We recently wrote about a Law 360 report indicating that the CFPB appears unlikely, at least in the near future, to undertake new rulemaking that would regulate the use of consumer arbitration agreements. The report was based on comments made by CFPB Director Rohit Chopra at a virtual meeting organized by Public Justice. However, another report about that meeting, published by BNA states that “[m]andatory arbitration clauses are likely to be a part” of the CFPB’s review of consumer contract clauses.
Are these reports inconsistent? Not really. Both reports acknowledge that the Congressional Review Act bars the agency from issuing a rule that is “substantially similar” to the CFPB’s arbitration rule that Congress overturned in 2017. Moreover, both reports reference comments by Director Chopra suggesting that the CFPB is examining the possibility of arbitration enforcement activity as part of a broader review of consumer contracts with businesses. So the reports are consistent in surmising both that a new arbitration rulemaking is unlikely to be undertaken in the near future, and that the CFPB is considering a review of consumer financial contracts that might include arbitration provisions.
Our earlier blog on the Law 360 report questioned the ability of the CFPB to regulate consumer arbitration agreements through enforcement since nothing in the Consumer Financial Protection Act authorizes the CFPB to restrict or prohibit the use of arbitration for alleged violations of law, and any such activity would be plainly inconsistent with the Federal Arbitration Act. We also noted that the arguments asserted by Public Justice and other consumer advocacy groups in their recent letter to Director Chopra urging the CFPB to limit the use of “forced” arbitration agreements with class action waivers by banks and financial institutions would not support enforcement activity, much less new rulemaking, because (a) consumer arbitration provisions are not “forced” since most of them allow the consumer to opt-out without affecting any other terms of the contract and also allow consumers to bring actions in small claims courts, and (b) the data contained in the CFPB’s own study of consumer arbitration show that individual arbitration is faster, less expensive and more beneficial financially than class action litigation.
There are numerous other significant flaws in the consumer advocates’ letter. For example, the letter contends that relatively few consumers actually pursue arbitration when a dispute arises. However, the reality is that most consumers end up resolving their disputes through companies’ informal dispute resolution procedures and also through on-line complaint portals provided by state and federal agencies (including the CFPB). Moreover, the CFPB has not spent any resources educating consumers about the benefits of arbitration, which is surprising since the CFPB’s earlier rule did not seek to prohibit individual arbitration agreements. Indeed, the CFPB has encouraged its own employees to use arbitration to resolve workplace disputes.
The consumer advocates’ letter also cites a 2017 Economic Policy Institute (EPI) article in arguing that “arbitrators are more likely to order consumers to pay corporations than the other way around.” That argument is unfounded. We analyzed the EPI article at great length back in 2017 and found it was riddled with material errors. In fact, when properly analyzed, the EPI data show that 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 studied. In other words, consumers, not corporations, are more likely to benefit from arbitration—a conclusion supported by numerous independent research studies, including one published by Professor Chris Drahozal, who has served as a Special Advisor to the CFPB. In sharp contrast, according to the CFPB’s arbitration study, in 87% of the 562 class actions that were studied, the putative class members received no benefits whatsoever.
Thus, it simply is not the case, as asserted in the consumer advocates’ letter, that arbitration produces “vastly more favorable results for corporations than consumers.” Further to this point, a November 2020 study by the U.S. Chamber Institute for Legal Reform of 101,244 consumer disputes that terminated between January 1, 2014 and June 30, 2020 concluded that:
- Consumers are more likely to win in arbitration than in court. Consumers initiated and prevailed in 44% of all consumer arbitrations that were terminated with awards during January 2014—June 2020. During the same period, consumers initiated and prevailed in 30% of all consumer litigation cases that were terminated with judgments.
- Consumers receive higher awards in arbitration than in litigation. The median award in arbitrations that consumers initiated and won was $20,019, compared to just $6,565 in litigation they initiated. The mean award to consumers was $68,198 in arbitration compared with $57,285 in litigation.
Nor is arbitration “unpopular … with the vast majority of the American public.” On the contrary, a 2005 Harris Interactive online poll of 609 individuals who had participated in an arbitration that reached a decision concluded that: (i) arbitration was widely seen as faster (74%), simpler (63%) and cheaper (51%) than going to court; (ii) two thirds (66%) of the participants said they would be likely to use arbitration again with nearly half (48%) saying they were extremely likely to do so. Even among those who lost, a third said they were at least somewhat likely to use arbitration again; (iii) most participants were very satisfied with the arbitrators’ performance, the confidentiality process and its length; and (iv) although winners found the process and outcome very fair and losers found the outcome much less fair, 40% of those who lost were moderately to highly satisfied with the fairness of the process and 21% were moderately to highly satisfied with the outcome.
Further contrary to the consumer advocates’ letter, arbitration provisions do not “block millions of consumers from seeking justice” or foster “systemic” wrongdoing by companies. A class action waiver in a consumer arbitration agreement does not immunize the company from alleged wrongful conduct because (a) arbitration agreements typically provide that a prevailing plaintiff shall recover attorneys’ fees and costs if applicable law permits (as virtually all federal and state consumer protection statutes do) and thus provide an incentive for plaintiffs’ attorneys to handle small dollar consumer claims against the company on an individual basis and (b) companies remain subject to sanctions issued by federal and state governmental authorities (such as the FTC, the FDIC, the CFPB itself, as well as state attorneys general and banking commissioners). Those authorities are potentially more draconian for companies than private class actions because they are not subject to the rigors of Rule 23 (which contains many criteria which must be satisfied before a class may be certified) and, in addition to obtaining restitution for aggrieved consumers, may cause a company to lose its charter or license.
In sum, even beyond the CFPB’s lack of authority to regulate consumer arbitration agreements through enforcement activities, the consumer advocates’ letter to Director Chopra provides no support for such enforcement and should not influence the CFPB in its deliberations.