In March, the Consumer Financial Protection Bureau (the “CFPB”) released its 728-page Arbitration Study(the “Study”) regarding the use of arbitration agreements in consumer financial products and services. The Study, which concludes that arbitration agreements are detrimental to consumers, is expected to result in significant restrictions on the use of arbitration and class-action waivers in consumer contracts, especially for companies that operate retail-banking units.


Section 1028 of the Dodd-Frank Act (the “Act”) provided the mandate for the CFPB to conduct the Study, and empowers the CFPB to “prohibit or impose conditions or limitations” on the use of pre-dispute arbitration agreements for consumer financial products and services. The Act also prohibits arbitration clauses in most residential mortgage loan contracts and gives the Securities and Exchange Commission authority to prohibit or restrict the enforcement of arbitration clauses for certain disputes. 

This legislative push against arbitration was likely a reaction to the United States Supreme Court’s ruling inAT&T v. Concepcion, 131 S.Ct. 1740, 1747 (2011), which upheld class arbitration waivers in consumer agreements. Arbitration as an alternative dispute resolution option is intended to be an informal, efficient, streamlined proceeding that is tailored to the type of dispute and can provide faster and better dispute resolution than a lawsuit. “Judicial hostility towards arbitration prompted the creation of the [FAA]” which was “designed to promote arbitration and embodies national policy favoring arbitration.” Concepcion, 131 S.Ct. at 1747, 1749. Since the FAA was enacted in 1925, courts have recognized the value in arbitration.  Now the CFPB appears to be moving in the opposite direction.

The Study

The tone of the Study’s press release, as well as the Study itself, steer toward the conclusion that arbitration is, at best, disadvantageous to consumers and, overall, damaging to them. The CFPB asserts that 53 percent of credit card accounts, 44 percent of insured deposits, and 86 percent of private student loans are subject to arbitration clauses. With those expansive-sounding percentages, the CFPB claims that tens of millions of consumers are covered by arbitration clauses. The CFPB further asserts that 160 million consumers were eligible for relief through class action settlements during the time period covered by the study.

While the CFPB has focused on those vast numbers, other, smaller numbers in the Study demonstrate that the current conflict resolution system for consumer financial services complaints (including arbitration) operates effectively and fairly. The Study states that consumer complaints led to, on average, 600 arbitration cases and 1,200 individual lawsuits during each of the five years of the Study, and estimates that more than 25 percent of those were actually filed by the companies. So, of the tens of millions of consumers who use consumer financial products and services each year, only about 1,350 per year had an unresolved dispute that required third party resolution. This suggests that consumer financial services providers have done exceptionally well at resolving disputes with their customers and contradicts the notion that the industry requires sweeping change.

The Study also seems to ignore the benefits of arbitration to consumers. Arbitration is typically faster than litigation (two to seven months, vs. two or more years for lawsuits). Arbitration is generally more economical for consumers because the fees a consumer pays are capped or waived, and often the company pays the majority (and sometimes all) of the fees. Arbitrations are also less confrontational than lawsuits because they frequently are conducted in person and by arbitrators who are committed to shepherding the parties through a less combative resolution process. And according to the Study, arbitration provided awards that likely were just as high, if not higher, than what consumers get when they file individual lawsuits. For arbitrations with ascertainable outcomes in favor of the consumer, the Study shows that the consumer received on average over $5,000. Of the individual lawsuits filed, only two in the Study went to trial, one of which resulted in company liability, and nearly half resulted in settlement, presumably with a benefit to the consumers. The Study does not provide any information about those lawsuits (such as the statutes pursuant to which they were brought) so it’s difficult to determine what benefits those settlements provided to consumers.

Class Action Waivers

The CFPB’s press release about the Study claims that credit card companies invoked arbitration clauses to block class actions in approximately two-thirds of consumer class actions. But this statement fails to highlight the context for that statistic: in only 17 percent of all  putative class actions (not just credit card class actions) did a consumer financial services company move to compel arbitration, and less than half of those motions were granted. So roughly 8 percent of consumer class actions were forced into arbitration, a truly marginal portion. 

While the CFPB may choose to focus on credit card arbitration clauses in an attempt to justify its anticipated prohibition on class action waivers, it cannot ignore the minimal returns that class actions provide consumers. Of the class actions included in the Study, 25 percent were resolved through individual settlement and 35 percent were withdrawn or dismissed. Thus, 60 percent of the class actions filed provided nothing to the putative class members. Only 12 percent reached class settlement. None went to trial.

In class settlements, consumers typically obtain little benefit. The Study claims that 160 million class members were eligible for $2.7 billion in awards. While those numbers sound impressive, 18 percent of that went to the plaintiff’s attorneys, giving them hundreds of millions of dollars, and leaving an average of $13.83 in awards per consumer. It took on average about two years for settlements to be approved. 

Those numbers are further supported by another class action study, Mayer Brown LLP’s “Do Class Actions Benefit Class Members? An Empirical Analysis of Class Actions” (Dec. 11, 2013). In that study, of the 148 consumer and employee class actions included, none went to trial, two-thirds provided no class relief or award, and only 20 percent settled.

The real class action winners are clear from the Study: plaintiff-side attorneys received $424,495,451 in fees for class settlements. If the CFPB really wants to level the playing field, it should consider addressing the issue of out-sized plaintiff attorney’s fees claims and awards in consumer class actions, as the Seventh Circuit recently has in Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014), Redman v. RadioShack Corp., 768 F.3d 622 (7th Cir. 2014), and Pearson v. NBTY, Inc., No. 12-1245, 2014 WL 6466128 (7th Cir. Nov. 19, 2014).

Overall, the Study fails to provide information about actual experiences of consumers who have gone through arbitration, does not acknowledge that plaintiff attorneys reap disproportionately high fees in consumer class actions, fails to consider the risk of “in terrorem” settlements that class actions entail, and does not recognize that consumers need more financial education about the benefits of arbitration and how consumer financial services contracts work (such as opting out of arbitration clauses).

Given the likelihood that the CFPB will use its power to limit or even prohibit arbitration clauses and class action waivers in consumer financial contracts, a new wave of class action lawsuits may follow. Companies would be well-advised to maximize customer satisfaction, understand customers’ complaints and their financial impact, and resolve consumer grievances before they escalate to litigation.