On March 10, the Consumer Financial Protection Bureau published a study that was critical of arbitration clauses as a consumer tool for disputes with lenders and servicers. The study was criticized by a wide array of industry groups that oppose heavy regulation or an outright ban on arbitration clauses in consumer credit contracts. Last month, two noted scholars added their own input, which questions both the methodology and the conclusions of the study.
The scholars published a lengthy critique of the CFPB’s study. They questioned the CFPB’s data collection, which relied upon a telephone survey only, despite the fact that Dodd-Frank grants the CFPB access to detailed arbitration and lawsuit data from regulated entities. The authors cited inconsistent interpretive rules and a diversity of sources as liabilities. For instance, the CFPB initially used data from credit cards, checking accounts, payday loans and prepaid credit cards to draw its conclusions. However, the Bureau later added data drawn from auto loans and private student loans. Taken together, auto and student loans account for 31 percent of the CFPB’s final data set, but have historically higher incidents of arbitration than the other products.
The authors conclude that the CFPB’s findings actually undermine several key arguments that are often asserted to justify restrictions on arbitration. One significant example is the supposed difficulty of arbitration procedures. The CFPB data demonstrates that arbitration is a simple and inexpensive process. The data showed that consumers achieve positive outcomes even when they are not represented by an attorney. Indeed, “arbitration may be the only way for consumers to successfully seek outside redress without resort to hiring costly legal counsel,” according to the authors. The CFPB’s findings also show that consumer arbitrations are resolved “very quickly.”
Further, the critique cites the CFPB’s own data to suggest that no additional regulation of arbitration clauses is necessary. When the CFPB asked consumers what they would do if a credit card company failed to remove a disputed fee, very few said that they would resort to calling a lawyer. Instead, the vast majority of consumers said they would simply cancel their accounts and take their business elsewhere. The CFPB’s data suggested that financial institutions respond to the threat of losing a consumer’s business by waiving various fees and charges on a case-by-case basis, proving that the market creates incentives for firms to resolve disputes internally.” It may well be that truly small-dollar claims are increasingly being eliminated by the market itself,” stated the authors.