Editor: David Reiss
Brooklyn Law School

May 26, 2016

Unruly Arbitration

By David Reiss

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I had blogged earlier about the Consumer Financial Protection Bureau’s proposed rule regarding arbitration. Along with 209 other law professors, I submitted a comment letter regarding it. The letter opens,

We write to strongly support proposed regulation CFPB-2016-0020, RIN 3170-AA51. We are 210 law professors and scholars who teach and write in such disciplines as civil procedure, contracts, consumer law, financial services law, and dispute resolution. This regulation would accomplish two important goals. First, it would bar companies that provide consumer financial products and services from imposing pre-dispute arbitration clauses combined with class action waivers. Second, the proposed regulation would require regulated parties to collect and transmit to the Consumer Financial Protection Bureau (“CFPB”) information regarding use of arbitration in the consumer financial context.

As a group of experienced legal academics, we approach the issues of pre-dispute arbitration clauses and bans on class proceedings from a myriad of different perspectives and political sensibilities. Nonetheless, based on our varied scholarship and teaching backgrounds, we all agree (1) it is important to protect financial consumers’ opportunity to participate in class proceedings; and (2) it is desirable for the CFPB to collect additional information regarding financial consumer arbitration.

The benefits and detriments of both forced arbitration and class actions have been debated vigorously for over twenty years in academia, as well as in litigated cases, Congressional hearings and among the general public. Although some good empirical work has been done on these issues, scholars have consistently asserted the need for more and better data-driven studies. Too often, heated discussions have been based on speculation, rather than data; this is especially problematic given the largely private world of confidential arbitration. Accordingly, we were very pleased when Congress, in enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act, mandated in Section 1028(a) that the CFPB study “the use of agreements providing for arbitration of any future dispute . . . in connection with the offering or providing of consumer financial products or services. . . .” After soliciting suggestions on how to conduct such a study, receiving and incorporating ideas from many corners, and spending three years collecting and analyzing massive amounts of data, the CFPB produced a comprehensive and impressive report in March 2015.The results of this study support the proposed regulation, as discussed below.

CFPB’s study clearly shows that pre-dispute arbitration clauses are extremely common in the consumer financial context, and, indeed, are becoming standard practice across a number of different industries. While the incidence of pre-dispute arbitration clauses varies substantially depending on the consumer product or service, CFPB found that mobile wireless and payday loan contracts virtually always compelled consumers to resolve future disputes through arbitration, and that checking account and credit card contracts mandated arbitration roughly half of the time.2 The CFPB study also found that almost all of the studied arbitration clauses precluded affected consumers from participating in class actions. Yet, despite the prevalence of these clauses, the CFPB found that the majority of financial consumers are not entering into these arbitration clauses knowingly. Based on a national telephonic survey of credit card holders, the CFPB determined, unsurprisingly, that most consumers simply did not focus on dispute resolution clauses when deciding on a credit card, and the vast majority did not understand the implications of forced arbitration. Less than seven percent of consumers whose credit card agreements included arbitration provisions understood that they were precluded from suing the company in court should a dispute arise.

As a group, we have varying perspectives on whether the CFPB regulation goes far enough. Some among us believe the agency should issue a broader regulation banning forced arbitration clauses altogether in consumer financial contracts, whether or not these clauses contain class action waivers. Others among us believe that using pre-dispute arbitration agreements in the consumer context may not be harmful, or may even be beneficial, apart from the class action prohibition. And, still others among us are not sure where they stand on the desirability of banning forced arbitration in this context. Nonetheless, these differences in our perspectives do not undercut our strong agreement that the CFPB is right to both prevent companies from using arbitration to take away financial consumers’ opportunity to participate in class proceedings and require the submission of additional data and information that will allow the agency to further study this important area. We believe that the proposed regulations are critically important to protect consumers and serve the interests of the American public. (1-2, footnotes omitted)

Jean Sternlight at UNLV led the effort to get this letter to the CFPB.

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