• CFPB Issues Preliminary Results of its Arbitration Study
  • December 19, 2013
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • In the wake of the Supreme Court’s historic arbitration decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Consumer Financial Protection Bureau (“CFPB”) took its first public action by issuing on December 12, 2013, its preliminary report setting forth the results of its comprehensive study of arbitration clauses. This is the first written report issued by the CFPB related to arbitration clauses and is part of what will likely be a lengthy review process, which may ultimately culminate in regulatory action. Concepcion legitimized broad class arbitration waivers in all types of consumer agreements, including consumer finance contracts. Approximately one year after Concepcion, the CFPB issued a Notice and Request for Information (the "Request") seeking public comment on mandatory arbitration clauses.

    The CFPB’s Preliminary Report on Arbitration

    Following its Request, and as the next step in its study and rulemaking process, the CFPB released preliminary research on the use of arbitration clauses in connection with consumer products and services. The CFPB’s preliminary research indicates that arbitration clauses are almost uniformly used by large banks in credit card and checking account agreements, and that almost 90% of arbitration clauses allow banks to prevent consumers from participating in class actions as a part of those arbitration clauses. Also noted in the report is the fact that, while many millions of consumers are subject to agreements containing arbitration clauses in the markets the CFPB studied, far less than 1% of all consumers (on average) filed disputes each year between 2010 and 2012 with the American Arbitration Association.

    Other preliminary results for the markets the CFPB has studied include:

    • In the credit card market, larger bank issuers are more likely to include arbitration clauses than smaller bank issuers and credit unions. As a result, while most issuers do not include such clauses in their consumer credit card contracts, just over 50% of credit card loans outstanding are subject to such clauses.
    • Nearly all the arbitration clauses studied include provisions stating that arbitration may not proceed on a class basis.
    • The AAA is the predominant administrator for consumer arbitration about credit cards, checking accounts, and prepaid cards.
    • Very few of the checking account and payday loan AAA arbitration filings from 2010 through 2012 were debt collection arbitrations.
    • Most arbitration clauses that the CFPB reviewed contained small claims court carve-outs.
    • Credit card issuers are significantly more likely to sue consumers in small claims court than the other way around.

    CFPB Director Richard Cordray explained that, “preliminary results help us better understand how these clauses are affecting consumers’ financial lives so that we can ultimately determine whether action should be taken for their greater protection.” The CFPB announced that for the second phase of its arbitration study it intends to look at a number of additional areas of analysis, including whether consumers are generally aware of, or have read the terms of, arbitration clauses and whether arbitration clauses influence consumers’ decisions about which financial consumer products to purchase. Any company that routinely uses, or is considering use of, arbitration clauses in its consumer agreements is well-advised to monitor the CFPB’s future pronouncements in this area.

    The Implications of the Report

    As part of the Dodd-Frank Act, Congress assigned to the CFPB the task of analyzing the impact of mandatory arbitration clauses in consumer contracts for financial products and services, such as credit cards and checking accounts. The Act explicitly provides that the CFPB may adopt regulations that “prohibit or impose conditions or limitations” on the use of arbitration clauses if it finds such measures to be “in the public interest and for the protection of consumers.” Given the CFPB’s rhetoric and its findings of asymmetric bargaining power related to the use of such clauses, as identified above, the initiation of regulatory action by the CFPB regarding arbitration clauses and procedures is foreshadowed.

    During the hearing on the proposed report, Director Cordray did not specifically acknowledge that the CFPB would be pursuing rulemaking to limit the use of consumer arbitration. He did, however, reiterate the authority conferred to the CFPB by the Dodd-Frank Act to adopt rules that could limit or prohibit the use of arbitration clauses if the CFPB found that consumers were being harmed. Indeed, the Dodd-Frank Act’s authority on this point has been previously utilized earlier in 2013 when the regulations issued under TILA (Regulation Z) were amended to ban arbitration provisions in the context of mortgage loans. For these reasons, upcoming regulatory limitations on arbitration appear to be likely.