Fight over Arbitration in Consumer Financial Contracts

Dodd-Frank required the CFPB to conduct a study on the use of pre-dispute arbitration clauses (PDAA's) in consumer financial markets.  Sec. 1028(a).  It also gave the CFPB authority to issue regulations on the use of arbitration clauses in other consumer finance markets "if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers."  Sec. 1028.

The CFPB posted a public inquiry on arbitration terms in Aprils 2012 and released preliminary research results in December 2013.   It issued its final report in March 2015.  In a press release accompanying the report, the CFPB noted that "very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements."  Also, "more than 75 percent of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers, and fewer than 7 percent of those covered by arbitration clauses realized that the clauses restricted their ability to sue in court." 

In May 2015, 58 Democratic Congressmen signed a letter to CFPB Director Richard Cordray urging the CFPB to promulgate rules prohibiting PDAA's.  Last week, the House Appropriations Committee adopted an amendment offered by Reps. Steven Womak (R-Ark,) and Tom Graves (R-Ga.) to a 2016 appropriations bill for funding for agencies that regulate financial services.  The amendment conditions CFPB appropriations on completion of a new study on PDAA's.  The American Banker's Association wrote to support the amendment, calling the CFPB's study "a deeply flawed piece of research that excludes critical information, misinterprets key data...."

The fight over PDAA's is hot, but based on the data, it's not clear what stake consumers have in the outcome.  The CFPB"s study concluded that arbitration was important in only 8% of the 562 class action cases it studied.  The defendants moved to compel arbitration in 94 of the 562 class actions.  The CFPB study does not support the conclusion that PDAA's are a tool to crush consumer redress, or have been particularly effective in eliminating consumer class action litigation.