At a presentation on February 18, 2016 to the American Constitution Society, CFPB Director Richard Cordray devoted most of his remarks to the subject of consumer arbitration. Director Cordray revealed that the effect on consumers of mandatory predispute arbitration clauses “has been on our radar screen since the very beginning,” and he confirmed that the CFPB strongly favors class actions over arbitration and is “considering whether to prohibit companies from using arbitration clauses to block class actions” through rulemaking. It appears that the CFPB is still on track to implement the proposals it outlined last fall which would prohibit class action waivers in consumer arbitration agreements while permitting individual arbitrations to continue subject to certain disclosure requirements. While Director Cordray stated that the CFPB is analyzing “a broad range of feedback we received in response to the outline, with a particular focus on feedback from small businesses,” his discussion of the proposals that the CFPB is considering does not appear to differ from the earlier outline.
The CFPB unquestionably has aligned itself with consumer advocacy groups in a common effort to promote class actions. Looking beyond the CFPB’s own jurisdiction, Director Cordray openly encouraged other consumer advocates “both inside and outside of government” to continue “doing great work investigating the effects of arbitration clauses in contracts for insurance, employment, franchises, and other goods and services.”
Director Cordray spoke glowingly of the 728-page empirical study of consumer financial services arbitration that the CFPB published last March. The study, he stated, “showed that arbitration clauses restrict consumers’ relief in disputes with financial service providers because companies are using them to block class action proceedings in any forum – whether court or arbitration. This affects consumers’ access to justice because group proceedings are often the only practical way to seek relief for relatively small claims.” What Director Cordray did not disclose is that the data in the study actually contradict his laudatory conclusions. In fact, the study confirmed that arbitration is a faster, less expensive and far more effective way for consumers to resolve disputes with companies than class action litigation.
According to the study, in 60% of the class actions studied by the CFPB consumers received nothing at all because the named plaintiff settled individually or voluntarily withdrew the suit. In the 15% of class actions that settled, consumers who received settlement cash payments got a paltry $32.35 on average after waiting for up to two years. As few as 4% of the class members who were eligible to receive benefits conditioned on submitting a claim form actually filed a claim. In sharp contrast, the study showed, consumers who prevailed in an individual arbitration recovered an average of $5,389.00, and the entire arbitration process was concluded through hearing or settlement in an average of 2-7 months. Moreover, the cost to the consumer for the entire arbitration was only one-half of the cost of simply filing a federal court complaint. While the average class member recovered only $32.35, counsel for the class were awarded a staggering $424,495,451.00 in attorneys’ fees.
Those are the numbers to bear in mind when Director Cordray gloats that the study showed that class action “settlements totaled $2.7 billion in cash, in-kind relief, fees, and expenses.” When you back out the half-billion dollars in attorneys’ fees and the non-cash items, and do the long division that the CFPB purposely did not do, the stark reality – according to the CFPB’s own study – is that consumers who prevailed in arbitration recovered 166 times as much as the average putative class member. The CFPB’s own data strongly suggest that the CFPB should be devoting substantial resources to educating the public on the benefits of arbitration, rather than propping up the plaintiffs’ class action bar.
Director Cordray’s presentation raises another interesting question: why does the CFPB need to bolster class actions when the CFPB itself is already doing a commendable job at protecting a vast number of consumers? According to Director Cordray, to date the CFPB’s enforcement activity has resulted in $11.2 billion in relief for over 25 million consumers. Its supervisory oversight has further resulted in financial institutions providing more than $300 million in redress to over two million consumers. In addition, the CFPB has handled over 800,000 complaints from consumers on its website portal, and has provided “unbiased, reliable answers” to consumer finance questions to more than 10 million people. And the CFPB did all that without racking up a half-billion dollars in attorneys’ fees.
In sum, we can still expect the CFPB to prohibit the use of class action waivers in consumer arbitration agreements when it issues its proposed rules (although Director Cordray provided no hint as to timing, we still expect the proposed rules to be issued in the next few months), but the CFPB’s own statistics demonstrate that it is consumers who will be harmed and plaintiffs’ class action attorneys who will reap the benefits.