The American Financial Services Association (AFSA) has sent a letter to Director Cordray responding to the letter sent to him last month by 16 Democratic state attorneys general calling on the CFPB to limit the use of pre-dispute arbitration in agreements for consumer financial products or services.

In its letter, AFSA challenges the accuracy of various assertions made by the state AGs.  Responding to their contention that the Federal Arbitration Act (FAA) was intended to facilitate disputes between commercial entities, AFSA asserts that Congress specifically intended that the FAA apply to individuals.  As support for its position, AFSA cites to Justice Breyer’s observation in Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995) regarding the potential advantages of arbitration for individuals.

AFSA also challenges the AGs’ contention that mandatory pre-dispute arbitration is procedurally unfair to consumers and jeopardizes the right of consumers to seek judicial redress, citing to further observations of Justice Breyer in Terminix regarding the many advantages of arbitration.  AFSA comments that given the workload of overburdened state courts, the AGs’ conclusion that courts provide a better avenue of consumer redress for small dollar cases is “inconceivable.”  AFSA also challenges contentions made by the AGs regarding arbitrator bias and the high costs of arbitration.

Finally, AFSA turns the tables on the AGs’ view that arbitration forestalls class actions, commenting that this is “a laudable result in light of the pittances consumers receive in settlements while class action lawyers reap financial windfalls.”  AFSA observes that as a mechanism for recompensing injured consumers or ensuring compliance, class action lawsuits “have taken a back seat” to the CFPB’s restitution powers, noting that consumers compensated through CFPB enforcement do not share their compensation with lawyers.  AFSA also notes the authority of state AGs to bring civil actions to enforce Dodd-Frank’s UDAAP prohibition.

We are in full agreement with the views expressed by AFSA in its letter.