Today's Trends in Credit Regulation

CFPB's Arbitration Report - Balanced or Biased?
By Thomas B. Hudson

The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the Consumer Financial Protection Bureau to conduct a study on the use of pre-dispute arbitration clauses in consumer financial markets. The Act specifically prohibited the use of arbitration clauses in mortgage contracts but gave the CFPB the power to issue regulations on the use of arbitration clauses in other consumer finance markets.

The CFPB conducted a public inquiry on arbitration clauses in April 2012 and released some preliminary research in December 2013. Industry has been waiting since then for the other shoe to drop. Did anyone just hear a big kerplop?

If so, it was probably a copy of the CFPB's mind-numbing, 728-page report hitting the doorstep. The report, crammed with charts and numbers, was accompanied by a press release trumpeting the CFPB's interpretations of the study.

According to the release, the report results indicate that

  • tens of millions of consumers are covered by arbitration clauses;
  • consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits per year on average in the markets studied;
  • roughly 32 million consumers on average are eligible for relief through consumer finance class action settlements each year (it is not clear how this relates to arbitration);
  • arbitration clauses can act as a barrier to class actions (you've really got to love this one - the main reason creditors use arbitration clauses in their agreements with consumers is for the protection those clauses give against class action lawyers, so it's nice of the CFPB to point out the obvious);
  • the CFPB found no evidence that arbitration clauses lead to lower prices for consumers; and
  • three out of four consumers surveyed did not know if they were subject to an arbitration clause (the report didn't indicate whether this was because the consumers were generally unaware of the contract terms or whether they understood everything in the contract except for the arbitration clause).

The authors of the press release seem to have cherry-picked the study's findings in order to support an anti-arbitration title for their press release. The release did not bother to mention that the report shows that

  • in many class action cases, where the principal purpose of seeking class relief is to pressure a settlement, members of the class got nothing or next to nothing;
  • class action cases almost never make it to a trial on the merits, while a significant percentage of arbitration proceedings actually resolve the disputes of the parties; and
  • arbitration is both faster and more economical than litigation.

And the study had some gaping holes, as well.

There was no discussion about creditor "best practices" reflected in the terms of arbitration clauses. The arbitration clauses used by creditors have grown more consumer friendly with each passing year. It isn't unusual now to see arbitration clauses that provide for the payment by the creditor of some or all of the costs of arbitration, permit the consumer to pick the arbitration organization, provide a carve-out for claims brought as single actions in small claims courts, and even permit the consumer to opt out of arbitration by notice. Creditors frequently use various means to call attention to the presence of an arbitration agreement by using large type, separately boxing the clause, having it separately signed or initialed, and/or adding "With Arbitration Agreement" to the title of a credit document. The study offers no insight on whether forms featuring these best practices might change any of the study's conclusions.

The study was not limited to auto financing. In fact, the bulk of the report dealt with other sorts of consumer financial services - credit cards, checking accounts, student loans, and the like.

There is very little in the report that specifically deals with auto credit, and what's there is close to useless because of the CFPB's continuing refusal to take the time to understand why auto credit is very different from other consumer financial services.

I think I had put 200 pages behind me before I came upon anything dealing with auto financing. And, sure enough, the CFPB predictably referred to the transactions as "loans."

Now, perhaps the transactions studied by the CFPB were loans, but I strongly suspect that they were instead retail installment contracts, typically used in dealer financing. If I'm right about that, then much of the study becomes really murky in a hurry.

"Why?" you ask. Here's why.

A retail installment sale contract evidences the simultaneous sale of a vehicle and the financing of the vehicle. Disputes involving these transactions can be credit-related (perhaps the finance company incorrectly charges finance charges), but they can also be car-related (the transmission fails). The type of dispute will have a bearing on the amount of the claim (an engine repair is expensive), the likelihood that a claim would be appropriate for class relief (a claim of fraud in the sales process is unlikely to get class treatment because of the individualized proof required), and the likelihood that a claim will be brought by a consumer (larger claims, it seems, would be less likely to be simply dropped by the consumer). The study makes no attempt to tease out of the data any distinctions regarding credit-related and car-related auto disputes.

So, there's much to dislike about the CFPB's work so far on arbitration. You'd think that arbitration must have some things to recommend it; after all, Congress passed the Federal Arbitration Act, and all or nearly all the states have enacted laws permitting arbitration. The CFPB seems determined not to see any good in the process.

My prediction? The CFPB is staunchly anti-arbitration (pre-dispute, binding arbitration) and has determined to prohibit its use in consumer financial transactions.

Thomas B. Hudson is a partner in the Hanover, Maryland office of Hudson Cook, LLP. Tom can be reached at 410-865-5411 or by email at

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