clauses prohibited consumers from participating in class actions.
Across all markets included in the study, fewer than 1,250 total consumer arbitration demands were filed during the relevant time period. Of these, the CFPB’s research indicates that approximately 900 of the demands were filed by consumers, and the remaining demands were filed either by companies or jointly by companies and consumers. In contrast, during this same time period, “over 3,000 cases were filed by consumers in federal court about credit card issues alone.” Of those 3,000 cases, approximately 400 were filed as class actions.
In addition to the preliminary report’s major findings, the report also finds that:
Large institutions are more likely than mid-sized or small community banks or credit unions to include arbitration clauses in their consumer contracts.
Despite the fact that 9 out of 10 arbitration clauses bar class actions, consumers prefer class action settlements over arbitrations.
In general, consumers do not file arbitration demands for disputes under $1,000. Likewise, in arbitration filings involving debt collection, the average amount of a dispute is over $13,000. In all other claims, the average amount is more than $38,000.
Few consumers take advantage of the opportunity to file disputes in small claims courts. Specifically, in arbitration clauses that allow the parties to bring disputes in small claims courts as an alternative to arbitration, few consumers elected to file a dispute in small claims court. Rather, banks were more likely to bring an action in that forum.
While CFPB Director Richard Cordray explained that these “preliminary results help [the CFPB] better understand how [arbitration] clauses are affecting consumers’ financial lives so that [the CFPB] can ultimately determine whether action should be taken for [consumers’] greater protection,” the CFPB deferred issuing any final analysis or recommendations. The CFPB’s final analysis and recommendations are expected to be released at a future date after further studies are conducted.
The CFPB’s preliminary report was prompted by a mandate in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Under Section 1028(a) of Dodd-Frank, the CFPB was tasked with “[studying] the use of pre-dispute arbitration contract provisions in connection with the offering or providing of consumer financial products or services.” Upon completion of the study, Dodd-Frank requires the CFPB to provide Congress with a report outlining the results of its research. In addition, Dodd-Frank also gives the CFPB the power to issue new regulations with respect to arbitration clauses if it determines that, based on the results of its study, new regulations are in the public interest. The report released yesterday represents the preliminary results of the CFPB’s statutorily-mandated study, which it launched in April 2012.
The report’s results are “based on a review of hundreds of consumer contracts, as well as on filings from the American Arbitration Association (AAA),” which the CFPB has found is the most frequently used administrator of arbitrations for the markets included in the report. While the report is representative of the CFPB’s study to date, all of the results are subject to revision, and the CFPB’s final report will also contain additional analyses for research which has not yet been finalized.
In the next phase of the study, among other topics, the CFPB intends to look at consumers’ general awareness of arbitration clauses as well as their perception of alternative dispute resolution. Additionally, the CFPB plans to conduct a comparative analysis of the disposition of disputes in litigation versus arbitration, the circumstances in which companies invoke arbitration clauses, and the benefits and transaction costs of arbitration in consumer financial services. The CFPB may also evaluate additional financial products, such as private student loans. The CFPB has not announced the release date of its final report and notes that its study is ongoing.