In an op-ed published in today’s New York Times, CFPB Director Richard Cordray argues against congressional repeal of the agency’s final arbitration rule by “correcting the record.” He contends that the CFPB’s March 2015 study of consumer arbitration shows that consumers fare much better in class action litigation than in individual arbitration. We have read that study many times and have drawn the opposite conclusion.
For example, the CFPB’s study contains the following statistics regarding class actions:
- Only 12.3% of the 562 class actions studied produced any settlement benefits to the putative class members. Since none of those class actions went to trial, that means about 87% of the putative class members received no benefits at all.
- 60 % of the class actions either settled individually or were dropped by the named plaintiffs, leaving the putative class members to fend for themselves.
- The benefits received by putative class members in the 12.3% of the class actions that settled were minuscule — an average of $32 — and for that paltry sum the settlement class members had to wait for two or more years.
- In class settlements that required the putative class members to submit a claim form, the weighted average claims rate was only 4%, meaning that 96% of the potentially eligible putative class members failed to obtain any benefits because they did not submit claims.
- Director Cordray argues that the lawyers for the class “collect a small portion compared with consumers.” But the CFPB’s study determined that the plaintiffs’ lawyers received a staggering $424,495,451 in attorneys’ fees in the class actions studied. Hardly a “small portion.”
Now, compare those numbers with the CFPB’s data regarding individual arbitration:
- The average award to a prevailing consumer in arbitration was $5,389 —166 times what putative class members recover on average in class settlements. And, they received that award within five months, instead of two or more years. (Even Director Cordray acknowledged in his op-ed that “[i]t is true that the average payouts are higher in individual suits”). While, as Director Cordray notes, fewer people go through arbitration, that is attributable in large part to the fact that the CFPB refused to spend any of its virtually unlimited resources educating consumers on the many benefits that arbitration has to offer them.
- The consumer’s share of the arbitration costs were minimal, typically $200 at most compared to the $400 fee for filing a federal court complaint. The companies pay the remaining costs (typically $3,000 or more), and many companies have agreed in their arbitration clauses to pay or advance the consumer’s share.
- While none of the 562 class actions the CFPB studied went to trial, of 341 cases resolved by an arbitrator, in-person hearings were held in 34% of the cases, and an arbitrator issued an award on the merits in about one-third of the cases.
Director Cordray’s op-ed overstates the importance of class actions to consumers. In submitting comments on the CFPB’s May 2016 proposed arbitration rule, the U.S. Chamber of Commerce analyzed 10 days’ worth of consumer complaints submitted to the CFPB through its complaint portal in 2016 to determine whether the complaints revealed individualized disputes or disputes that would be amenable to class treatment. It concluded that “over 90 percent of the narratives that consumers submitted to the Database described disputes that were likely individualized.” The CFPB’s final arbitration rule imposes draconian measures on the financial services industry to benefit (supposedly) only a small percentage of the disputes that consumers have.
The op-ed attempts to minimize the financial harm the rule will inflict on affected companies. The CFPB estimates that the proposed rule will cause 53,000 providers who currently utilize arbitration agreements to incur between $2.62 billion and $5.23 billion over a five-year period to deal with 6,042 additional federal and state court class actions that will be filed due to the proposed rule’s elimination of class waivers. Those numbers presumably will be repeated every five years. He repeats his position that this will not pose a risk for the safety and soundness of banks because it is only about “$1 billion per year,” but we have shown in a previous blog that in fact there is a very real safety and soundness concern depending upon future circumstances. In any event, the op-ed neglects to mention that most if not all of these increased costs will be passed through to consumers, who as taxpayers will also bear the additional costs to the court systems of administering thousands of additional class actions.
Director Cordray’s op-ed argues that class actions benefit consumers “by halting and deterring harmful behavior.” It gives an example of a class action in which a class action recovered $1 billion. But the CFPB itself is far more effective and efficient than class action litigation in addressing alleged consumer harm. On the front page of its website, the CFPB announces that through July 20, 2017, it has ordered companies to pay more than $11.9 billion to more than 29 million consumers in enforcement actions. That is an average payment of $410 to each consumer, about 13 times the $32 cash payment received by the average putative class member. Moreover, none of that consumer relief went to pay private attorneys’ fees.
Finally, the op-ed accuses opponents of the rule as “falsely” claiming that the rule bans individual arbitration. We certainly have not made that assertion. But we have argued that many if not most companies, based on a cost-benefit analysis, will likely cease offering even individual arbitration programs if class-action waivers are prohibited. That is because a cost-benefit analysis may not support a company’s subsidizing of individual arbitrations without the corresponding benefit of reducing class action litigation costs incurred in defending mostly meritless class actions. If companies abandon arbitration altogether, that effectively will eliminate even individual arbitration.
Section 1028 of the Dodd-Frank Act imposed three express limits on the CFPB’s rule-making authority. Any arbitration rule must be (1) “in the public interest,” (2) “for the protection of consumers” and (3) “consistent” with the study. The failure of the final arbitration rule to satisfy these statutory mandates, as shown by the CFPB’s own study, should compel the Senate to join the House in overturning the rule.