On Wednesday May 18, 2016, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Examining the CFPB’s Proposed Rulemaking on Arbitration: Is it in the Public Interest and for the Protection of Consumers?”
The Committee questioned the panel members on whether the CFPB’s proposed rule meets the mandate of Section 1028 of the Dodd-Frank Act. Specifically, under Section 1028, the CFPB has authority to limit the use of consumer arbitration agreements if and only if its study of such agreements establishes that doing so “is in the public interest and for the protection of consumers.”
The panel of speakers included:
- Professor Jason S. Johnston, Henry L. and Grace Doherty Charitable Foundation Professor of Law, University of Virginia School of Law
- Dong Hong, VP and Regulatory Counsel, Consumer Bankers Association
- Andrew Pincus, Partner, Mayer Brown LLP, on behalf of the U.S. Chamber of Commerce
- Paul Bland Jr., Executive Director, Public Justice
As reported earlier, the CFPB’s proposed rule would prohibit covered providers of certain consumer financial products and services from using pre-dispute arbitration agreements that contain a class action waiver.
In his opening remarks, Congressman Randy Neugebauer (R-TX), who chaired the hearing, stated that the CFPB study “failed to adequately compare outcomes” for consumers between arbitrations and class actions. Chairman Neugebauer further noted that the CFPB’s proposed rule is inconsistent with the CFPB study’s conclusion that arbitrations resulted in substantially quicker claim resolution and significantly greater recovery as compared to class actions, such that the proposed rule constitutes “arbitrary and capricious” agency action that will result in a “justice gap” by removing consumers’ most effective means of redress. Throughout the hearing, the industry representatives stressed, using the CFPB study’s data, that arbitration provides a more convenient vehicle than class actions to vindicate contractual and statutory rights. Implicitly, the testimony questioned whether the CFPB could maintain that its proposed rule was “in the public interest and for the protection of consumers” without further study and data establishing that class actions increase consumer welfare.
As the panel highlighted from the CFPB’s study, arbitration typically concludes within five months, as compared with an average class action lifespan of roughly two years. Arbitration also allowed consumers to pursue their claims in closer proximity to their homes (an average of 15 miles) and, in some cases, remotely by phone or by submitting documents without making an appearance. In addition to procedural convenience and effectiveness, the industry representatives also noted that the study concluded that the average consumer award was multiple times greater than that received by consumers in class actions. The arbitrations studied resulted in consumer awards averaging $5,400, as compared with an average of $32 for consumer class actions that settled. The panelists also pointed out that 60% of class actions produce no benefits at all for consumers and 96% of class members do not recover because they fail to file claim forms.
Additionally, the industry representatives noted that the study established that arbitration allowed consumers to bring disputes without an attorney and thus allowed consumers to avoid the costs and complexity of civil litigation. The study established that consumers were represented by counsel in “roughly 60% of the cases” and that unrepresented consumers achieved outcomes nearly as good as those represented by counsel. While issues were raised concerning the ability of the average consumer to fully understand the arbitration process, the panel was in general agreement that the CFPB had not dedicated a significant amount of resources to educating consumers on how to effectively pursue their rights in arbitration. The panel noted that the arbitration process is widely misunderstood, including that consumers do not know that firms “most often” front a significant portion of the cost. The study was also criticized for being limited to the quantitative aspects of arbitration and thus failing to achieve an informed view of consumers’ actual experiences.
Despite being the “most extensive” study to date, the CFPB’s study was criticized for its lack of detail and its small data set. The overwhelming theme of the hearing was that, even if the study data did not establish that arbitration was more protective of consumer interests than class actions, the only conclusion that the CFPB can draw is that more comprehensive study is needed. Professor Johnston, who has conducted an independent study of class actions and arbitrations, concluded that the CFPB was essentially using “one data point”—a credit reporting class action settlement—as the basis for its far-reaching proposed rule. He noted specifically that this settlement did not result in a monetary award to consumers. Instead, this “one data point” only secured the class six months of credit monitoring and free credit reports (the Fair Credit Reporting Act already provides that consumers may obtain a free credit report each year). Additionally, not one of the class actions identified in the study was litigated through to a jury trial. Professor Johnston concluded at the hearing that the “evidence [the CFPB] found does not justify what they did.” In making his report available to the public, Professor Johnston noted that “owing to flaws in the report’s design and a lack of information, the report should not be used as the basis for any legislative or regulatory proposal to limit the use of consumer arbitration.” Mr. Hong concurred, stating that the CFPB’s proposal was “aggressive,” “inconsistent with the study findings,” and that industry’s attempted dialogue with the CFPB about its flawed study “has not led to any results.”
The study was also criticized for only covering a small time frame—from 2008 to 2012. As Mr. Hong emphasized, the majority of the study covered a period before the CFPB became active in late July, 2011. As a result, the study failed to capture the effectiveness of CFPB enforcement actions to displace the need for the blunt vehicle of consumer class actions. Professor Johnston agreed, noting that the CFPB can make “calibrated” enforcement decisions that eliminate the need for its proposed rule. Mr. Pincus added that the CFPB study only represents the “tip of the iceberg” in demonstrating the effectiveness of arbitration because the data did not capture all privately resolved claims. In turn, the panel members criticized the study for wallpapering over this lack of data. In making crucial conclusions about the consumer costs of the proposed rule, the study self-servingly states, without citation and without underlying data, that “economic theory suggests” its rule would not adversely affect consumers through increased costs.
The panel expressed that rulemaking based upon unsupported and generalized claims about “economic theory” is especially risky because of potential unintended consequences. In particular, the industry representatives expressed that economic realities would not allow firms to maintain dual methods of complaint resolution. Effectively, the ability of consumers to bring class actions would cause firms to cease offering arbitration as a means to resolve claims and, therefore, close off a consumer’s most effective means of redress. This is especially harmful to low income consumers that have “individualized” claims that are not appropriate for resolution under the class action vehicle. Instead of arbitration providing a means of redress for small claims, in order to present their cases in court, consumers would be required to obtain representation and pay, out of pocket, legal fees that would eclipse the value of claims several times over. The industry representatives also noted that the firms subject to the rule were regulated by prudential regulators. Comprehensive “safety and soundness” review requires meaningful assessment of firms’ litigation exposure. A class action arbitration waiver ban may require firms to “lock-out” capital to cover the increased exposure. This capital “lock-out” would decrease the amount of capital available for consumer lending and therefore, create lending on less favorable terms than under a competing arbitration regime. The panel was in general agreement that the increased costs associated with class action litigation would be passed on to consumers in the form of increased costs of financial goods and services.
Several Congressional representatives and Mr. Bland praised the proposed rule, arguing that without the class action arbitration ban, consumers would be left with no remedy at all for small claims. Though disagreeing, industry representatives also responded by pointing out that in its zeal for instituting a class action arbitration ban, the CFPB had not researched or considered whether it could improve any identified inefficiencies of the current arbitration system without de facto banning its use. One panel member, Mr. Pincus, noted that the “flawed study” did not include any requests for public comment and that the effect of this insular process was to produce “preordained results.” He proffered that the CFPB had overlooked the elephant in the room: “Is there a way to make arbitration more useful than it is?” He noted that the CFPB could consider rules regarding incentives within the current arbitration system—a system that has been repeatedly upheld and strengthened by the Supreme Court within the past 15 years—by altering incentives. The CFPB could consider rules incentivizing attorneys to bring arbitration claims with fee awards or, as an alternative, consider rules that would penalize companies for not settling meritorious claims with consumers.