The Consumer Financial Protection Bureau today released a report looking at the use of arbitration agreements in consumer financial products, finding that roughly nine out of 10 clauses allow banks to prevent consumers from participating in class actions, and that almost no consumers actually use arbitration to resolve financial disputes.
While tens of millions of people are subject to arbitration clauses in their credit card, checking account, payday loan and prepaid card agreements, the agency found that consumers filed an average of just 300 disputes in these markets each year between 2010 and 2012 with the American Arbitration Association.
During that same time period, consumers filed more than 3,000 federal court cases about credit card issues alone, including more than 400 class actions.
Since July 2009, more than 13 million class members made claims or received payments for class actions involving credit cards, deposit accounts, or payday loans, and 3,605 individuals opted out, according to the CFPB.
“At most, only a handful of these individuals who opted out chose instead to file an arbitration claim,” said CFPB Director Richard Cordray, according to remarks he is set to deliver today in Dallas. “One significant takeaway from these various points is that few consumers use arbitration at all, at least when compared to the number of consumers involved in lawsuits and class actions.”
Under the Dodd-Frank Act, the CFPB was charged by Congress with conducting a study on arbitration agreements in consumer financial products. This is the first phase of the study. When the process is complete, the CFPB may adopt regulations that “prohibit or impose conditions or limitations” on the use of arbitration agreements if it finds such measures to be “in the public interest and for the protection of consumers” and such findings “are consistent” with the agency’s study.
The U.S. Chamber of Commerce Center for Capital Markets Competitiveness and the U.S. Chamber Institute for Legal Reform in a Dec. 11 letter to the CFPB complained that the agency “has not informed the public of the topics it is studying and it has not solicited information regarding those topics.”
The Chamber said that "prohibiting or regulating arbitration will harm consumers more than it would benefit them…Arbitration is at least as likely, and often more likely, than litigation in court to result in positive outcomes for consumers, as empirical studies repeatedly have shown.” The CFPB’s 168-page study found that larger institutions are more likely than community banks or credit unions to include an arbitration clause in consumer contracts. “That raises interesting questions about why smaller institutions and credit unions do not use arbitration clauses as frequently in these markets,” Cordray said.
The study also found that arbitration clauses were particularly confusing. The clauses “were almost always more complex and written at a more demanding grade level of readability than the other parts of the contracts we studied,” Cordray said. “In fact, in every case, the rest of the credit card contract scored better in terms of readability than did its arbitration clause considered alone.”
While many arbitration clauses allow the parties to pursue low-level disputes in small claims court rather than arbitration, the CFPB found that almost no consumers actually did so. The agency identified 870 credit card cases brought by consumers in small claims court against large credit card issuers—but more than 41,000 cases brought by banks against consumers.
In the second phase of the study, Cordray said the CFPB will consider questions such as whether consumers are “aware of the terms of arbitration clauses; whether they make assumptions about their legal rights under the terms of these clauses; and whether they factor the existence of these clauses into their decision-making process about obtaining or using particular consumer financial products and services.”
The final report will be submitted to Congress.