Insights

I attended the Consumer Financial Protection Bureau (CFPB) field hearing on arbitration on March 10 in Newark. As expected, the hearing coincided with the release of the CFPB's final arbitration study and report to Congress (Arbitration Study). Section 1028 of the Dodd-Frank Act mandates the CFPB to conduct a study of the use of pre-dispute arbitration agreements in connection with consumer financial products and services. The same section also gives the CFPB broad rulemaking authority to prohibit or limit pre-dispute arbitration agreements. To do so, the CFPB need only find such prohibition or limitation is in the public interest, is for the protection of consumers, and aligns with the results of the Arbitration Study.

Nearly 3 years in the making, the Arbitration Study focuses on 6 markets: credit cards, checking accounts, prepaid cards, storefront payday loans, private student loans, and mobile wireless agreements. The CFPB examined and analyzed 850 consumer finance agreements, 1,800 consumer finance arbitration disputes, 3,500 individual consumer finance cases, 562 consumer finance class actions, 40,000 small claims filings, 400 consumer financial class action settlements, and 1,100 state and federal public consumer finance enforcement actions. The CFPB also conducted a nationwide survey of 1,000 credit card consumers to gauge their knowledge and understanding of arbitration and other methods of dispute resolution. At a whopping 728 pages, the Arbitration Study was lauded at the hearing as "the most comprehensive empirical study of consumer financial arbitration ever conducted."

The field hearing kicked off with prepared remarks by Director Cordray, which highlighted the history of the CFPB's undertaking and a broad overview of the study's conclusions. Specifically, he noted that the Arbitration Study revealed the following:

• Consumer arbitration agreements are prevalent, affecting tens of millions of consumers.
• Consumers are more likely to file a lawsuit in court than pursue a dispute in an arbitration proceeding.
• Class action litigation generally results in dual benefits for consumers in the form of monetary relief and changes in corporate behavior.
• Arbitration agreements effectively block filing of class actions in court and nearly all arbitration agreements include a provision which states that arbitrations may not proceed on a class basis.
• In a sample of companies that dropped their arbitration agreements versus those that continued to use arbitration agreements, there was no evidence to suggest that elimination of arbitration agreements caused a price increase to consumers or reduced their access to credit.
• Consumers surveyed generally did not know whether they were subject to an arbitration agreement, and if they were, believed that they could still participate in a class action.
• Although some agreements allow consumers the right to opt out of pre-dispute arbitration, most consumers are unaware of this option or do not exercise it.

Next, a panel of speakers discussed their views on pre-dispute arbitration agreements. The opponents of arbitration made the usual arguments: arbitration agreements cannot be negotiated, they are buried in fine print, consumers do not understand them, they deprive consumers of the right to have their day in court, and the results of arbitration are not public and cannot be appealed. Despite the purported diversity of viewpoints of the speakers on the panel, the only proponent of pre-dispute arbitration was Alan Kaplinsky, a partner at Ballard Spahr LLP, who presented the industry perspective. Mr. Kaplinsky argued that arbitration agreements benefit consumers because they are faster, cheaper, more efficient and more congenial than litigation. He noted that the Arbitration Study did not contain the point of view of consumers that had actually gone through an arbitration proceeding, but that the CFPB did not seem to want to hear about the positive aspects of arbitration. He also noted that plaintiffs' lawyers (a group that was very well-represented at the hearing) do not like arbitration because it is against their economic interests. Finally, he noted that if the CFPB's statistics are correct, then consumers are not reading their contracts and the cure for this is to work together to better educate consumers about arbitration.

Finally, the public comment portion of the hearing consisted of a string of consumer advocates echoing the sentiments from the panel's speakers that consumers do not read or understand their contracts and are shocked to find that they do not have the ability to go to court or participate in a class action when something goes wrong. The study was universally praised during the comment period (although I don't see how anyone could have read and digested such a behemoth in the 3-hour window between the release of the Arbitration Study that morning and the start of the hearing), and the commenters urged the CFPB to enact a rule that would ban consumer pre-dispute arbitration agreements.

It remains to be seen how far the CFPB will go in regulating pre-dispute arbitration agreements. However, it is clear that under the standards set out in Section 1028 of the Dodd-Frank Act, the Arbitration Study gives the CFPB the ammunition to either ban or severely restrict consumer arbitration agreements. For further details, see the Arbitration Study (available at http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/) and accompanying Fact Sheet (available at http://files.consumerfinance.gov/f/201503_cfpb_factsheet_arbitration-study.pdf).

Lauren Hunt is an associate in the Richmond, Virginia office of Hudson Cook, LLP. Lauren can be reached at 804-212-2697 or by email at lhunt@hudco.com.