A Biased Report

The Dodd-Frank Act directed the Consumer Financial Protection Bureau to study the use of pre-dispute arbitration clauses in consumer financial markets and gave the CFPB the power to prohibit or regulate the use of such clauses depending on its findings.

The CFPB conducted a 2012 study and released some preliminary research in December 2013. The 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 Bureau’s mind-numbing, 728-page report hitting the industry’s doorstep. The report was accompanied by a press release trumpeting the Bureau’s interpretations of the study. According to the Bureau’s release, the report indicates 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 in the markets studied;
• Roughly 32 million consumers are eligible for relief through consumer finance class action settlements each year (it is not clear how this relates to arbitration);
• Arbitration clauses can bar class actions (you’ve really got to love this one — the main reason creditors use arbitration clauses is for the protection they give against class action lawyers — it’s nice for the CFPB to point out the obvious);
• The Bureau found no evidence of arbitration clauses leading to lower consumer prices; 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 clause).

The press release authors cherry-picked the study to support an anti-arbitration title for their release, which did not bother to mention that the report shows that:

• In many class actions, where the principal purpose of seeking class relief is to pressure a settlement, class members got nothing or next to nothing;
• Class action cases almost never make it to a trial on the merits, while a significant percent of arbitration proceedings resolve the parties’ disputes; 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 arbitration “best practices.” Arbitration clauses used by creditors have grown more consumer-friendly over time. It isn’t unusual now to see clauses that have the creditor paying for some or all of the arbitration costs, that permit the consumer to pick the arbitration organization, that provide a carve-out for small claims court actions, and that even let the consumer opt out of arbitration by notice. Creditors now frequently highlight the presence of an arbitration agreement with big type, borders, shading or coloring, or by having it separately signed or initialed or adding “With Arbitration Agreement” to a credit document’s title. The study offers no insight on whether such “best practices” forms might change any of the study’s conclusions.

The study was not limited to auto financing. In fact, most of the report dealt with other sorts of consumer financial services — credit cards, checking accounts, student loans and the like. The parts of the report dealing with auto credit are nearly useless because auto credit isn’t like other consumer financial services.

When it addressed auto credit, the CFPB predictably called the transactions “loans.”

Now, perhaps the transactions the Bureau studied were loans, but I strongly suspect that they were retail installment contracts, typically used in dealer financing. If I’m right about that, much of the study quickly gets really murky.

“Why?” you ask. Here’s why.

A retail installment contract is used in the simultaneous sale and financing of a vehicle. Disputes involving these transactions can be credit-related (the creditor incorrectly charges finance charges) but they can also be car-related (the transmission fails). The type of dispute will affect 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 individualized proof is required), the likelihood that a claim will be brought by a consumer (larger claims are less likely to be abandoned). The study ignores any distinctions regarding credit-related and car-related disputes.

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

My prediction? The Bureau is staunchly anti-arbitration and has determined to prohibit its use in consumer financial transactions.

Thomas B. Hudson is a partner in the firm of Hudson Cook LLP and the author of several widely read compliance manuals. Email him at [email protected].