Consumer Law & Policy Blog

Kaplinsky & Levin Concede "Consumers rarely pursue individual arbitration" But Miss Mark on Why

by Jeff Sovern

Earlier this week, Senator Elizabeth Warren issued a press release about the responses she had received from Bank CEOs to her questions about the CFPB's arbitration rule, Responses from Bank CEOs Demonstrate Positive Impact of CFPB Arbitration Rule, Undermine Industry Case for Reversal.  The press release contains a lot of interesting information, but this post is about just a few sentences and the response it elicited. First, the sentences:

[C]onsumers rarely pursue individual arbitration. Of the tens of millions of consumers covered by mandatory arbitration agreements, consumers filed an average of only 616 arbitration cases a year. In contrast, over the five-year period studied by the CFPB, 34 million consumers were eligible to receive more than $1 billion in cash payments from class actions.

Alan Kaplinsky and Mark Levin, of the Ballard Spahr firm, responded with a blog post, Senator Warren’s Numbers Don’t Add Up,  which also included interesting information.  But here's the paragraph I found most intriguing:

Senator Warren’s press release states that “consumers rarely pursue individual arbitration.”  But that is because most consumers resolve disputes through the use of companies’ informal dispute resolution procedures and also through on-line complaint portals provided by federal and state agencies including the CFPB itself.  Moreover, although the CFPB has a Consumer Education and Engagement division and virtually unlimited resources, it did not spend a single dollar trying to educate consumers about arbitration. 

I interpret that as agreement with the statement in the press release about the infrequency of consumers bringing arbitration actions because Messrs. Kaplinsky and Levin have not exactly been shy elsewhere in their blog post about disagreeing with Senator Warren.  And it would be hard to disagree with the Senator's statement in light of the fact that the CFPB, the New York Times, and the Horton\Chandrasekher studies all found exactly the same thing. But what about the Kaplinsky/Levin explanation?  Is it true that informal dispute resolution has obviated consumer arbitration?  If so, why wouldn't that also be true for consumer class actions?  A more plausible explanation is that consumers simply don't bother filing arbitration claims or even complaining to customer service over small amounts. Empirical literature shows just that. See, e.g., Arthur Best & Alan R. Andreasen, Consumer Response to Unsatisfactory Purchases: A Survey of Perceiving Defects, Voicing Complaints, and Obtaining Redress, 11 LAv & Soc'Y REV. 701, (1977). In truth, that problem also bedevils class action claims because many consumers likewise don't file claims forms in the class action context when small amounts are at issue. But that problem goes away when damages are automatically deposited into consumer accounts. In addition, class actions also deter misconduct in a way that arbitration claims don't. In any event, I identified ten problems with the idea that customer service eliminates the need for class actions in a recent article. For a further example, there is no publicly available evidence indicating that consumers injured by Wells Fargo's unauthorized account scandal obtained redress until the regulators reached a consent decree with Wells and the class action settlement was agreed to (it still has not been finalized).  If informal dispute resolution was such an effective way of dealing with that problem, why haven't we heard about it? Wouldn't Wells, which has suffered a huge black eye because of that scandal, have wanted to publicize it?

As for the claim about education, I am not aware of any evidence that consumers can be usefully educated about arbitration.  Teaching people that they can make claims if they want to doesn't change their behavior if they conclude that their winnings won't be worth the effort it takes to get them. 

Finally, I notice that Messrs. Kaplinsky and Levin have not come forward with statistics showing how many consumers who are included in their clients' class action settlements complained to their clients' informal dispute resolvers, and how many never complained. If informal dispute resolution were a satisfactory alternative to class actions, wouldn't class members already have obtained what they were entitled to that way?  And wouldn't the overlap between class action claimants and consumers who used the informal dispute resolution mechanisms be an effective way to show that the class action didn't add value?  Sometimes, silence speaks loudly.

 

 

House Again Passes Bill to Put Consumer Protection at Risk, This Time, In an Appropriations Bill

by Jeff Sovern

Yesterday, the House passed an appropriations bill that incorporates provisions from the Financial Choice Act that would cripple the CFPB.  According to Law360:

The base bill would make a number of changes to the CFPB, including bringing it under the purview of the normal appropriations process. In addition, the bill would remove the bureau’s ability to target “Unfair, Deceptive, or Abusive Acts and Practices” under the law, and remove its ability to initiate rulemakings on small dollar loans.

Rep. Keith Ellison, D-Minn., offered an amendment to try and reinstate the agency’s authority over such “debt traps,” but was unsuccessful. Ellison also offered amendments on the agency’s authority over manufactured home loans and other rules, but they were defeated.

We had written about the bill at an earlier stage of the process here. While the House-passed Financial Choice Act seems unlikely to receive much, if any, consideration in the Senate, appropriations bills are another story.  By including anti-consumer in the must-pass appropriations bill, members of the House increase the chances that some of those provisions are enacted into law.

Some Comments on Recent Op-Eds Opposing the CFPB Arbitration Rule

by Jeff Sovern

I wanted to comment on a couple of op-eds opposing the CFPB arbitration rule.  One is Joseph Cioffi's piece in the American Banker, headlined CFPB arbitration rule will still pose costs to consumers.  Though Cioffi (Chair of the Insolvency, Creditors’ Rights & Financial Products Practice Group at Davis & Gilbert) sees the arbitration rule as having some positive aspects, he believes it will also be "an expensive proposition for banks and consumers alike." He writes:

The Trump administration and GOP-controlled Congress aim to weaken the CFPB’s enforcement powers as part of a larger deregulatory effort. If that occurs, plaintiffs may have a better chance of convincing courts that their class action, versus government action, is the superior method of prosecuting claims. Further, as banks self-regulate according to their own standards in a deregulated environment, market inconsistencies and consumer uncertainty may result in yet more litigation.

That paragraph left me confused.  Cioffi seems to be saying that a weaker CFPB may lead more courts to allow class action to proceed.  But as far as I know, courts shouldn't take the CFPB into account in deciding whether or not to certify a class.  In addition, it sounds as if Cioffi, an apparent opponent of the CFPB rule, is arguing that consumers should be left without any recourse when financial institutions misbehave, except for arbitration, which of course is ineffective as to small claims.  Finally, the last sentence suggests that self-regulation will lead to more litigation.  But self-regulation is essentially voluntary self-restraint; how can that lead to litigation?

Another Story About How Class Actions Help and Arbitration Hurts Consumers, Military Families

From Paul Bland in HuffPo, CFPB Rule Fight Forces Senators to Choose: Military Families or Big Banks. Excerpt:

When Gary Childress of Raleigh, North Carolina learned in July 2008 that he was being deployed to Iraq as part of his Army National Guard service, one of the things he did before reporting for duty was to contact Bank of America, where he and his wife Anne had a credit card account. He wanted to let the bank know that he was on active-duty status because under the Servicemembers Civil Relief Act or SCRA, a law passed by Congress in 2003 to reduce burdens on military families, all interest rates on debts that servicemembers owed before going on active status must be reduced to 6%. This interest rate protection was significant to the Childresses, who owed over $5000 on their Bank of America credit card with an interest rate of around 27% when Gary left for Iraq.

Bank of America began sending Anne Childress monthly statements suggesting that the interest rate on the account had been reduced to 6% as the SCRA requires. But according to a lawsuit the bank just settled in federal court in North Carolina, these statements were deceptive. In fact, the bank was actually continuing to charge a much higher interest rate. And the Childresses were not alone; the bank’s own internal audits, as well as an investigation conducted by the Office Of the Comptroller of the Currency, revealed that nearly 130,000 servicemembers and their families were affected * * *

[I]n July of 2017, [the military families] reached a settlement with Bank of America that will award nearly $30 million, after fees and expenses, to the approximately 130,000 military families who were overcharged and deceived by the bank. The cheated servicemembers will not need to file claims in order to receive compensation under the settlement; the amount owed to each class member will be calculated based on Bank of America’s records, and checks will be sent out automatically. * * *

"Too Popular to Pick a Public Fight With"

Many have probably already seen yesterday's article in the New York Times about the Consumer Financial Protection Bureau's popularity getting in the way of Republicans' efforts to weaken it, but just in case...

Relying on emails and other documents obtained in public records requests, the article describes the CFPB's strategy to shield itself from the Trump administration. Part of that effort included "compil[ing] stories from ordinary Americans thanking [the agency] for resolving complaints." The agency knew that many of those stories would come from parts of the country that voted for President Trump.

This is not lost on the White House, which has taken an "uncharacteristically low-key public stance toward the agency." Apparently, the administration considered a "high-profile run on the agency," but after "examin[ing] polling data from political bellwether states," it concluded that the CFPB is "too popular to pick a public fight with."

It really shouldn't be a surprise that the CFPB is popular with the public at large. As the article notes, it's returned nearly $12 billion to 29 million consumers in refunds and cancelled debts. And it's helped individual consumers in numerous other ways, including helping remove a disputed property lien, warding off a debt collector pursuing a medical bill that had been paid, and helping resolve a contested credit card debt. Those are real solutions to real problems that people, no matter their political views, can appreciate.

WSJ: Consumer Watchdog to Scale Back Payday Rules

by Jeff Sovern

Here. Excerpt:

The Consumer Financial Protection Bureau, still under the leadership of an Obama-appointed director, is expected to scale back its new rule on small-dollar lending as it rushes to complete the regulation * * *

* * *

The rule is now expected to focus on short-term payday loans that are typically due in two weeks, or the borrower’s next payday, with annual interest rates of as much as 390%. To be excluded are high-cost installment loans lasting 45 days or longer.

* * *

People familiar with the matter said the rule is undergoing a peer review by other banking agencies, such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., with a deadline in early September.

* * *

At a later date, the CFPB may issue a separate rule to address the longer-term loan market, which requires more complex regulations and involves a wider range of lenders, including banks and credit unions.

I wonder if the leak about the new rule came from the OCC or FDIC. The OCC's leadership, in particular seems hostile to the CFPB's consumer protection mission under the new administration.

Still Another Conservative Supports the CFPB Arbitration Rule

Colin Hanna, President of Let Freedom Ring USA, has penned Forced arbitration: Big banks' 'Star Chamber' in the Washington Examiner. Excerpt:

Elbridge Gerry was a colonial-era plutocrat who became a patriot, a signer of the Declaration of Independence and a champion of equal justice under the law. * * *

One of his more famous sayings was that "a tribunal without juries would be a Star Chamber in civil cases" -- "Star Chamber" being a reference to the supervisory English court known best for protecting friends of the king and persecuting his enemies.

* * *

[L]eaders like Gerry saw that without the right protections in place, civil proceedings could be used as means to oppress the powerless.

This is exactly what has happened with the ubiquity of forced arbitration.  * * *

* * *

[A]rbitration hearings, in tilting the scales of justice heavily to Big Business and rendering consumers virtually defenseless, seem indeed to be the 21st-century version of the Star Chambers. Like the clauses themselves, the hearings remain largely hidden from view, with no jury of one's peers, no real chance for appeal, and no mandate even to adhere to the law, federal or state.

* * *

The practice of forced arbitration is so offensive to any sense of justice – as envisioned by Elbridge Gerry and the other Founders – that conservatives must demand the CFPB rule be preserved until Congress itself has opportunity to revisit the issue and rid America of the Big Banks' Star Chambers.

 

Lauren Willis Article on Ordering Firms to Eradicate Their Own Fraud

Lauren E. Willis of Loyola of Los Angeles has written Performance-Based Remedies: Ordering Firms to Eradicate Their Own Fraud, 80 Law and Contemporary Problems 7-41 (2017). Here is the abstract:

In resolving cases of unfair, abusive, and deceptive acts and practices, consumer protection enforcement agencies often prospectively dictate—in great detail—the design of defendants’ marketing, websites, disclosures, sales processes, and products. However, advances in technology and analytics increasingly allow defendants to comply meticulously with these precise requirements while simultaneously continuing to deceive and injure consumers.

By trying to micromanage defendants’ conduct, enforcement agencies fail to protect consumers, squander precious enforcement resources, and create pointless compliance work for defendants. Defendants themselves are in the best position to ascertain how to cure the confusion and ill consequences they have wrought and they should bear ultimate responsibility for doing so.

To effectuate this, this article introduces two new performance-based remedies to consumer law enforcement: (1) confusion prohibitions and (2) consequences prohibitions. These injunctive remedies order defendants to eliminate the confusion and ill consequences induced by defendants’ fraud. To comply with these prohibitions, defendants would be required to reduce the confusion and ill consequences they inflicted on their customers to prescribed levels within a prescribed time period. Defendants would bear the costs of demonstrating, through independent third-party audits, their compliance.

Buckley Sandler Partners: Personnel Is Policy: Succession Possibilities At The CFPB

In Law360, by Andrew Sandler and Benjamin K. Olson  Here is an excerpt:

It is not entirely clear whether the Dodd-Frank Act or the [Federal Vacancies Reform Act] controls in these circumstances. The one thing that is clear is that there will be real and significant differences in the operation of the CFPB depending on which statute prevails. For that reason, the administration can be expected to conclude, if at all possible, that the president may appoint an acting director, and those who wish for the CFPB to continue business as usual may seek to challenge any such appointment.

* * *

[I]n the event that the two statutes were found to be in conflict, the Dodd-Frank Act’s specific provision on CFPB succession would arguably control over the FVRA’s more general provisions on vacancies at executive agencies.

Mortgage Default Rate Reported to be at Lowest Level in Decade; Could the CFPB be the Cause?

by Jeff Sovern

Here is a report on the mortgage default rate from Housing Wire. So we have a low mortgage default rate and record highs in consumer debt, as Brian reported earlier, half a dozen years after creation of the CFPB.  Yet conservatives want to eliminate or reduce the Bureau's power.