The Consumer Financial Protection Bureau released an “Arbitration Study” exceeding 700 pages to Congress this week. You have likely heard the headlines – most commentators assume that the CFPB will use the study to support an effort to restrict or regulate the use of “pre-dispute” arbitration in financial transactions. But, let’s not get ahead of ourselves. The study itself is worth digging into; the CFPB was able to access lots of information that us regular folks cannot. Indeed, one complaint about arbitration is that it happens inside a black box, out of reach of statistical analysis or scholarly study, and precluding development of legal precedent. Here’s part one of my peek inside that black box, courtesy of the CFPB.
What the Cool Kids Are Putting in Their Arbitration Clauses
About a year ago, CFPB published its findings on the frequency of arbitration agreements in financial agreements. This report does not add much in that area. But, it has new information on the features of arbitration clauses that are prevalent in contracts in the industries studied (credit cards, checking accounts, general purpose reloadable prepaid accounts, private student loans, payday loans, and mobile wireless third-party billing).
- Would you guess that 50% of payday loan agreements and 83% of private student loan agreements allowed their customers to opt out of arbitration? I was surprised. More than a quarter of credit cards and checking account agreements did also.
- A majority of all types of financial agreements carved out small claims from their arbitration agreements.
- The AAA is king. It is listed as either the sole provider or an arbitral option in about 9 out of 10 financial agreements (other than student loans). By comparison, JAMS is an option for about half of the agreements (but only 14% of mobile).
- Roughly 9 of 10 arbitration clauses in these industries preclude class actions in arbitration. Most also stated that if the class waiver is unenforceable, the entire arbitration clause is unenforceable as well. (CFPB calls it the “anti-severability provision.”)
- What are financial institutions not putting in the agreement? They are not shortening statutes of limitations often, they are not limiting damages very often, they are not authorizing the arbitrator to award attorneys’ fees to the prevailing party often, and they are generally not addressing confidentiality.
What the Public Understands About those Arbitration Clauses
The CFPB surveyed 1007 people about their dispute rights with respect to their credit cards, and found they know *nothing.* And this should surprise no one. (I am not pointing fingers. If you asked me whether I could sue one of my credit card issuers in court, I would not know either.) The study explains partly why that is: dispute resolution clauses do not factor into a consumer’s choice of credit card. When all 1007 people were asked what features they considered in acquiring their credit cards, literally no one mentioned the ADR clause.
The 1007 people were asked what credit cards they had, and whether they could sue the company if there was a dispute. The people who thought they could sue their credit card issuer in court were wrong 80% of the time.
The most surprising thing about the survey results to me were just how passive people are about disputes. When confronted with a hypothetical example of a credit card refusing to correct a billing mistake, most people would cancel their cards and take no further action. Only 2% of people would consider going to court or talking to an attorney.
In the next post (part two), I will highlight statistics and findings from the CFPB’s comparison of how consumer disputes are resolved in arbitration and how they are resolved in court.