CFPB Issues Report on Arbitration Agreements

The CFPB today issued its report to Congress on Arbitration Agreements.  The report, including appendices, checks in at just over 700 pages. Despite being touted as an “empirical” rather than an “evaluative” study, the report is likely to be a prelude to CFPB rulemaking concerning arbitration provisions.  The report focuses on six financial product markets: credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile wireless.   I break down the highlights of the report in 750 words or less:

·       Arbitration clauses are present in a significant number of contracts over the six financial product markets.  Specifically, the CFPB reports:

o   53 %: The market share of credit card issuers that include arbitration clauses.

o   44%: While fewer than 8 % of banks and credit unions include arbitration clauses in their checking account agreements, those who do represent 44 % of insured deposits.

o   92 % of prepaid card agreements the CFPB obtained are subject to arbitration clauses.

o   86% of the largest lenders in the private student loan market (specifically 6 of the 7 reviewed for this study) include arbitration clauses in their contracts.  

o   99 % of the Texas and California pay day lenders with storefront locations include arbitration clauses in their agreements.

o   88 % of the largest mobile wireless carriers (7 of 8) include arbitration clauses and they cover 99.9% of all subscribers.

·       In the credit card and checking account markets, arbitration clauses are more widely used by larger banks than smaller banks and credit unions;

·       Most arbitration clauses include provisions that arbitration may not proceed on a class basis;

·       AAA is the predominant arbitration forum;

·       The existence of an arbitration clause is not a consideration for consumers when deciding on a credit card provider (in fact, it was dead last in the factors listed);

·       Most consumers are not aware that their credit card contracts include arbitration clauses;

·       Arbitration clauses are disproportionately lengthy when compared to the remainder of the contract and tend to be written on a more complex level;

·       Arbitration clauses tend to be very broad;

·       Most contracts with arbitration clauses did not include damage limitations;

·       CFPB acknowledged that its analysis of arbitration outcomes was subject to certain limitations which “made it quite challenging to attempt to answer even the simple question of how well do consumers (or companies) fare in arbitration.  See Arbitration Study: Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act 1028(a), Section 5, p. 7.

·       The Report, however, goes on to compare claims brought in arbitration with those brought through litigation;

·       Of the cases brought through arbitration (and the Report only identified 1,847 between 2010-2012):

o   69.1% involved some dispute over the debt and 59.8% involved an affirmative consumer claim (there were instances where the demand involved both);

o   Arbitrators resolved less than a third of the disputes on their merits;

o   Decisions on the merits took 5-8 months;

o   The median time to settle cases was 155 days;

o   Summarized by the CFPB, “[t]he total amount of relief and debt forbearance consumers obtained in all of these cases combined was under $400,000. Companies obtained decisions requiring consumers to pay $2.8 million in cases filed during this same time period, predominantly for disputed debts.”

·       The CFPB also studied cases that proceeded through litigation in these product markets.  The CFPB Report finds that:

o   Almost all the litigation cases studied by the CFPB were resolved prior to trial;

o   Juries were sought by consumers in the overwhelming majority of class and individual cases;

o   The consumer obtained a judgment in only 6.8% of the individual federal cases

·       The CFPB Report focuses on the recovery in class actions in contrast to individual actions or arbitrations and conducted a more expansive analysis covering 2008-2012, noting:

o   Total gross relief offered to the classes over 419 settlements was almost $2.7 billion (including $2 billion cash and $644 million of in-kind relief);

o   34 million consumers were guaranteed recovery over that 5 year period;

o   The average time to settle was 690 days.

Looking ahead, it is likely that the CFPB will begin exploring rule making which likely will seek to:

·       Limit the availability and scope of arbitration;

·       Simplify the arbitration provisions;

·       Eliminate the ability of credit providers to provide that consumers cannot proceed as a class in arbitration; and

·       Require additional disclosures as to the inclusion of arbitration provisions and perhaps conspicuous opt out provisions.