CFPB Creeps Closer to Drafting New Arbitration Rules

WASHINGTON — The Consumer Financial Protection Bureau appears ready to act on rules limiting arbitration clauses as the bureau continues to argue such agreements harm consumers.

The CFPB's final arbitration study, slated to be released Tuesday, heavily criticizes provisions in which consumers agree to seek recourse from their financial institution only through out-of-court arbitration, giving up their ability to sue.

More than 75% of consumers surveyed said they were not aware of arbitration clauses in product agreements, and less than 7% of those covered by such a clause knew it restricted them from suing. The report said, without such clauses, "millions of consumers" would otherwise have been eligible for more substantial relief through class action settlements.

Observers said the study — a summary of which was given to reporters on embargo — is likely to bolster the argument that clear regulations are needed to clarify when institutions can include such provisions in their product agreements. The ongoing theory from both consumer and trade groups is that the CFPB will either ban arbitration clauses altogether or require the agreements to include an option for consumers to file a class action lawsuit as well.

"Our hope is that the next step for the CFPB is that they propose new rules that these financial products cannot contain pre-dispute mandatory binding arbitration clauses," said Susan Weinstock, the consumer banking project director at the Pew Charitable Trusts. "Once a dispute has arisen, there needs to be an option for consumers, rather than hidden terms in an account agreement that require arbitration before there has been a problem."

The agency's first study on arbitration was released in 2013. While the CFPB has not specifically identified its next move, the reports make clear the bureau views arbitration clauses in a negative light.

"Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact," CFPB Director Richard Cordray said in a press release accompanying the final report. "Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. Now that our study has been completed, we will consider what next steps are appropriate."

Many say the financial services industry has already come to the conclusion that rules to regulate arbitration clauses are the bureau's next move.

The CFPB "won't say it but they've already concluded that they are going to begin a rulemaking at some point," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr. "At minimum, they seem hell-bent to restrict any arbitration agreement that precludes a consumer from joining a class action lawsuit."

Banks argue arbitration is a better option for both parties than a drawn-out lawsuit since it is less costly, rulings come more quickly and consumers often get more back on an individual basis that joining a class action lawsuit.

"I've gone through many class action suits myself and one time I got a check for $5. Another time I got a coupon," Kaplinsky said. "Arbitration clauses were meant to level the field so that everybody is treated the same. We've had a lot of experience in defending clients and we've found that consumers do at least as well and, sometimes, better than they do in court."

Independent of the CFPB's findings, many industry groups and consumer advocacy organizations have both published their own competing reports to argue their sides of the debate.

Weinstock said studies conducted by Pew show survey respondents are "conflicted" about arbitration proceedings.

"They like the idea of arbitration in terms of protecting them from frivolous lawsuits and it's cheaper than going to court," Weinstock said. But she added they overwhelmingly did not support "certain components that are sometimes in arbitration clauses like that the arbitrator might not be required to have a law degree, there's no right of appeal even if the law is misapplied, and no public decision."

The CFPB report compares how consumers fared in several types of proceedings. It reviewed more than 1,800 consumer finance arbitration disputes, 3,400 individual federal court lawsuits, 42,000 credit card cases filed in small claims court and 420 class action settlements filed in federal courts, among other data.

The agency concluded arbitration clauses can be a "barrier" to consumers getting relief from class actions. Roughly 34 million consumers could have been eligible for at least $1.1 billion in cash payments based on its review of such settlements during a five-year period.

But some suggest the agency's conclusions may offer an overly glowing assessment of the benefits of class actions.

"The number of people who are taken up as eligible to receive money from a class action lawsuit is in the single digits, certainly less than 10%. And it could take years for those consumers to receive the money. Most of these disputes are either dropped or dismissed before reaching that point," said Bryan Quigley, the head of communications for the U.S. Chamber Institute for Legal Reform. "All of this is a complete red herring."