Insights

The Consumer Financial Protection Bureau (CFPB) recently released its preliminary research on the use of pre-dispute arbitration clauses in connection with credit cards, checking accounts, payday loans, and prepaid cards. The CFPB held a field hearing in Dallas to deliver their preliminary results and to give consumer advocates and the industry an opportunity to provide testimony and to answer select questions posed by the CFPB. Public comments were also taken during the field hearing. I attended the field hearing and will offer up some thoughts about the preliminary report, the field hearing and the next steps for the CFPB.

As you may know, the arbitration study is mandated by Section 1028 of the Dodd-Frank Act which requires the CFPB to "conduct a study of, and to provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services." Section 1028 also provides that the CFPB may by regulation, prohibit or impose conditions or limitations on the use of arbitration agreements if the CFPB finds that a prohibition or imposition of conditions or limitations is in the public interest and protective of consumers. The CFPB has been seeking standard forms of checking account agreements from various financial institutions and other consumer financial services agreements to review in connection with the arbitration study.

The preliminary results of the study provided by the CFPB were reportedly based on a review of hundreds of consumer contracts, as well as on filings from the American Arbitration Association (AAA), which the CFPB found was the predominant administrator of consumer financial arbitrations in the markets covered by the study. The CFPB looked at AAA filings about credit cards, checking accounts, payday loans and prepaid cards between 2010 and 2012. The CFPB observed that fewer than 1,250 consumer arbitrations about those four products were filed. Other preliminary results for the markets the CFPB has studied include:

• Larger institutions are most likely to use arbitration clauses. The preliminary report indicates that larger institutions are more likely than community banks or credit unions to include an arbitration clause in consumer contracts for credit cards or checking accounts.
• Arbitration clauses are more complex than the rest of the contract. The preliminary report indicates that, in credit card contracts, the arbitration clause section of the contract was almost always more complex and written at a higher grade level than the rest of the contract.
• Around 9 out of 10 arbitration clauses expressly bar consumers from filing class arbitration. In the contracts the CFPB studied, around 90 percent of the arbitration clauses specifically bar consumers from filing class arbitrations. The few clauses without this provision were in smaller bank contracts.
• Consumers do not choose arbitration over class action settlements. At most, only a handful of individuals chose instead to file an arbitration case over a class action.
• Consumers do not file arbitrations for small-dollar disputes. The CFPB found that almost no consumers filed arbitrations about disputes under $1,000.
• Few consumers file small claims court actions. A number of arbitration clauses allow a consumer, and sometimes the company, to use small claims courts rather than arbitration for dispute resolution. The CFPB's preliminary analysis indicates that not many consumers initiate small claims court cases in credit-card disputes. Rather, the analysis shows that small claims court cases are much more likely to be brought by banks than by consumers.

The field hearing went about as you might have expected: Director Cordray read from his prepared remarks which were posted online late the night before; the consumer activists brought out their horror stories--one of which included the story of a deployed servicemember who was foreclosed on and not able to litigate the dispute because of an arbitration clause, and blasted "forced" arbitration which they say strips consumers of their fundamental right to a trial, the right to a jury and the right to join with other consumers in a class action to hold corporations accountable. The industry representatives urged the CFPB to focus the arbitration study on what is best for a consumer, from the relative speed and low costs of arbitration vs. those found in litigation. Some of the CFPB's questions to the consumer activists and industry were very interesting: (i) Are there products or markets where arbitration is helpful?; (ii) Are there markets where arbitration is troublesome?; (iii) What are the costs and benefits to using arbitration clauses?; and (iv) What are the factors when deciding whether to use an arbitration provision? By far though, the public comments were the highlight of the field hearing as the public "hijacked" the hearing. There were very few comments on the actual arbitration report, and many more comments on the evils of payday lenders and title lenders in the state of Texas; calling them rats, snakes and just downright evil.

In the second phase of its study, the CFPB plans to spend more time analyzing and considering class actions. It will look at the types of cases brought by public and private actors. It may also expand its study to include other financial product markets, such as auto finance products. Finally, the CFPB will look at whether consumers are aware of the terms of arbitration clauses and whether arbitration clauses influence their decisions about which consumer financial products to purchase.

Stay tuned as the CFPB didn't provide anticipated timelines for the next round of its study.

Eric L. Johnson is a partner in the Oklahoma office of Hudson Cook, LLP. Eric can be reached at 405-602-3812 or by email at ejohnson@hudco.com.