March 11, 2015

CFPB Arbitration Study May Create Basis for Regulation

2 min

On March 11, 2015, the Consumer Financial Protection Bureau (CFPB) released its Arbitration Study and Report to Congress (Arbitration Study) based on a review of consumer finance agreements, arbitration disputes, class actions, and small claims filings, and a survey of credit card consumers regarding their knowledge and understanding of arbitration and other dispute resolution mechanisms.

The Arbitration Study found that consumers often do not understand, or are unaware of, the arbitration clauses in their finance agreements. At a field hearing, Director Cordray stated that arbitration clauses are often "take it, or leave it" and do not present consumers an opportunity to opt-out. He further noted that when consumers had opt-out options, they were often unaware of the option. The results of the study likely forecast the CFPB's future position on arbitration clauses in consumer finance agreements.

Arbitration Study Key Findings

  • Few consumers take individual complaints to court or arbitration.
  • The average amount of a consumer dispute is over $1,000. Consumers are unlikely to engage in any legal action (including arbitration) to settle disputes of amounts less than $1,000.
  • On average, 32 million consumers a year claimed refunds, debt relief, or other redress through class actions. However, over 90 percent of the arbitration agreements it studied expressly prohibited consumer class actions in arbitration.
  • In 1,060 cases filed between 2010 and 2012, arbitrators awarded a combined total of less than $400,000 to consumers. In the same period, arbitrators ordered consumers to pay $2.8 million, mostly in disputed debts.
  • Mandatory arbitration may not result in lower prices or expanded access to credit for consumers.
  • Consumers by and large do not understand the ramifications of an arbitration clause compared to class action litigation. Notably, the survey was limited to just over 1,000 credit card consumers.

With the release of the Arbitration Study, Section 1028(b) of the Dodd-Frank Act allows (but does not require) the CFPB to prohibit or condition arbitration clauses in consumer financial agreements, if such regulation is "in the public interest and for the protection of consumers."

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For more information, please contact Venable’s CFPB Task Force.