The Consumer Financial Protection Bureau (CFPB) released the preliminary results of its arbitration study on December 12, 2013.  On the same day, CFPB Director Richard Cordray summarized some of the findings from the 168-page arbitration study at a field hearing on arbitration in Dallas, Texas. 

The CFPB conducted the arbitration study pursuant to Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

Congress instructed the CFPB to study pre-dispute arbitration provisions in connection with the offering or providing of consumer financial products or services and then report to Congress.  Section 1028 of Dodd-Frank gives the CFPB the power to issue regulations that prohibit or impose limitations on the use of pre-dispute arbitration agreements concerning consumer financial products or services if necessary for the protection of consumers.

According to Director Cordray, when Congress enacted Dodd-Frank it “diverged from the general policy of favoring arbitration as expressed in the Federal Arbitration Act.”  For example, Section 1414 of Dodd-Frank prohibits the inclusion of mandatory arbitration clauses in most residential mortgage loan contracts. 

At the Dallas hearing, Director Cordray highlighted some of the more significant findings of the CFPB’s preliminary study, including:

  • Overall, larger institutions are more likely to include an arbitration clause in consumer contracts than community banks or credit unions.
  • More than 90% of arbitration clauses studied by the CFPB bar consumers from participating in class arbitrations.
  • About 25% of the arbitration provisions in checking and credit card account contracts allow consumers to opt out of arbitration.
  • For the consumer products reviewed by the CFPB, the American Arbitration Association (AAA) is the preferred venue for resolving disputes.
  • More than half of the arbitration agreements reviewed by the CFPB contain a “carve-out” for disputes that could be brought in small claims court.
  • The CFPB obtained records on all consumer arbitration cases filed with the AAA from 2010 through 2012.  About 900 of those cases were filed by consumers.  In contrast, during that same two-year time period, 3,000 consumer cases were filed in federal court, including over 400 class actions.

According to Director Cordray, the study reveals that “few consumers use arbitration at all, at least when compared to the number of consumers involved in lawsuits and class actions.”

The vast majority of consumer contracts studied by the CFPB contained provisions that limit class proceedings. Panelists at the Dallas hearing, such as representatives from the National Association of Consumer Advocates and the U.S. Chamber Center for Capital Markets Competitiveness, provided various views on the subject.  Proponents of pre-dispute arbitration agreements argued that class actions deliver minimal benefits and little recovery to consumers.  Opponents argued that consumers need the ability “to band together” on certain small, complicated cases that would not otherwise be brought unless they could be brought as a class action.

The preliminary report states that the CFPB will “attempt to evaluate whether class actions exert improper pressure on defendants to settle meritless claims.” 

The CFPB will now enter the second phase of its arbitration study.  The CFPB’s final report to Congress will likely include additional analysis regarding the benefits and transaction costs of consumer class actions involving consumer financial services.