On March 10, 2015, the Consumer Financial Protection Bureau (CFPB) released its Arbitration Study, which concludes that arbitration agreements in contracts associated with consumer financial products constrain consumers’ ability to assert their rights if a dispute arises. The study, which the CFPB was directed to carry out under Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, sparked many predictions about the “end” of consumer arbitration agreements when it was released last week. Below, we highlight several themes from the report that may inform the CFPB’s eventual rulemaking regarding consumer arbitration agreements so that our readers can consider how best to respond to the CFPB’s views and findings.
First, the study’s finding that arbitration agreements limit consumers’ ability to obtain relief is predicated on the conclusion that consumer class actions are a valuable, and even preferable, way for consumers to obtain relief, compared with individual lawsuits or arbitration actions. In the press release announcing its study results, the CFPB noted that, in addition to resulting in the payment of hundreds of millions of dollars in class settlements every year, class actions offer other benefits to consumers that the CFPB concludes individual lawsuits and arbitration actions do not. These purported benefits include the ability to seek relief for low-value claims that otherwise would not be worth the attorneys’ fees to bring the suits and the ability to force companies to change their behavior through class action settlements.
Second, the CFPB has concluded from its study results that arbitration clauses in consumer contracts inhibit the ability of consumers to seek redress for their claims, in part by focusing on the dollar values of settlements in class actions versus in arbitration or individual actions. The study found that about 32 million individuals are eligible for relief through class actions every year, and that class actions result in the payment of about $220 million a year to members of consumer class actions. By contrast, the study found that a disproportionately low number of individual lawsuits (about 1,200 per year) and arbitration actions (about 600 per year) are filed by consumers, and that the awards are relatively low. The study found that around 90 percent of arbitration clauses in consumer contracts include a prohibition on class arbitration, and that companies regularly invoke these arbitration clauses to prevent class actions from going forward.
Third, the CFPB noted a lack of understanding among consumers about the existence and significance of arbitration agreements in their contracts. The study found that 75 percent of credit card consumers did not know whether their contracts had arbitration clauses in them, and even fewer consumers understood that the presence of the arbitration clause in their contract meant that they could not sue their credit card company in court.
And fourth, the CFPB’s choice of consumer financial markets to be included in its study may shed light on the markets it believes are the highest priority for any future rulemaking in the area of arbitration agreements. The CFPB’s study reviewed data from several consumer markets, including credit cards, checking accounts, prepaid cards, private student loans, payday loans, and wireless telephone contracts.
In light of the CFPB’s conclusions that class actions are a valuable method of redress for consumers, that arbitration agreements inhibit consumers’ ability to obtain relief, and that many consumers are uniformed about whether their contracts include arbitration clauses prohibiting court action, it is possible that the CFPB may issue new rules governing arbitration clauses in the future. The CFPB’s press release notes that the Dodd-Frank Act empowers the CFPB to regulate the use of arbitration agreements “if it finds doing so is in the public interest and for the protection of consumers,” and it quotes CFPB Director Richard Cordray as saying, “Now that our study has been completed, we will consider what next steps are appropriate.” Understanding the general themes that underlie the CFPB’s arbitration study (i.e., availability of relief for low-dollar claims, ability to obtain counsel, the dollar value of settlements, the relative number of claims filed, lack of consumer knowledge, and target markets) may help members of the consumer financial industry better anticipate what those “next steps” may be.