Consumer Law & Policy Blog

CFPB field hearing on consumer arbitration, live-tweeted and livestreamed

The following consumer advocates will be live-tweeting today's CFPB field hearing on arbitration, which gets underway at 11am.

• Ellen Taverna, NACA – @NACAdvocate
• Christine Hines, Public Citizen – @chrhines
• Michelle Schwartz, Alliance for Justice – @SchwartzAFJ
• NCLC – @NCLC4consumers
• AFR – @realbankreform

You should also be able to watch a web livestream of the hearing here.

Richard Cordray's remarks on the CFPB arbitration report

Here's the text of CFPB Director Richard Cordray's remarks on the arbitration report, to be delivered at today's field hearing in Newark.  He summarizes the legal backdrop to the Bureau's report, its empirical approach, and its key findings (which I've highlighted in bold). Well worth reading in full.                                                                           

Prepared Remarks of Richard Cordray

Director of the Consumer Financial Protection Bureau

Field Hearing on Arbitration, Newark, New Jersey, March 10, 2015

Thank you for joining us for this field hearing of the Consumer Financial Protection Bureau.  We are here in Newark today to discuss the subject of arbitration.  At its most basic level, arbitration is a way to resolve disputes outside of the court system.  Parties can agree in their contract that if a dispute arises between them at a later time, rather than take it before a judge and perhaps a jury as part of a public judicial process, they will be required to turn instead to a non-governmental third party, known as an arbitrator, to resolve the dispute in private.  These contractual provisions are referred to as “pre-dispute arbitration clauses.”

Arbitration clauses were rarely seen in consumer financial contracts until the last twenty years or so.  Arbitration is often described by its supporters as a “better alternative” to the court system – more convenient, more efficient, and a faster, lower-cost way of resolving disputes. Opponents argue that arbitration clauses deprive consumers of certain legal protections available in court, may not provide a neutral or fair process, and may in fact serve to quash disputes rather than provide an alternative way to resolve them.

Long ago, prior to the Great Depression, Congress provided a general framework that located the role of arbitration in federal law.  Court decisions over the years refined the relationship between private arbitration and formal judicial proceedings under a number of federal business statutes, including the antitrust laws and the securities laws as well as under the labor laws.  More recently, however, Congress has taken an increased interest in arbitration clauses in consumer financial contracts.  In 2007, Congress passed the Military Lending Act, which prohibited such clauses in connection with certain loans made to servicemembers.  That was the first occasion on which Congress expressed explicit concern about the effect such clauses may have on the welfare of individual consumers in the financial marketplace.

In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress went further and prohibited the inclusion of arbitration clauses in most residential mortgage contracts.  Another measure in that same law is of special interest because it leads directly to our discussion today.  In section 1028 of the Dodd-Frank Act, Congress directed the Consumer Bureau to conduct a study and provide a report to Congress on the use of pre-dispute arbitration clauses in consumer financial contracts.  Further, Congress provided that “[t]he Bureau, by regulation, may prohibit or impose conditions or limitations on the use of” such arbitration clauses in consumer financial contracts if the Bureau finds that such measure “is in the public interest and for the protection of consumers,” and findings in such a rule are “consistent with the study” performed by the Bureau.

We have set about this mandatory task to study the use of arbitration clauses with conscious care.  We began our study almost three years ago, when we issued a Request for Information seeking public input on the appropriate scope, methods, and data sources for this work.  We received dozens of written comments in response and held a series of stakeholder meetings to gather more informal input.  In December 2013, we released preliminary results from our study.  We wanted to provide a progress report to the public on our work, while also eliciting further comments on the work plan that we had developed.  In those results, we found that arbitration clauses are commonly used by large banks in credit card and checking account agreements.  We also found that these clauses can be used to prevent any litigation, including class litigation, from moving forward.  In addition, we observed that roughly nine out of ten such clauses barred arbitrations on behalf of a class of consumers.

Breaking news: CFPB study finds that mandatory pre-dispute arbitration clauses undermine consumers' rights by limiting class actions

Read the agency's fact sheet and the full report.

Here's what the CFPB had to say about its study:

Today, the Consumer Financial Protection Bureau 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 a careful 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: The CFPB’s research indicates that tens of millions of consumers are covered by arbitration clauses in the consumer finance markets studied. For example, in the credit card market, card issuers representing more than half of all credit card debt have arbitration clauses – impacting as many as 80 million consumers. In the checking account market, banks representing 44 percent of insured deposits have arbitration clauses.

 ·         Consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits per year on average in the markets studied: The CFPB’s review of case data from the leading arbitration administrator indicates that between 2010 and 2012, across six different consumer finance markets, 1,847 arbitration disputes were filed. More than 20 percent of these cases may have been filed by companies, rather than consumers. In the 1,060 cases that were filed in 2010 and 2011, arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance. Arbitrators also ordered consumers to pay $2.8 million to companies, predominantly for debts that were disputed. Between 2010 and 2012, consumers filed 3,462 individual lawsuits in federal court about consumer finance disputes in five of these markets. The Bureau analyzed all individual cases filed in four of these markets and a random sample of the credit card cases and found that of the relatively few cases that were decided by a judge, consumers were awarded just under $1 million.

 ·         Roughly 32 million consumers on average are eligible for relief through consumer finance class action settlements each year: Bureau research found that millions of consumers are eligible for financial redress through class action settlements. Across substantially all consumer finance markets, at least 160 million class members were eligible for relief over the five-year period studied. The settlements totaled $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses – with roughly 18 percent of that going to expenses and attorneys’ fees. Further, these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior. Based on available data, the Bureau estimates that the cash payments to class members alone were at least $1.1 billion and cover at least 34 million consumers.

 ·         Arbitration clauses can act as a barrier to class actions: By design, arbitration clauses can be used to block class actions in court. The CFPB found that it is rare for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to block class actions. For example, in cases where credit card issuers with an arbitration clause were sued in a class action, companies invoked the arbitration clause to block class actions 65 percent of the time.

·         No evidence of arbitration clauses leading to lower prices for consumers: The CFPB looked at whether companies that include arbitration clauses in their contracts offer lower prices because they are not subject to class action lawsuits. The CFPB analyzed changes in the total cost of credit paid by consumers of some credit card companies that eliminated their arbitration clauses and of other companies that made no change in their use of arbitration provisions. The CFPB found no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses.

 ·         Three out of four consumers surveyed did not know if they were subject to an arbitration clause: The CFPB surveyed credit card consumers to analyze the extent to which they were aware of, and understood the implications of, arbitration agreements. Among those who said they understood what arbitration is, over three quarters acknowledged they did not know whether their credit card agreement contained an arbitration clause. Of those who thought they did know, more than half were incorrect about whether their agreement actually contained an arbitration clause. Among consumers whose contract included an arbitration clause, fewer than 7 percent recognized that they could not sue their credit card issuer in court.

 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: http://files.consumerfinance.gov/f/201503_cfpb_factsheet_arbitration-study.pdf

 The complete report on arbitration will be available on March 10, 2015 at 8 a.m. at: http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/

NY AG Reaches Agreement with Credit Bureaus

by Jeff Sovern

New York's Attorney General, Eric Schneiderman, announced a settlement with the big three credit bureaus, Experian, Equifax, and Transunion, which is intended to improve credit report accuracy.  According to Scheiderman's release:

The agreement requires that the CRAs employ specially trained employees to review all supporting documentation submitted by consumers for all disputes involving mixed files, fraud or identity theft. The agreement also requires that, for all categories of disputes, when a creditor verifies a disputed credit item through the automated dispute resolution system, the CRA will not automatically reject the consumer’s dispute, but rather, a CRA employee with discretion to resolve the dispute must review the supporting documentation.

This seems quite promising, though long overdue. A 2012 FTC report found that more than a fifth of credit report mistakes contained errors, and other reports have also found what seemed like an excessive level of mistakes. When consumers complain of errors, the Fair Credit Reporting Act obliges the credit bureau to conduct a reasonable investigation.  Credit bureau investigations, until 2013, often consisted of having a clerk boil down the consumer's complaint to a two-digit code, which was then forwarded to the lender.  If the lender reported that the entry was erroneous, that took care of the problem, but lenders often reported that the complained-of entry was accurate.  Starting in 2013, the credit bureaus began forwarding to the creditor the consumer's actual complaint and documentation, which undoubtedly facilitated the lender's investigation. Now it sounds like the credit bureaus will not assume automatically that lenders which verify entries are correct, but will conduct their own investigation.  I wonder how often the credit bureau's investigators will uphold the creditor's determinations. Will this agreement affects the credit bureau's incentives? In 2013, Ira Rheingold and I wrote in the New York Times:

[T]he marketplace can penalize credit bureaus that investigate too aggressively. Credit bureaus are heavily dependent on lenders for both revenue and the information the bureaus package and sell; if a credit bureau presses a lender too hard, the lender could patronize a different bureau and withhold data about its customers.

*  * *

For their part, lenders may benefit when credit bureaus report consumer defaults, even incorrectly, because such reports put pressure on consumers who wish to maintain good credit ratings to pay even disputed claims.

But because this settlement applies to each of the big three credit bureaus, lenders who are unhappy with credit bureau investigations will not be able to simply switch to a different one of the big three to avoid them.   Will they still have some power to penalize credit bureaus who are investigate too aggressively?  We will see.

Missouri Attorney General acts against payday lenders

The online publication Kansas City infoZine reports:

Attorney General Chris Koster has obtained an agreement with eight online payday loan operations to shut down payday loan operations in Missouri, provide $270,000 in consumer restitution, and erase all loan balances for Missouri consumers. ...

The Attorney General’s Office received 57 complaints from consumers who were collectively charged approximately $25,000 in excess fees. The Attorney General’s investigation subsequently discovered as many as 6,300 other Missourians who may have also been charged excessive fees. One Missouri consumer was charged a $500 origination fee on a $1,000 loan, which was immediately rolled into the principal of the loan. She was charged 194 percent APR and eventually paid more than $4,000.

Under Missouri law, a payday lender cannot charge “origination” or other such fees in excess of 10 percent of the loan, up to a maximum of $75.

The eight online payday lenders were operated by one man from a Native American reservation in South Dakota.

The full story is posted here.

Public Justice's Arthur Bryant Op-Ed on Arbitration

Here. 

Are Proposals for More Cost-Benefit Analysis a Stealth Attack on Dodd-Frank?

by Jeff Sovern

The American Banker had an article this week, Could the Fight Over Cost-Benefit Analysis Kill Reg Relief? that made some interesting points.  After noting that Senate Banking Committee Chair Richard Shelby advocates more cost-benefit analysis, the author, Victoria Finkle, wrote:

"The idea of rigorous cost-benefit analysis is like motherhood and apple pie which means Democrats will have a hard time explaining why it should not be determinative," said Aaron Klein, director of the Bipartisan Policy Center's financial regulatory reform initiative. "Cost-benefit analysis is great in theory, and where practicable it should be implemented, but the challenge is to find where it works in the real world and where quantifiable analysis is not possible and cost-benefit analysis doesn't make sense."

I think that cost-benefit analysis can be a great idea, and that's why I applaud Congress for directing the CFPB and the CPSC to consider cost-benefit analysis in drafting rules. The FTC's very organizational structure, including a Bureau of Economics, seems designed to carry out cost-benefit analysis, see Jonathan Baker, "Continuous" Regulatory Reform at the Federal Trade Commission, 49 ADMIN. L. REV. 859, 874 ( 1997), while the statutory definition of unfairness applicable to the CFPB and FTC alike has been called "[b]asically a cost benefit test."  See J. Howard Beales, III, Regulatory Analysis and the Independent Agencies, slide 4 (April 7, 2011).

But slavish adherence to cost-benefit analysis has costs of its own, as I argued here.  It can slow down adoption of regulations so much that it may become a weapon used by opponents of regulation not because of its merit but because of the delays it generates.  See, e.g., Editorial, Stuck in Purgatory, N.Y. Times, July 1, 2013 (noting that 72 draft rules had been under review for longer than the 90 days specified by executive order; 38 had been under consideration for more than a year; and three had been languishing since 2010);

Moreover, it is often hard to figure out how to value benefits to consumers.  For example, how do we value privacy?  Some people don't care about it at all, while others care greatly about it.  How can we tell how much those who care about privacy value it?  Do we pay attention to surveys or how people act--which seem to say very different things. If we focus on what people do, by, say, looking at how many opt-out of disclosure of their financial information under Gramm-Leach-Bliley, can we be sure that we are actually seeing how much they value privacy, or could it be that people don't realize from the privacy notices that their privacy is implicated and so discard the notices as junk mail?   As Ms. Finkle wrote:

 Critics of the push for greater cost-benefit requirements argue that such estimates can provide a false sense of precision when data is often based on assumptions or estimates.

So cost-benefit analysis can be a positive, but it shouldn't become an end in itself.  The relevant statutes provide for just the right amount of cost-benefit analysis. Those who seek more should bear the burden of showing that more would provide more benefits than costs. 

Calls for CFPB to issue strong rules on payday lending

The Hill reports:

The chairs of the congressional progressive, Hispanic and Black caucuses are urging financial regulators to crack down on payday loans.

In a joint letter to Consumer Financial Protection Bureau Director Richard Cordray, Congressional Progressive Caucus Co-Chairs Keith Ellison (D-Minn.) and Raúl Grijalva (D-Ariz.), Hispanic Caucus Chair Linda Sánchez (D-Calif.) and Black Caucus Chair G.K. Butterfield (D-N.C.) called for strong rules to stem predatory practices that are based on exorbitant interest rates and high fees.

The letter is posted here.

A March 2014 CFPB report on payday loans found that a majority of the loans are rolled over or renewed within 14 days and that borrowers often pay more in fees than the amount originally borrowed.

The CFPB is expected to issue regulations for payday loans in the next month or two. Last month, the New York Times reported on the topics that the regulations are expected to address.

Dissatisfaction with "Privacy Bill of Rights"

As we reported last week, the Administration recently released a proposed "Privacy Bill of Rights." Since then, both consumer groups and industry groups have noted their dissatisfaction with the Administration's draft. An article today in the Christian Science Monitor reviews the complaints of both sides.

Vairo on Class Actions

Georgene M. Vairo of Loyola Los Angeles haw written Is the Class Action Really Dead? Is that Good or Bad for Class Members? 64 Emory Law Journal 477 (2014). Here's the abstract:

Recent Supreme Court decisions have tightened up the standards for obtaining class certification and virtually eliminate class arbitration as well. However, while the Court has made it more difficult for plaintiffs’ attorneys to use class resolution of claims as a prosecutorial tool, the lower federal courts appear to relax certification standards when the parties seek to certify a settlement class. Because of the preclusive power of a class action, which binds all class members who do not opt out, the class action remains a potent settlement tool. The 2014 Randolph W. Thrower Symposium panel that served as the foundation for this paper, “Binding the Future: Global Settlements and the Death of Representative Litigation,” asked, however, whether class settlements are bad for class members.

This Article begins by analyzing the Supreme Court’s certification decisions and agrees with most commentators that although class actions are not dead, the device’s utility as a prosecution tool has been compromised. However, the Article then shows that certification of class actions for settlement purposes is alive and well. Finally, the Article identifies possible alternatives to the use of class actions. Although much attention has been (and should be) directed at the fairness of proposed settlements, the Article suggests that it is fortunate that the lower federal courts are not applying class certification standards as stringently in the class settlement context. This is because, despite all the problems inherent in class action practice, class actions remain the best of a range of options for protecting the rights of class members, particularly in low-value claim cases.