In April 2012, the Consumer Financial Protection Bureau conducted a public inquiry on arbitration clauses. Since it released preliminary research in December 2013, the industry has been waiting for the other shoe to drop. Did you hear the big “kerplop”? If so, it was probably a copy of the CFPB’s mind-numbing, 728-page report hitting your doorstep.
The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the CFPB to study the use of pre-dispute arbitration clauses in consumer finance markets. The act does prohibit the use of such clauses in mortgage contracts, but it gave the bureau the power to issue regulations on their use in other consumer finance markets.
Released March 10, the report was accompanied by a press release trumpeting the bureau’s findings:
- Tens of millions of consumers are covered by arbitration clauses.
- Consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits per year, on average, in the markets studied.
- Roughly 32 million consumers are eligible for relief through consumer finance class action settlements each year. (I’m not sure how this relates to arbitration.)
- Arbitration clauses can act as a barrier to class actions. (The main reason creditors use arbitration clauses is the protection they provide against class action lawyers, so it’s nice of the CFPB to point out the obvious.)
- The CFPB found no evidence of arbitration clauses leading to lower prices for consumers.
- Three out of four consumers surveyed did not know if they were subject to an arbitration clause.
But the authors of the release seem to have overlooked these findings:
- In many class action cases where the principal purpose of seeking class relief is to pressure a settlement, members of the class action got nothing or next to nothing.
- Class action cases almost never make it to a trial, while a significant percentage of arbitration proceedings actually resolve the disputes.
- Arbitration is both faster and more economical than litigation.
The study had some gaping holes as well, including the fact that arbitration clauses used by creditors have grown more consumer-friendly. In fact, it isn’t unusual to see clauses that provide for the payment by the creditor of some or all of the costs of arbitration. Creditors also frequently call attention to the presence of an arbitration agreement by using large type, separately boxing the clause or having it separately signed or initialed. The study offers no insight on whether these best practices might change any of its conclusions.
And while there is very little in the report that specifically deals with auto credit, what’s there is close to useless because of the bureau’s continuing refusal to understand why auto credit is different from other consumer financial services. I think I put 200 pages behind me before I came upon anything dealing with auto financing. Sure enough, the CFPB predictably called the transactions “loans.”
Perhaps the transactions studied by the bureau were loans, but I strongly suspect they were retail installment sales contracts (RISC). If I’m right, then much of the study gets really murky in a hurry.
See, a RISC evidences the simultaneous sale of a vehicle and the financing of the vehicle. Disputes involving these transactions can be credit-related (perhaps the finance company incorrectly charged finance charges), but they can also be car-related (the transmission failed). The type of dispute will have a bearing on the amount of the claim, the likelihood a claim will be appropriate for class relief (a claim of fraud in the sales process is unlikely to get class treatment because of the individualized proof required), and the likelihood a claim will be brought by a consumer (larger claims, it seems, would be less likely to be dropped by the consumer). The study makes no attempt to tease out any of these distinctions.
There’s much to dislike about the CFPB’s work on arbitration. You’d think arbitration must have some things to recommend it, since Congress passed the Federal Arbitration Act and nearly all states have enacted laws permitting arbitration. But the bureau seems determined not to see any good in the process. That’s why I believe the bureau is also determined to prohibit its use in consumer financial transactions.
Tom Hudson is a partner in the law firm of Hudson Cook LLP and the author of several compliance manuals available at CounselorLibrary.com. ©Counselor Library.com 2014, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to Bobit Business Media. HC# 4847-6510-6978 (3/15).