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From Banking and Finance Law Daily, March 11, 2015

CFPB report jumpstarts debate on pros/cons of arbitration clauses

By Katalina M. Bianco, J.D.

A report detailing the findings of a Consumer Financial Protection Bureau study of pre-dispute arbitration clauses has become the latest bureau hot topic. Trade groups and consumer groups have weighed in on the subject of arbitration, and predictable lines have been drawn with banking associations thus far backing arbitration and consumer organizations taking the opposite stance.

CFPB report to Congress. The bureau’s report to Congress indicated that arbitration clauses restrict consumers’ relief for disputes with financial service providers by limiting class actions. The bureau found that in the consumer finance markets covered in the study, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements.

Cordray discussion of arbitration. In remarks prepared for a field hearing on arbitration, CFPB Director Richard Cordray began with a discussion of the different views on arbitration held by supporters and opponents. “Arbitration is often described by its supporters as a “better alternative” to the court system—more convenient, more efficient, and a faster, lower-cost way of resolving disputes,” he said. “Opponents argue that arbitration clauses deprive consumers of certain legal protections available in court, may not provide a neutral or fair process, and may in fact serve to quash disputes rather than provide an alternative way to resolve them.”

Cordray noted that it is important when discussing the bureau’s findings to keep in mind that when it comes to consumer finance, arbitration clauses are contained in standard-form contracts with terms that are not subject to negotiation. “Like the other terms of most contracts for consumer financial products or services, they are essentially ‘take-it-or-leave-it’ propositions.” One question that was key to the bureau’s study, he said, was to what extent individual consumers use arbitration procedures or individual litigation to challenge company behavior that they believe to be wrongful. “The answer is: not very often.” The bureau also found that larger numbers of consumers are eligible for financial redress through class action settlements than through arbitration or individual lawsuits (see Banking and Finance Law Daily, March 10, 2015, for further discussion of the results of the study).

Consumer groups react to CFPB findings. Several consumer groups weighed in on the CFPB’s study, all of them lending support to the bureau’s findings. The Americans for Financial Reform said that the CFPB “makes a compelling case for banning forced arbitration.” AFR noted that the bureau’s data “refutes financial industry claims that giving consumers access to the court system raises costs. In its examination of financial companies that dropped their arbitration clauses, the CFPB found ‘no statistically significant evidence’ that customers experienced increased prices or reduced access to credit.

The Center for Responsible Lending stated that the CFPB’s report “makes what we’ve known crystal clear: forced arbitration clauses limit consumer relief and have no place in a fair marketplace.” The consumer group said that companies claim that arbitration is simpler, easier, and cheaper than taking a case to court, but “they fail to mention that the forced arbitration rarely provides the same kind of discovery, impartiality, or meaningful review that can be achieved in courts of law.”

According to a statement by the Consumer Federation of America, “Forced arbitration clauses are hidden in complicated language in many contracts that consumers sign to obtain services or products.” These clauses “prevent access to the judicial system by forcing people to agree to a private, often secretive, decision making system before a problem has arisen.”

Public Citizen’s Congress Watch Division wrote that “The evidence from the Consumer Financial Protection Bureau (CFPB) is in: Forced arbitration clauses and class-action bans eliminate valid claims against bad industry practices and leave consumers of financial products and services with practically no meaningful avenue to seek remedies for harm.” Christine Hines, Consumer and Civil Justice Counsel, said, “Or, stated more plainly: Big Banks and financial predators are using fine-print terms in contracts as an effective license to steal. To protect consumers, the CFPB must follow up its groundbreaking study with action: a rule taking away the banks’ right to steal and ending forced arbitration.”

Trade group reactions. The trade groups that have commented on the bureau’s report took a position that was opposite to that of the consumer groups. The Consumer Bankers Association released a statement the same day the report was published, writing that the CBA considers arbitration a positive for consumers by allowing them “quick and easy access to an affordable option for dispute resolution.” The group said that as a last resort,” arbitration is the “best path forward because it is mutually beneficial” to both consumers and lenders.

The Financial Services Roundtable agrees, stating that “Arbitration makes it possible for American consumers to resolve disputes in a cost-effective, fair and timely manner that often benefits all parties involved.” The FSR called arbitration “an important tool for the customers of financial institutions” because it keeps costs down and financial products, including credit cards, affordable. The FSR urged the CFPB to continue working with the industry to educate consumers about “this important benefit.”

The U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC) and U.S. Chamber Institute for Legal Reform (ILR) took a tougher stance against the CFPB’s findings. “The CFPB’s study makes one wonder if the Bureau is really trying to protect consumers or is instead trying to protect plaintiffs’ lawyers.” The Chamber said the report contained “predetermined conclusions” that “ignore key facts and are the result of an unfair and biased approach” leading to “fatal flaws.” In light of these flaws, the study should not be used as a basis for any subsequent rulemaking by the CFPB.

Brown comments. Finally, Sen. Sherrod Brown (D-Ohio), Ranking Member of the Banking Committee, commented on the results of the study. “Consumers deserve the right to seek relief in court but many don’t know that they’re subject to mandatory arbitration,” the lawmaker said. “Only when consumers are faced with a serious financial dispute do they realize that they are prohibited from filing individual and class action lawsuits, often depriving them of a fair settlement.”

Companies: Americans for Financial Reform; Center for Responsible Lending; Consumer Bankers of America; Consumer Federation of America; Financial Services Roundtable; Public Citizen; U.S. Chamber of Commerce

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