WASHINGTON, D.C. — In a report released Tuesday, the Consumer Financial Protection Bureau found that arbitration agreements ultimately restrict customers’ relief for disputes with financial service providers. This is because those agreements often limit class action lawsuits — and consumers are much less likely to seek relief on their own through arbitration or the federal courts.
The report also found that more than 75% of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers, and fewer than 7% of those covered by arbitration clauses realized that the clauses restricted their ability to sue in court.
“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” said CFPB Director Richard Cordray in a statement. “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. Now that our study has been completed, we will consider what next steps are appropriate.”
The CFPB’s study of pre-dispute arbitration clauses in consumer finance markets was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act specifically prohibits the use of arbitration clauses in mortgage contracts and gives the bureau the power to issue regulations on the use of arbitration clauses in other consumer finance markets if it finds that doing so is in the public interest and for the protection of consumers. The CFPB first launched a public inquiry on arbitration clauses in April 2012 and released preliminary research in December 2013.
According to the study released March 10, tens of millions of consumers are covered by arbitration clauses in the consumer finance markets studied. For example, in the credit card market, card issuers representing more than half of all credit card debt have arbitration clauses — impacting as many as 80 million consumers. In the checking account market, banks representing 44% of insured deposits have arbitration clauses.
The CFPB’s review of case data from the leading arbitration administrator indicates that between 2010 and 2012, across six different consumer finance markets — including auto loans — 1,847 arbitration disputes were filed. More than 20% of these cases may have been filed by companies, rather than consumers. In the 1,060 cases that were filed in 2010 and 2011, arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance. Arbitrators also ordered consumers to pay $2.8 million to companies, predominantly for debts that were disputed.
Between 2010 and 2012, consumers filed 3,462 individual lawsuits in federal court about consumer finance disputes in five of these markets. The bureau analyzed all individual cases filed in four of these markets and a random sample of the credit card cases and found that of the relatively few cases that were decided by a judge, consumers were awarded just under $1 million.
Also according to the report, millions of consumers are eligible for financial redress through class action settlements. Across substantially all consumer finance markets, at least 160 million class members were eligible for relief over the five-year period studied. The settlements totaled $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses — with roughly 18% of that going to expenses and attorneys’ fees. Further, these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior. Based on available data, the bureau estimates that the cash payments to class members alone were at least $1.1 billion and cover at least 34 million consumers.
By design, the CFPB noted, arbitration clauses can be used to block class actions in court. The CFPB found that it is rare for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to block class actions. For example, in cases where credit card issuers with an arbitration clause were sued in a class action, companies invoked the arbitration clause to block class actions 65% of the time.
There is no evidence that arbitration clauses lead to lower prices for consumers. In fact, when the CFPB analyzed changes in the total cost of credit paid by consumers of some credit card companies that eliminated their arbitration clauses and of other companies that made no change in their use of arbitration provisions, the regulator found no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses.
In total, the bureau looked at nearly 850 consumer finance agreements to examine the prevalence of arbitration clauses and their terms. The CFPB also reviewed more than 1,800 consumer finance arbitration disputes filed over a period of three years and more than 3,400 individual federal court lawsuits. The bureau also looked at 42,000 credit card cases filed in selected small claims court in 2012.
This research was supplemented by assembling and analyzing a set of roughly 420 consumer financial class action settlements in federal courts over a period of five years and over 1,100 state and federal public enforcement actions in the consumer finance area. The CFPB also conducted a national survey of 1,000 consumers with credit cards concerning their knowledge and understanding of arbitration and other dispute resolution mechanisms.
To read the full report, click here.