The agency released a report yesterday that found arbitration clauses that lenders commonly put in contracts for credit cards and other products frequently disadvantage consumers.
Officially, the agency said only that the report indicated further study, but industry observers said the way the CFPB collected and presented the data—in addition to comments by CFPB Director Richard Cordray—signaled more definitive action is on the way.
"The CFPB seems to be setting the stage for a rulemaking which will likely not be favorable to the industry," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr. "While they claim not to be prejudging the ultimate outcome, their findings seem to be designed to support a conclusion that arbitration is inhibiting consumers from vindicating their rights and that class actions are necessary. That is certainly how the consumerists are viewing things at this point."
The U.S. Chamber of Commerce issued a statement echoing the point, saying the report and a field hearing conducted in Dallas "signal a conclusion before all the research has even been done."
"The bureau says its report is 'preliminary,' but the topics it chose to address seem gerrymandered to denigrate arbitration," wrote Lisa Rickard, president of the U.S. Chamber's Institute for Legal Reform; and David Hirschmann, president and chief executive of the Chamber's Center for Capital Markets Competitiveness. "The bureau has thus far ignored the most critical questions in the entire debate: For the kinds of injuries that most consumers will suffer, what is the real-world accessibility, cost, fairness, and efficiency of arbitration as compared to court?"
The industry argues that arbitration clauses are beneficial to customers because it forgoes the cost of a lengthy court battle, but consumer groups strongly disagree.
In the CFPB's highlighted findings of the study, it said that 62% of the 50 largest banks in the country have imbedded arbitration clauses in their checking account contracts and their use is even more widespread in prepaid contracts with nearly any size institution. It also found that arbitration clauses in credit card contracts were "almost always more complex" and harder to read than the rest of the contract.
During the CFPB's field hearing, consumer advocates on the panel praised the agency for its early perspective on the issue.
"Forced arbitration strips consumers of fundamental rights such as the right to a trial, the right to a jury and the right to join with other consumers to hold corporations accountable. Across the board, the CFPB study demonstrates arbitration clauses give businesses the license to steal," said Ellen Taverna, legislative director of the National Association of Consumer Advocates. "On behalf of all the consumers and servicemembers whose rights have been decimated by forced arbitration, I urge the bureau to complete the study as quickly as possible so that it can initiate rulemaking to eliminate forced arbitration clauses from consumer financial contracts."
During the hearing, CFPB Director Richard Cordray did not explicitly say the agency was pursuing a rulemaking to limit arbitration, but he noted that the Dodd-Frank Act gave the agency authority to "adopt regulations that 'prohibit or impose conditions or limitations' on the use of such agreements" if they found consumers were being harmed.
"Although we have more work ahead of us, we know this is an important topic in the realm of consumer finance," Cordray said. "So we wanted to share some of our initial research in order to facilitate a broader discussion about issues such as where these clauses are found, what they say, and what we have learned about arbitration filings by consumers."
The report stretched beyond the arbitration language lenders use in contracts to evaluate every legal avenue a consumer has for a dispute, particularly their ability to form a class action in court had they not been bound to arbitration.
The study said nine out of 10 arbitration clauses that it viewed prohibited consumers from filing class arbitrations, or a group lawsuit. However, the study also found few consumers are filing any arbitration dispute, particular on amounts less than $1,000, despite the fact that there were millions of consumers who filed claims in court or settled through class action.
"They haven't appeared to reach any conclusions one way or another but it strikes me the biggest issue is regarding class actions," said Tom Allen, a partner at Reed Smith in the financial industries group. "To some extent the biggest policy question is how desirable are class actions and that seems to be the question they're going to look at in next phase."
Cordray said that in the next phase of the study, "we will seek to obtain a better understanding of what explains the incidence and nature of arbitration claims, including small-dollar claims."
"We will look to see what happens to arbitration filings and endeavor to compare what we see happening in arbitration to what we see happening in litigation, including class litigation," he said.
Consumer advocates argued at the hearing that being able to file a class action is the best way for consumers to gain visibility on their claim since the arbitration route is argued in private. But industry supporters argue that most often, the individuals in the class suit end up with mere pennies from the case—if they win at all.
"On a personal note, I received check from a class action a few days ago" and "it was for 39 cents," said Shannon Phillips, deputy general counsel of the Independent Bankers Association of Texas, during the hearing. "I think everybody in this room knows who made the money off that. It certainly was not the consumer … the lawyers would know; they're the ones that made the money in this case."
Based on the most recent Supreme Court cases, the court has largely upheld the use of arbitration in contracts. Bankers also argue the CFPB has authority to take enforcement actions if it sees individual companies abusing arbitration clauses.
"This is about class actions. And in the past, the argument for a class action was to fill in a gap in compliance enforcement but the bureau fills in that gap now," said Nessa Feddis, the American Bankers Association's vice president and deputy chief counsel for consumer protection and payments. "The bureau has not been shy about bringing on enforcement actions."
Richard Hunt, chief executive of the Consumer Bankers Association, said in an emailed statement that he was "disappointed" in the "piecemeal release of data in connection with the arbitration study [that] does not show the whole picture."
"For nearly 90 years, arbitration has been an important right which allows consumers to quickly and easily resolve disputes in a manner that is affordable for the consumer. We all know the winners in lawsuits are usually the attorneys, not consumers," he said. "Moving forward, I hope the CFPB, who has the sole authority on this important issue, will focus on how consumers fare in arbitration versus a suit in court or as a party to a class action."
Cordray said during the hearing that the bureau would be surveying consumers on their understanding of arbitration specifically in the credit card marketplace, in addition to its overall study of class actions versus arbitration.
For their part, industry representatives said they hope the CFPB does study the issue further.
"We're recommending that the bureau staff compare the real consumer benefits and outcomes among the various legal options" before taking further action, Feddis said. "They said they were going to be data driven, so we take them at their word."