Last month, the CFPB delivered preliminary results of a study into the use of arbitration clauses in consumer products. The study is mandated by Dodd-Frank and began in April of 2012. Final results are to be delivered to Congress. The full report is available here.
Although the CFPB stated that there is more analysis to be done and the preliminary results are not necessarily indicative of their ultimate determination, the data presented may indicate a preference for class action litigation over the use of the Federal Arbitration Act. Dodd-Frank authorizes the CFPB to limit or even prohibit arbitration clauses if it determines such action is in the public interest.
The CFPB researched the use of arbitration clauses connected to consumer credit cards, checking accounts, payday loans and reloadable pre-paid cards offered by 27 lenders across the 30 most populous counties in the nation. Although the report estimates that there are 160 million credit card holders, 105 million households with checking accounts, and 2 million households that use payday loans annually, the CFPB identified just 1,241 arbitration filings (1,033 credit card disputes, 71 checking account disputes and 137 payday loan disputes) to form the basis of its preliminary conclusions. The report admits that “the number of arbitrations was low relative to the total populations using these products.”
The findings present some interesting information on arbitration clauses. In the credit card market, larger bank issuers are more likely to include arbitration clauses than smaller bank issuers and credit unions. As a result, while most issuers do not include such clauses in their consumer credit card contracts, just over 50 percent of credit card loans outstanding are governed by them. There was a similar concentration of arbitration clauses used by larger banks in the checking account market where only 8 percent of lenders required them but that accounted for approximately 44 percent of all checking consumers. Eighty-one percent of pre-paid credit cards had arbitration clauses. An estimated 72 percent of all consumer arbitration filings were initiated by the consumer.
Turning to the clauses themselves, the CFPB noted that nearly every one included a provision forbidding consumer participation in a class action. Citing the American Arbitration Association, the report states that there is an average of only 415 arbitration actions filed annually across all four markets. In only 53 percent of the cited arbitration claims was the consumer represented by an attorney, whereas the lender had legal representation in almost every case.
The relatively low number of arbitration filings seems to suggest to the CFPB that arbitration clauses are not the best means of securing the rights of consumers. The report found arbitration clauses to be more problematic for consumers in a number of ways, including a short time frame for filing, added expense, inconvenient locations and rules about confidentiality and disclosure. The report cited a low opt-out rate for class action settlements as an indication of consumer preference for that avenue.