On December 12, 2013, the Consumer Financial Protection Bureau (the CFPB) published a preliminary version of its long-awaited research report on the use of pre-dispute arbitration clauses in contracts for consumer financial products and services.
Section 1028(a) of the Dodd-Frank Act requires the CFPB to study the use of arbitration clauses in contracts for consumer financial products and services and to provide a report of its research to Congress. Section 1028(b) of the Act also authorizes the CFPB to promulgate regulations that prohibit or impose conditions or limitations on the use of pre-dispute arbitration clauses in such contracts to the extent that doing so is consistent with the CFPB’s research findings, the public interest, and the interests of consumers.
The preliminary report does not make express prescriptive findings as to whether and how the use of arbitration clauses should be curtailed by regulation. Instead, it purports to make only factual observations about the prevalence of arbitration clauses in contracts for credit cards, prepaid cards, payday loans, and checking accounts. It also presents observations as to the particular characteristics and features of these clauses and the frequency and circumstances in which consumers actually avail themselves of the arbitration process to resolve disputes.
The nature of these observations, however, and the fact that the CFPB is now promoting them heavily, suggests strongly that the CFPB will indeed promulgate regulations restricting the use of arbitration clauses in consumer contracts and that these regulations will address several perceived problems with such clauses.
One such perceived problem, which Director Cordray highlighted in his remarks announcing the publication of the preliminary report, is the prevalence of provisions in such arbitration clauses which bar consumers from participating in arbitrations proceedings on a class basis. According to the preliminary report, more than ninety percent of contracts with arbitration clauses contain such “no class” provisions. “No-class” provisions of arbitration clauses have long been a source of concern among consumer advocates who argue that they effectively immunize companies from private civil liability. In the wake of the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which upheld the enforceability of “no class” provisions in arbitration clauses, consumer advocates have been pushing hard for the CFPB to use its authority under section 1028(b) of the Dodd-Frank Act to severely restrict or eliminate the use of these provisions. Given that the CFPB often describes its mission publicly as “leveling the playing field” between consumers and the industry, it seems likely that the CFPB will be sympathetic to these calls from advocates even as the CFPB represents that it will continue to study the issue.
A second perceived problem that the CFPB may address through regulations is that contracts tend to communicate arbitration clauses to consumers in a manner that consumers are unlikely to comprehend or read. Even though the preliminary report acknowledges that most arbitration clauses describe to consumers certain important differences between arbitration and litigation proceedings, the preliminary report observes that – at least in the credit card market – arbitration clauses account for more than 14 percent of contract language, on average, and that typically, these clauses are more complex and written at a higher grade level than surrounding contract language. In other contexts, the CFPB is prodding companies to simplify, shorten, and make more prominent and meaningful disclosures and other contract language, which describes the terms, conditions, and costs of consumer financial products and services. There is good reason to expect that the CFPB will take similar steps in drafting rules that govern arbitration clauses.
A third perceived problem that the CFPB is likely to address is consumers’ lack a choice in whether and on what terms to accept arbitration clauses when they purchase consumer financial products or services. The preliminary report finds that for certain categories of products, such as credit cards and prepaid cards, arbitration clauses are prevalent, if not ubiquitous. Those contracts that include arbitration clauses, moreover, typically are not negotiable. The CFPB has expressed often its distaste for unavoidable and non-negotiable features of consumer financial products and services to the extent that such features do not, in the CFPB’s view, serve the interests of consumers. Although the CFPB has said that it will continue to study the extent to which arbitration serves the interests of consumers relative to other forms of dispute resolution, it is noteworthy that the CFPB chose to highlight for the press data from the preliminary report, which shows that consumers rarely file arbitration proceedings to resolve their disputes with the industry – especially when they are able to choose to join class action litigation proceedings instead. The CFPB’s selection of such data arguably suggests that the CFPB has concluded already that consumers disfavor arbitration and should have opportunities to choose their preferred means of resolving disputes.
One potential route for the CFPB to address this issue is to require arbitration clauses to include opt-out provisions. The preliminary report notes that some contracts already allow consumers to opt-out of arbitration. However, Director Cordray’s public comments on the preliminary report suggest that he believes that procedures associated with existing opt-out clauses – including the submission of written requests to do so within short periods of time after signing contracts – are too onerous and require too much forethought on the part of consumers to be effective. Accordingly, the CFPB’s rules may seek to liberalize opt-out procedures so that consumers are better able to take advantage of them.
Although it is reasonable to expect the CFPB to issue rules that restrict the use of arbitration clauses in contracts for consumer financial products and services, it is yet unclear as to how far the CFPB can, and will go in doing so. Section 1028(b) requires the CFPB, in promulgating its arbitration rules, to act “in the public interest and for the protection of consumers.” As of yet, the preliminary report does not appear to provide the CFPB with any “slam dunk” evidence that banning or restricting severely the use of mandatory arbitration clauses would, as a practical matter, help consumers to resolve their disputes with the industry more efficiently or effectively or that doing so would otherwise serve the interests of justice. Similarly, the preliminary report presents no evidence that class actions are any better than arbitrations at protecting consumers’ interests.