You might have seen it this March in the New York Times: an article about American troops having their vehicles repossessed by auto lenders while on active duty, and the troops being unable to fight repossession in court because of mandatory arbitration clauses in their lending contracts.
The poignant story on vets and car repossession is just one piece in the ongoing discussion about what actions the CFPB will take regarding provisions in consumer contracts limiting the consumer to arbitration in the event of a future dispute, referred to as “pre-dispute arbitration clauses.” Under Section 1028 of Dodd-Frank, the CFPB was required to conduct a study on use of arbitration clauses in connection with offering consumer financial products and services. If, through study, the CFPB finds that prohibiting or limiting the clauses in agreements between market participants it regulates and consumers “is in the public interest and for the protection of consumers,” it can impose regulations to that effect. Further, Section 1414 of Dodd-Frank already prohibits pre-dispute arbitration clauses in mortgage contracts.
With the CFPB recently releasing its final, 728-page arbitration study finding that arbitration agreements “limit relief for consumers,” indications are that the CFPB will conduct some rulemaking to curtail, or at least significantly limit, them in the consumer financial product market, and likely over industry objections. The study, which began in April 2012 and was followed by a preliminary report released in December 2013 before the final report was published, involved analysis of data from consumer contracts and the courts regarding the resolution of consumer disputes.
For the final report, the CFPB studied arbitration clauses in six different consumer finance markets it deemed the largest: credit cards, checking accounts, prepaid cards, payday loans, private student loans and mobile wireless contracts. The CFPB concluded that the number of consumers covered by arbitration clauses in these markets was in the “tens of millions.” Notably, it found that the market share of credit card issuers including arbitration clauses was 53 percent, impacting as many as 80 million consumers. It also determined that, while fewer than 8 percent of banks and credit unions include arbitration clauses in their checking account agreements, those that do represent 44 percent of insured deposits. The report also notes several statistics contrasting the awards consumers received in arbitration cases against those obtained in class action settlements that essentially showed relief to consumers in class-action settlements is notably greater than in arbitrations.
Further, the CFPB concluded that:
- Arbitration clauses can act as a barrier to class actions, as it saw that they were often used by companies to block class actions in courts, and most arbitration agreements studied prohibited class arbitrations.
- There was “no evidence” of arbitration clauses leading to lower prices for consumers.
- 75% of consumers surveyed nationally did not know if their credit-card agreements included an arbitration clause and, specifically, had not considered arbitration clauses in choosing a credit card.
A full summary of the study is available here.
Although the scope of a potential rulemaking is still ripe for speculation, cases involving veterans augment the narrative supporting increased limits on mandatory arbitration clauses. In his prepared remarks for the March 10 Arbitration Field Hearing coinciding with the release of the final arbitration study, CFPB Director Cordray noted the history of congressional and court action that provided a framework for arbitration clause regulation. Specifically, he addressed the Military Lending Act, passed in 2007, which already prohibits mandatory arbitration clauses in connection with some loans made to servicemembers, including certain payday, vehicle title, and tax refund anticipation loans.
In this climate of increased regulation following the financial crisis and the resulting passage of Dodd-Frank, it is not a stretch to conclude that the CFPB will limit the use of arbitration clauses. The open question – fodder for thought – is how far the CFPB regulation will go.