by Jeff Sovern
Brian posted earlier that the CFPB has announced a field hearing on arbitration for March 10. Because the CFPB often schedules such hearings when it announces something, it is probably going to release the next installment in its arbitration report (maybe the final installment) in conjunction with the hearing. As Brian also noted, the Bureau can regulate or ban arbitration in consumer financial contracts after issuing the report, under the authority of 12 U.S.C. § 5518. But that is not the only provision in Dodd-Frank that would enable the Bureau to regulate arbitration. For example, 12 U.S.C. § 5532 provides (emphasis added):
(a) In general. The Bureau may prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.
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(c) Basis for rulemaking. In prescribing rules under this section, the Bureau shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.
The St. John's Arbitration Study raised serious questions about whether the arbitration feature in contracts is "fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances." Not only did the respondents not understand what agreeing to the arbitration clause in the contract we showed them meant, but many had agreed to arbitrate in other contracts without realizing it. We asked the respondents about three different types of contracts: cell phones (Verizon Wireless, AT&T Mobility, and Sprint), PayPal, and Skype. Not one of those contracts produced a greater level of consumer awareness of the arbitration clause than the others. Put another way, the differences in respondents' answers to the questions about whether they had agreed to an arbitration clause were not statistically significant regardless of which one of those contracts they had entered into (I should note that there was overlap among the respondents, meaning that some had entered into two such contracts, and some had entered into all three types). Adding in our credit card contract, we have reason to think that not one of the four contracts fully and effectively disclosed to consumers what they were agreeing to.
Perhaps the Bureau will use be § 5518 to determine that arbitration clauses should be banned or regulated. But another option would be for the Bureau to use § 5532 (or both sections) to prescribe a rule that the clauses cannot bind consumers unless companies can fully, accurately and effectively disclose to consumers the features of an arbitration clause in a way consumers can understand. Given the CFPB's findings that the average credit card contract arbitration clause requires two years of college to understand, I wonder if arbitration clauses can even be written in a way that meets the § 5532 standard.