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What’s The Big Deal About The CFPB Arbitration Study?

May 24, 2015 - The CFPB recently issued an “Arbitration Study” laying the groundwork for a potential ban or limitation of predispute arbitration agreements in transactions involving consumer financial products or services. The Study suggests class action lawsuits, which are waived in most arbitration clauses, might provide greater benefits to consumers in resolving disputes than arbitration hearings. The implication of the Study is class action lawsuits should be allowed for all disputes between consumers and providers of financial services, including credit cards and credit card processing services, payday loans, debt settlement, debt collection and a wide variety of other consumer financial businesses. However, that conclusion is unwarranted based on the data presented in the Study, which demonstrates class action attorneys, not consumers, are the ones who would benefit from the elimination of arbitration clauses.


Most agreements in consumer financial transactions currently include arbitration clauses requiring disputes to be resolved in private arbitration. The Study acknowledges these clauses usually limit upfront filing costs to the consumers, require hearings be held reasonably close to the consumer’s residence and “carve-out” small claims actions if either the consumer or the company prefers to resolve the dispute in small claims court.


These arbitration clauses typically include a waiver of the consumer’s right to bring a class action lawsuit since such cases are notoriously expensive to defend and generally provide minimal benefits to consumers. (If you have ever filled out a class action claim form only to receive a check in the mail fourteen months later for 43 cents, you know what I mean). Consumer arbitration clauses, including those prohibiting class actions, have been upheld by the U.S. Supreme Court on numerous occasions based on the Federal Arbitration Act, enacted by Congress to protect the viability of arbitration as an alternative to court actions.


However, language from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) authorizes the CFPB, after it completes the Study, to enact regulations that ban or limit the use of arbitration agreements, including class action waivers, from transactions involving consumer financial products and services.  This means the CFPB is now poised to begin rulemaking procedures that could ban or limit the use of arbitration clauses and accompanying class action waivers.


Opening the floodgates of class action litigation to all consumer financial transactions will expose businesses, and ultimately consumers, to millions of dollars of additional costs in defending and resolving such claims, even in cases where there is no demonstrable liability. Studies of securities class action litigation from 1996 through 2013 reveal that Plaintiffs’ lawyers’ contingency fees totaled $19 billion in those actions and defense costs ranged between $22 billion and $30 billion.


More importantly, both the CFPB’s data and the securities class action analyses demonstrate consumers receive little or no benefit from class actions and, not surprisingly, the real winners are the attorneys. The CFPB’s data reflects that class members received an average of $6.29 each while the plaintiffs’ law firms received more than $1.1 million on average.


And perhaps that’s where the heart of this issue really lies: fifty-seven Members of Congress recently signed a letter to CFPB Director Richard Cordray calling for the CFPB to begin rulemaking to ban “forced arbitration clauses” in consumer financial agreements. Not surprisingly, if you review the lists of donors who support many of the MOCs who signed the letter, you will see the names of major plaintiffs’ class action law firms. For example, the top two donors in 2014 for Sen. Al Franken (fka Stuart Smiley and the letter’s first signatory) are class action law firms. Where attorneys, both plaintiffs’ and defense, would be the primary beneficiaries of a ban on arbitration provisions, it makes sense law firm lobbyists would be leading the charge on this issue.


There are many good reasons to step up and fight against this potential elimination of arbitration. Mobilize peers and constituents to reach out to legislators and the CFPB to challenge the Study’s flaws and bring forward evidence of the costs that will be imposed on your business and customers if arbitration is eliminated. Industry associations must become fluent in these issues as quickly as possible and work together to advocate against further CFPB action. This battle has already begun; the short time available to prepare for and wage this fight will fly by.

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