The American Bankers Association, the Consumer Bankers Association and The Financial Services Roundtable (Associations) have filed a joint letter commenting on the CFPB’s proposed rule regulating consumer arbitration agreements in financial services contracts. Ballard Spahr served as counsel to the Associations in preparing the comment letter.  The firm also served as counsel to the Associations in preparing comment letters on the CFPB’s March 2015 empirical study of arbitration and its April 2012 Request for Information Regarding Scope, Methods, and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements.

Section 1028 of the Dodd-Frank Act requires the CFPB to conduct a study of the use of arbitration in consumer financial services agreements.  It also provides that the CFPB “by regulation, may prohibit or impose limitations for the use of [such] an agreement” if it “finds that such a prohibition or imposition of conditions and limitations is in the public interest and for the protection of consumers.”  The findings in such a regulation must also be “consistent with the study.” (emphasis added).

In their comment letter, the Associations assert that the CFPB’s proposal is not in the public interest, is not for the protection of consumers, and is not consistent with the CFPB’s March 2015 empirical study of arbitration.  The Associations urge the CFPB to withdraw the proposal and not to issue a re-proposal unless it is consistent with the statutory requirements.

In support of their position, the Associations make the following arguments for why the proposal is not “in the public interest” and does not meet the requirement to provide for consumer protection:

• The proposal would inflict serious financial harm on (1) consumers, (2) the American federal and state court systems, and (3) financial services providers.  The CFPB has estimated an unprecedented and staggering amount of costs to covered entities that will result from the additional class action litigation that will be filed if the proposal becomes final.  According to the CFPB, the proposal is estimated to 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 an additional 6,042 class actions that will be brought every five years after the proposed rule becomes final.  These costs are not one-time costs, but continuing costs as the increase in class action filings are perpetual.
• Consumers will suffer if the proposal becomes final.  As taxpayers, they will pay for the increased costs to the court systems required to handle the permanent surge of 6,042 additional class actions every five years.  As litigants, they will suffer increased court backlogs that long delay resolution of their cases.  As customers of the providers, they 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.  In at least 87% of those class actions, they will not benefit because, as the CFPB found in its study, consumers receive no compensation in 87% of class action settlements, and in the rare cases where they do receive a cash payment from a class action settlement, it will be a pittance–the CFPB’s study found that the average participant in the class actions who were granted any reward received $32.35.  Meanwhile, billions of dollars will be paid to the lawyers “representing” them.
• While spending more as taxpayers and users of financial services, consumers will lose the many benefits of arbitration that the CFPB acknowledges in the proposal – resolving disputes in months, not years (at a fraction of the cost of litigation), receiving an average recovery of nearly $5,400 (166 times the average putative class member’s recovery of $32.35), and enjoying the much more accessible avenue of dispute resolution than  of not having to go to court.
• Because arbitration is likely to disappear almost entirely if class action waivers are eliminated, consumers will lose access to a fast, efficient, less expensive, and more convenient dispute resolution system.  Most notably, it will no longer be a viable option for those who have small-dollar “non-classable” claims – i.e., claims that are not amenable to class action disposition because they do not implicate systemic conduct.  Consumers wanting to pursue non-classable claims will have to endure the inconvenience and costs of going to court.  This includes taking time off from work, paying court costs, and facing the challenges inherent in the court system to prosecute such claims.  Particularly for small dollar claims, consumers are likely to conclude that prosecuting the claim in court is more trouble than it is worth.
• The CFPB has ignored other dispute resolution mechanisms that address the CFPB’s justifications for the proposal, specifically its concerns regarding resolution of small-dollar claims, redress for harms unknown to consumers, and the modulation of corporate behavior.  The CFPB has discounted the impact of informal resolutions, its own Complaint Response Portal, and social media.  It has also not mentioned the power of government enforcement actions, including its own, something the CFPB loudly touts in its public statements.  The CFPB also failed to consider, as required, alternatives that would address the CFPB’s concerns, such as allowing enforcement of class action waivers for matters that the financial services provider has identified and resolved prior to a class action being filed.

The Associations also argue that:

• The proposal is not “consistent with” the CFPB’s study, as shown by the CFPB’s own data. The CFPB’s background discussion accompanying the proposal expressly confirms the Associations’ position that arbitration is faster, more economical, and far more beneficial to consumers than class action litigation and that the arbitration process is fair to consumers.
• The study was incomplete on key issues that would have further demonstrated that the proposal is not in the public interest or needed for the protection of consumers.  The CFPB neglected to review the effect of its own administrative and enforcement activities and did not study consumer satisfaction with arbitration, as recommended.  Nor did it study either the impact on consumers and society if companies abandon arbitration or the costs to consumers and society of the additional 6,042 class actions that would be filed every five years.  It also did not investigate whether class actions are necessary as a deterrent given the impact of modern social media.  Finally, while its survey found a lack of awareness about arbitration as an option for dispute resolution, its Consumer Education and Engagement division spent none of its resources on educating consumers about arbitration.