In a press release issued earlier this week, Senator Elizabeth Warren argued that the CFPB’s arbitration rule should not be repealed under the Congressional Review Act because consumers recovered “in only 9 percent of the disputes that arbitrators resolved” and the average award “is only 12 cents for every dollar they claimed.” Senator Warren attributed those statistics to a “fact sheet” published on August 1, 2017 by the Economic Policy Institute (“EPI”) titled “Correcting the Record — Consumers fare better under class actions than arbitration.” Unfortunately, these statistics obfuscate the record, rather than correcting it, and create the misimpression that consumers fare very poorly in arbitration compared to class action litigation. That is not the case. Let’s look at the math:
- In its 2015 study of consumer arbitration, the CFPB examined a total of 1847 consumer financial services arbitrations administered by the American Arbitration Association filed between 2010 and 2012.
- For purposes of analyzing substantive arbitration outcomes, the CFPB eliminated cases filed in 2012, leaving a total of 1060 arbitrations filed in 2010-2011.
- Of these 1060 arbitrations, 246 arbitrations (23.2%) settled, 362 arbitrations (34.2%) ended in a manner consistent with settlement and 111 arbitrations (10.5%) ended in a manner inconsistent with settlement although it is possible that settlements occurred. The CFPB did not include these “settlement” arbitrations in its analysis of substantive arbitration outcomes because “[t]here are almost no consumer financial arbitrations for which we know the terms of settlement.” However, there were six credit card arbitrations where the CFPB did know the settlement terms. One settlement provided for a monetary payment to the consumer, and three settlements provided for an amount of debt forbearance.
- In the remaining 341arbitrations, arbitrators made a determination regarding the merits of the parties’ disputes. Of those 341 arbitrations, there were 161 arbitrations in which an arbitrator rendered a decision with respect to a consumer’s affirmative claim against a company. This means that 180 of the 341 arbitrations involved disputes in which consumers did not assert affirmative claims — i.e., debt collection claims by a company against a consumer.
- In three of the 161 arbitrations, CFPB could not determine the results. Of the remaining 158 arbitrations, arbitrators provided some kind of relief in favor of consumers’ affirmative claims in 32 cases (20.3%). In these 32 cases, the average award to the consumer was about $5,400.
- Let’s turn now to the assertion by Senator Warren and EPI that consumers recovered in only “9 percent” of the disputes. No explanation was given for that number, but it apparently was derived by dividing the number of cases in which consumers obtained relief on their affirmative claims (32) by the 341 cases in which the arbitrator made a determination regarding the parties’ disputes. That was Mistake # 1. 180 of the 341 arbitrations were debt collection arbitrations by companies against consumers, so they were not arbitrations in which consumers were even seeking affirmative relief from the company. Leaving those 180 cases in the equation is mixing apples and oranges. To compare apples to apples, the 32 cases in which the arbitrator actually provided affirmative relief to consumers should have been divided by the 158 cases in which the consumer was actually seeking affirmative relief. That percentage is 20.3%, as the CFPB indicated in its study. So the statement that consumers recovered in only “9 percent” of the disputes is incorrect.
- Mistake # 2 was omitting any consideration of the 719 consumer arbitrations that settled or may have settled, according to the CFPB. Just because a case settles does not mean that the consumer did not come away with a monetary payment or some amount of debt forbearance. In fact, the opposite is likely true — a case settles because the parties found a way to compromise their positions and resolve their dispute. In fact, as noted above, the CFPB was able to identify six credit card arbitration settlements, and in four of them consumers did receive either a monetary payment or an amount of debt forbearance. Indeed, all of the CFPB’s statistics on class actions in its arbitration study were derived from class action settlements, since none of the class actions studied by the CFPB actually went to trial.
- This means that the data field for measuring consumer success in arbitrations was actually 749 arbitrations — 32 arbitrations in which consumers actually obtained relief on affirmative claims, plus 717 arbitrations that settled (719 minus the two credit card settlements in which consumers did not obtain relief). Therefore, of the 1060 arbitrations filed in 2010-2011, consumers either did or may have come away with a monetary payment or some amount of debt forbearance in as many as 71% of the arbitrations.
- Notably, Professor Christopher Drahozal, who served as a Special Advisor to the CFPB in connection with its arbitration study, also conducted a study of more than 300 American Arbitration Association arbitrations in 2009 for the Northwestern University Searle School of Law. He concluded that consumers won relief in 53.3% of the arbitrations.
With respect to the statement in the press release that the average consumer award “is only 12 cents for every dollar they claimed,” once again no consideration was given to amounts received by consumers in settlement, which certainly would have increased this calculation. Notably, the CFPB did conclude that in arbitrations in which the consumer asserted an affirmative claim against the company and the arbitrator reached a decision on the merits, consumers recovered 57 cents for every dollar claimed. The CFPB also concluded that consumers obtained debt forbearance in 19.2% of disputes in which debt forbearance was sought and the arbitrator made a decision. The average debt forbearance was $4,100, which was 51 cents of each dollar of debt forbearance claimed. None of these statistics was mentioned in Senator Warren’s press release or the EPI fact sheet.
Another statistic in the press release and fact sheet that bears scrutiny is that when companies bring arbitration claims against consumers, “they win 93 percent of the time.” While that number is consistent with the CFPB’s findings, it is taken completely out of context. These claims were debt collection claims by companies in which the consumer either defaulted or had no defenses or very weak ones. What the press release and fact sheet fail to state is that the result would not have been any different in court. This precise point was made by the Maine Bureau of Consumer Protection in a 2009 report to the Maine Legislature on consumer arbitrations:
[I]t is important to keep in mind that although credit card banks and assignees prevail in most arbitrations, this fact alone does not necessarily indicate unfairness to consumers. The fact is that the primary alternative to arbitration (a civil action in court) also most commonly results in judgment for the plaintiff. Although certainly there are cases in which a consumer has a valid defense to the action, it is also correct to say that most credit card cases result from a valid debt and a subsequent inability of the consumer to pay that debt.
(Emphasis added). Also, the success rate in debt collections claims by companies is irrelevant to the question of whether class actions are better for consumers than arbitration because such debt claims are completely individualized and not susceptible to class action treatment. The fact that companies “win 93% of the time” does not support the conclusion that class actions should replace arbitration as the forum for resolving consumer disputes.
By the CFPB’s own calculations, 87% of the class actions studied provided no relief at all to the putative class members, while in the 13% of class actions that settled, the average payment to putative class members was a paltry $32. The lawyers for the class, by contrast, made a whopping $424,495,451 in attorneys’ fees. These are not numbers that support the additional 6,042 class actions that the CFPB estimates will be filed over the next five years if the arbitration rule is not repealed. Nor are they numbers that justify the $2.6 billion to $5.2 billion that companies will have to spend defending them.
Even the CFPB did not find arbitration to be a system rigged against consumers. If it had found arbitration to be unfair, it would not have allowed companies to continue to engage in individual arbitrations with consumers. However, very few companies are expected to retain individual arbitration programs if the CFPB rule takes effect. That is because companies subsidize almost all of the costs of individual arbitrations, and few of them will continue to pay those costs while also spending many billions of dollars defending against the 6,042 new class actions that will be filed against them as a result of the rule.
Senator Warren’s press release states that “consumers rarely pursue individual arbitration.” But that is because most consumers resolve disputes through the use of companies’ informal dispute resolution procedures and also through on-line complaint portals provided by federal and state agencies including the CFPB itself. Moreover, although the CFPB has a Consumer Education and Engagement division and virtually unlimited resources, it did not spend a single dollar trying to educate consumers about arbitration.
When all of the relevant numbers and facts are considered, there is only one conclusion — the CFPB arbitration rule must be repealed so that consumers can continue to enjoy the many benefits that arbitration affords them in resolving disputes with companies. If the rule is repealed, Congress would still be able to issue a regulation supporting the use of arbitration as a vehicle for resolving consumer disputes, if it chose to do so. For example, such a regulation could require companies using arbitration to provide enhanced disclosures to consumers. It could also require the CFPB to devote some of its resources to educating consumers about arbitration so that they will be more knowledgeable and better equipped to use it.