Sternlight – CFPB Report Shows Mandatory Consumer Arbitration Harms Consumers

Last week Paul posted about the CFPB report on Mandatory Consumer Arbitration, and after wading through the entire report, FOI Jean Sternlight provides us with a post reporting the report’s key findings.


For many years we have debated whether companies’ imposition of mandatory arbitration is helpful or harmful to consumers. Well-intentioned academics and neutrals have often disagreed with one another, while jointly wishing we had better empirical evidence to help us make an accurate assessment. The Consumer Financial Protection Bureau recently issued an extensive report (hundreds of pages long) (available here: definitively showing that rather than providing consumers with a quick, cheap, fair way to resolve their claims, mandatory arbitration primarily serves to deprive consumers of access to class actions that would have deterred companies from engaging in misconduct and provided many wronged consumers with compensation. While the CFPB Report only discusses the use of mandatory consumer arbitration in the financial sectors, its findings are likely applicable more broadly as well.

Here are some of the key findings:

(1) Mandatory arbitration clauses are widely used in the financial sector, though the incidence varies by financial product. Whereas most payday lenders and issuers of prepaid cards use the clauses, the clauses are less widely used with respect to checking accounts. (Report Section 2).

(2) When companies mandate the use of arbitration they almost always proscribe the use of class actions. Studying the use of mandatory arbitration with respect to credit cards, checking accounts, prepaid cards, payday loans, students loans and mobile wireless devices the CFPB Report found that between 86 and 100% of the imposed arbitration clauses insulated companies from class actions. (Report Section 2.5.5). Indeed, in a statement given after the CFPB Report was issued attorney Alan Kaplinsky, a leading attorney advocate for the use of such clauses, stated “If [the CFPB were to eliminate class action waivers in arbitration] most of my clients would have no interest in using arbitration. It would be the death knell of arbitration even without an outright ban.” Carter Dougherty, “CFPB Finds Arbitration Harms Consumers, Presaging New Rules,” Bloomberg Business,

(3) Although quite a few mandatory consumer arbitration clauses contain “opt out” provisions theoretically allowing consumers between 30 and 60 days from the time account was opened/application submitted to opt out of arbitration, (Section 2.5.1) these opt-out provisions are not meaningful in practice because consumers very rarely understand arbitration clauses and almost never exercise a right to opt out. (Section 3) For example, “[l]ess than 7% of consumers whose credit card agreements included pre-dispute arbitration clauses stated that they could not sue their credit card issuers in court,”(Report Section 3 p. 4) and only one person whose clause contained an opt out provision recalled being offered that opportunity. (Id.)

(4) Most of the consumer arbitration clauses contained a small claims court “carve-out.” (Report Section 2.5.2) Some academics have speculated that such carve-outs are fair, and designed to help consumers bring small claims more expeditiously. However, it turns out that small claims court is primarily used by companies against individuals, except in those jurisdictions in which companies are foreclosed from using the small claims process. (Report Section 7 & Appendix Q).

(5) Only a very small number of consumers bring arbitration claims, suggesting that arbitration is not the quick accessible process that some have urged. Although the AAA is the predominant administrator of consumer arbitration claims (Report Section 2.5.3), just 411 financial arbitration claims were filed by consumers with AAA in an average year between 2010 and 2012. (Report Sections 1.4.3 & 5.5.1). As well, although some have suggested that mandatory arbitration can be a hospitable forum for consumers who cannot obtain legal representation, consumers were represented by counsel in roughly 60% of these arbitrations. (Report Section 5.5.3). Companies, by contrast, almost always had counsel. (Id.).

(6) Consumers were not able to obtain a great amount of relief through arbitration with respect to financial claims. Of the mere 1847 consumer claims filed between 2010 and 2012, a third of which were filed by companies, 31% percent sought only affirmative relief for consumers, 40% sought debt forbearance, and 29% sought both.   (Report Section 5.2.1) Arbitrators issued decisions in only 32% of the filed cases, (Report Section 5.2.2), and only one third of these involved an in-person hearing as opposed to a consideration of paper filings or telephonic hearing. (Id.) In 2010 and 2011 arbitrators awarded consumers affirmative relief in just 32 cases (20.3% of claims seeking affirmative relief in which decision was granted), (Report Section 5.2.2 p. 13), and awarded them debt forbearance in 46 cases (19.2%). (Id.) The total amount of affirmative relief awarded to consumers through arbitration over the three year period was $172,433 and the total debt forbearance was $189,107. (Report Section 5.6.6 pp. 42-43). In short, to put it mildly, arbitration is not a helpful forum for consumers in financial disputes.

(7) Companies secured far more relief against financial consumers in arbitration than consumers obtained against companies. In the 244 cases in which companies made claims against consumers, and which arbitrators issued awards, the companies obtained $2,806,662 in relief in 227 disputes. (Report Section 5.6.7) Notably, however, the AAA no longer handles debt collection arbitrations except when it is the consumer who invokes the arbitration clause. (Report Section 5.6.4 p. 36 n. 73).

(8) The CFPB also examined how well consumers did in class actions that were filed in court with respect to consumer financial issues. Advocates defending mandatory arbitration have argued that eliminating class actions would not harm consumers because consumers do not actually benefit from class actions. However, the CFPB results do not support this argument. The CFPB identified 422 federal consumer financial class settlements approved between 2008 and 2012. (Report Section 8). Looking at the 419 of these settlements for which information was available the CFPB found that estimated class membership in these cases was 350 million. (One case alone included 160 million class members). (Report Section 8.1). On average these settlements secured aggregate relief in the amount of $540 million per year, including fees, expenses, and in-kind relief. (Report Sections 1.4.7 & 8.3.3). Over the five year period these settlements made available more than 2.6 billion dollars in cash payments to consumers including more than $2 billion in cash relief and more than $600,000 in in-kind relief. Netting out fees and costs, $ 2.2 billion in relief was made available to the plaintiff consumers. (Report Section 8.3.3). While not all consumers receive funds that are made available in class action settlements, the CFPB found that at least $1.1 billion was actually paid to consumers pursuant to these settlements. (Report Section 8.3.3 p. 28).

(9) While it is sometimes suggested that plaintiff attorneys obtain more benefit from class actions than do plaintiffs, the CFPB study found that attorney fee rates were 21% of cash relief and 16% of cash and in-kind relief. (Report Section 8.3.5).

(10) Defenders of mandatory consumer arbitration sometimes argue that class actions are not needed because state and federal regulators can handle any enforcement that is needed. However, the CFPB found relatively little overlap between regulatory enforcement and class actions in the financial consumer area. Of 1,150 identified enforcement actions filed between 2008 and 2012 by federal, state, municipal and county regulators CFPB found only 12% had an overlapping class action complaint. (Report Section 9.4.1). And, examining a subset of class actions they found overlapping public enforcement proceedings in just 31% of the cases. (Report Section 9.4.2).

(11) Defenders of mandatory consumer arbitration also sometimes argue that imposing mandatory arbitration allows companies to lower prices for consumer goods and services. The CFPB investigated this claim by looking at the costs of consumer credit imposed by certain credit card issuers who agreed, pursuant to settlement, to remove pre-dispute arbitration clauses from their credit card agreements. The CFPB then compared these costs, including both interest rates and fees, to the costs of credit imposed by card issuers who continued to impose mandatory arbitration. After performing a regression analysis that controlled for numerous other factors the CFPB found no evidence that the companies that imposed arbitration offered credit more cheaply than companies that did not impose arbitration. (Report Section 10).

The CFPB has not yet made any recommendations in light of its empirical findings, but I need not be so circumspect. I believe it is now abundantly clear we should all work to ensure that companies cannot use mandatory binding arbitration in the consumer setting to eliminate consumers’ opportunity to participate in class actions. We should, at minimum, urge passage of federal legislation to this effect. The CFPB Study shows that consumer class actions do benefit millions of consumers directly. We can also infer that the threat of such class actions encourages companies to adhere to the law. Allowing companies to use arbitration to elude the threat of class actions is not consistent with proper use of dispute resolution processes.

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