“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” CFPB director Richard Cordray said in a statement released in advance of the report. “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year.”
The agency is holding a field hearing on the topic this morning in Newark, N.J., where consumers will get a chance to share their experiences with arbitration.
By restricting class actions and instead steering people into arbitration when they take issue with a company, the agreements often lead to poorer outcomes for consumers, the CFPB noted in the long-awaited report. When they are barred from class action status, few consumers end up taking action either by going through arbitration or by filing individual lawsuits, the report showed.
Between 2010 and 2012, an average of 600 arbitration disputes were filed each year with the American Arbitration Association, the largest administrator of arbitration disputes in the country. In contrast, 32 million consumers are eligible to receive relief through class action settlements.
The agreements are used regularly for credit cards, loans and other types of consumer products. More than half of all credit card debt is subject to arbitration clauses – affecting up to 80 million consumers. The clauses are used in enough checking accounts to make up roughly 44 percent of insured deposits, the agency found. They also show up in the majority of prepaid cards, private student loans and payday loans.
The findings shed light on what type of relief is offered to consumers who choose to go through arbitration, which is usually conducted in private. For the 1,060 cases filed in 2010 and 2011 with the American Arbitration Association, roughly two-thirds ended without a decision from an arbitrator, resulting in a settlement or another form of resolution. Of the cases that were decided, arbitrators awarded consumers a grand total of less than $175,000 in damages and less than $190,000 in debt forbearance. Consumers were also ordered to pay $2.8 million to companies, mostly for debts that were disputed.
While more than 90 percent of arbitration agreements ban class action lawsuits, the clauses are rarely invoked to block individual lawsuits, the agency found. Still, few consumers actually file lawsuits on their own, the report showed. Between 2010 and 2012, consumers filed an average of 1,200 individual lawsuits in federal court per year. The bureau analyzed most of the cases and a random sample of the credit card cases and found that in the few instances where the outcomes were decided by a judge, consumers were awarded just under $1 million total.
Some consumers fared better as parts of class action suits, according to the data released by the agency. Of the 251 settlements studied by the bureau that reported data on payments, consumers received an estimated $1.1 billion total in cash or “in-kind” payments. Still, the bureau said it was difficult to determine how many people received payments since those specifics aren’t always broken out in settlement information.
Many consumers may decline to sue on their own because they can’t afford the legal fees, consumer advocates and attorneys say. Through class action suits, consumers fighting for small amounts can split legal fees, as well as the costs for hiring experts and gathering evidence they may need to prove their case, says Michelle Schwartz, programs director for Alliance for Justice, a nonprofit that advocates for making the court system accessible. “A lot of times a company will harm hundreds, thousands — even millions — of people, but not for very much money,” she said.
Supporters of arbitration counter that the process can be a way to offer relief to the many consumers who aren’t eligible for class action status. If multiple customers are facing the same issue, they can work with a lawyer to file multiple arbitration claims, says Andy Pincus, a partner at Mayer Brown who represents the Chamber of Commerce on arbitration related issues. “Usually, if the claim is legitimate, the company will settle,” he said.
Financial firms say arbitration can be less intimidating than going to court. The process can also offer consumers more flexibility, since they can sometimes be handled on the phone, by mail or in person, said Dong Hong, vice president of regulatory counsel for the Consumer Bankers Association, a trade group representing the retail banking industry. Outcomes can also be more tailored than what a person might receive as part of a class action suit, Hong said.
The arbitration supporters say that in general, credit card companies and other companies have a good record of accommodating consumers’ concerns, reducing the need for arbitration. “A huge amount of consumers get what they want at that stage of the game before they even file an arbitration claim,” said Pincus.
However, the CFPB report challenges one of the most common arguments made in favor of arbitration clauses: that they lower costs for consumers by limiting litigation and reducing what companies have to pay in legal fees. The CFPB found “no statistically significant evidence” that credit card companies that had eliminated their arbitration clauses increased their prices or made it harder to access credit, compared with companies that made no change in their use of arbitration clauses.
Nessa Feddis, a senior vice president with the American Bankers Association, said arbitration still helps to keep costs down for consumers and the companies involved. When consumers do have to pay a fee for arbitration, it is still typically much lower than what they might have to pay an attorney, she says. “When needed, arbitration is an efficient, fair and low-cost method of resolving disputes in a fraction of the time – and at a fraction of the cost – of expensive litigation, which helps keep costs down for all consumers,” Feddis said in a statement.
The report was ordered under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which banned arbitration clauses from being added to most residential mortgages. Consumer advocates hope that the report, which was described by the agency as the most comprehensive look at mandatory arbitration clauses, will lead to rules restricting how companies can use arbitration clauses.
The bureau examined more than 850 consumer finance contracts and reviewed the various methods consumers have for resolving disputes with a company. That included looking at over 1,800 arbitration disputes filed over three years; a sample of about 3,500 individual consumer cases filed in federal court; and all of the 562 consumer finance class actions filed in federal court and in certain state courts. The agency also studied small claims filings and surveyed 1,000 credit card holders.
About 25 percent of the credit card contracts reviewed offered consumers a chance to opt out of the agreement and maintain the ability to sue the company in court, but the majority of consumers didn’t know they had that option. Most people don’t learn that these agreements exist until after they feel they’ve been wronged and attempt to sue a company, consumer advocates say.
The agency will consider the research, along with comments received from consumers and advocates, to decide if changes are needed. “Now that our study has been completed, we will consider what next steps are appropriate,” Cordray said in the statement.