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CFPB Study: Arbitration Agreements Limit Relief for Consumers
Wednesday, March 11, 2015 6:40 AM

The Consumer Financial Protection Bureau has released a study indicating that arbitration agreements restrict consumers' relief for disputes with financial service providers by limiting class actions.

The report found that, in the consumer finance markets studied, 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. The Bureau's report also found that 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.

"Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact," said CFPB Director Richard Cordray. "Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. Now that our study has been completed, we will consider what next steps are appropriate."

Arbitration is a way to resolve disputes outside the court system. In recent years, many contracts for consumer financial products and services have included a "pre-dispute arbitration clause" stating that either party can require that disputes that may arise about that product or service be resolved through arbitration instead of the court system. Where such a clause exists, either side can generally block lawsuits, including class actions, from proceeding in court.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandates that the CFPB conduct a study on the use of pre-dispute arbitration clauses in consumer financial markets. The Dodd-Frank Act specifically prohibits the use of arbitration clauses in mortgage contracts. And it gives the Bureau the power to issue regulations on the use of arbitration clauses in other consumer finance markets if the Bureau finds that doing so is in the public interest and for the protection of consumers, and if findings in such a rule are consistent with the results of the Bureau's study.

The Bureau first launched a public inquiry on arbitration clauses in April 2012 and released preliminary research in December 2013. Today's report uses an analysis of empirical evidence, including consumer contracts and court data, to understand the resolution of consumer finance disputes—both in arbitration and in the courts. The CFPB studied arbitration clauses in a number of different consumer finance markets including credit cards and checking accounts, which have the largest numbers of consumers. The report results indicate that:

  • Tens of millions of consumers are covered by arbitration clauses.
  • Consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits per year on average in the markets studied.
  • Roughly 32 million consumers on average are eligible for relief through consumer finance class action settlements each year.
  • Arbitration clauses can act as a barrier to class actions.
  • No evidence of arbitration clauses leading to lower prices for consumers.
  • Three out of four consumers surveyed did not know if they were subject to an arbitration clause.

The Bureau looked at nearly 850 consumer-finance agreements to examine the prevalence of arbitration clauses and their terms. The CFPB also reviewed more than 1,800 consumer finance arbitration disputes filed over a period of three years and more than 3,400 individual federal court lawsuits. The Bureau also looked at 42,000 credit card cases filed in selected small claims court in 2012.

The Bureau supplemented this research by assembling and analyzing a set of roughly 420 consumer financial class action settlements in federal courts over a period of five years and over 1,100 state and federal public enforcement actions in the consumer finance area. The CFPB also conducted a national survey of 1,000 consumers with credit cards concerning their knowledge and understanding of arbitration and other dispute resolution mechanisms.

A fact sheet on the report is available at: files.consumerfinance.gov/f/201503_cfpb_factsheet_arbitration-study.pdf

The complete report on arbitration is available now at: www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015