Consumer Law & Policy Blog

Kaplinsky on Why Consumers Don't File Arbitration Claims

by Jeff Sovern

BloombergBusiness columnist Carter Dougherty has a story, Bank Customers May Get Their Day in Court, about the CFPB arbitration report.  Dougherty writes:

In its report, the CFPB noted that there were just 52 arbitration claims under $1,000 in 2010 and 2011, and consumers won relief in just four of them. Says [Deepak] Gupta: “What this report shows is not that claims go to arbitration but that they simply go away.”

Alan Kaplinsky, an attorney with Ballard Spahr who helped pioneer the use of arbitration clauses in financial contracts, counters that consumers resolve claims in other ways. They call the company to complain. They go to the Better Business Bureau. “That’s why you don’t see a heck of a lot of arbitration or litigation when there’s a clause,” he says.

I'm skeptical about Kaplinsky's claim, because a lot of research, beginning with Best and Andreason's seminal article, Consumer Response to Unsatisfactory Purchases: A Survey of Perceiving Defects, Voicing Complaints, and Obtaining Redress, 11 Law & Soc.Rev. 701, 728–29 (1977), shows that dissatisfied consumers mostly do not complain to either the offending business or external agencies like the BBB.  Mostly, they don't do anything.  If Alan has evidence to substantiate his claim, I hope he will make it public.

But even if his claim is true, it's hard to see how it helps to defend arbitration. If consumers benefit so much from arbitration, as Kaplinsky claims, why do consumers with arbitration clauses in their contracts prefer the Better Business Bureau?  Why don't they just use arbitration?  Does the benefit of arbitration derive from the fact that it drives consumers to use something else to resolve disputes?

 

Fitzpatrick article on "The End of Class Actions?"

Prolific class action scholar (and former Scalia clerk) Brian Fitzpatrick of Vanderbilt Law has just posted to SSRN an interesting new paper foreseeing and lamenting the effects of his former boss's handiwork in AT&T Mobility v. Concepcion and American Express v. Italian Colors (both cases in which I had the privilege of representing the losing plaintiffs). Fitzpatrick's article is especially timely because it buttresses the CFPB's recently released study on the effects of mandatory arbitration clauses in consumer contracts. Here's the abstract of Fitzpatrick's piece, which is forthcoming in the Arizona Law Review:

In this Article, I give a status report on the life expectancy of class action litigation following the Supreme Court’s decisions in Concepcion and American Express. These decisions permitted corporations to opt out of class action liability through the use of arbitration clauses, and many commentators, myself included, predicted that they would eventually lead us down a road where class actions against businesses would be all but eliminated. Enough time has now passed to make an assessment of whether these predictions are coming to fruition. I find that, although there is not yet solid evidence that businesses have flocked to class action waivers — and that one big category of class action plaintiffs (shareholders) remain insulated from Concepcion and American Express altogether — I still see every reason to believe that businesses will eventually be able to eliminate virtually all class actions that are brought against them, including those brought by shareholders.

Excellent Sheryl Harris Column on Arbitration

Here.  An excerpt:

 

In the Big Business narrative, arbitration is a far better place for consumers than a nasty-wasty court. Lack of choice is a better choice!

Well, this week, a big, fat government report blew that fiction away.

* * *

Companies, it turns out, weren't using mandatory arbitration clauses to protect us. They were protecting them. The CFPB found that companies overwhelmingly invoked the arbitration clause to head off class-action suits.

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.

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. 

A Proposal to Ban the Sale of Junk Debt

By guest blogger Peter A. Holland

 I have covered the NCLC's excellent proposal to ban the sale of time-barred debt here.

The NCLC recommendations point to the larger problem that some banks sell off their worst, most unreliable, least collectible, most dubious accounts for literally pennies on the dollar (sometimes less), pursuant to broad disclaimers of accuracy and reliability.  I have written about this here.  The problem, in the words of Jeff Horwitz in an American Banker article is that, "Bank of America Sold Card Debts to Collectors Despite Faulty Records."  You can read what some of the typical disclaimers of accuracy in Forward Flow Agreements are here, including the revelations that the accounts being sold may not be legally enforceable (see page 4), and that (page 26, Schedule 1), the balance of each account is only "approximate." 

Banks should not be allowed to sell their worst, most unreliable accounts as junk debt for junk prices to junk purchasers who will then file junk lawsuits.  If one reads the broad disclaimers of warranty in any of the Forward Flow Agreements, one has to wonder, why is this not already explicitly banned?  In her excellent article, "Dirty Debts Sold Dirt Cheap" UConn Law Professor (and former CFPB staffer) Dalie Jimenez has rightly called for the CFPB to declare that the selling such accounts under such circumstances is an unfair or deceptive trade practice.  (A sampling of over 80 Forward Flow Agreements is available from Dalie Jimenez, here ).  I have written about the lack of proof in these junk lawsuits here, and about the "junk justice" effect of these lawsuits here.

While banning the sale of time-barred debt as recommended by the NCLC, and declaring the sale of junk debt to be a UDAP violation as recommended by Dalie Jimenez are both excellent and realistic proposals, the CFPB should also consider going further and calling for an outright ban on the sale of any debt which is not accompanied by affirmative representations and warranties of completeness, accuracy, reliability and enforceability.  Further, the Forward Flow Agreements should be made publicly available on a website, so that consumers, consumer attorneys and judges can decide for themselves just how reliable accurate and reliable are the claims of the debt buyers. 

Currently, we are living under a system where banks are knowingly selling inaccurate, unreliable junk accounts which are then used to extract money from consumers, some of whom do not owe any amount at all, and many of whom owe considerably less than the "approximate" amount being sued on.  We need to move from a business model where it is perfectly acceptable to sell false, incomplete and unreliable accounts, to a model where the only accounts which may legally be sold are those accounts which are true, complete and accurate.  Banning the sale of time-barred debt is an excellent start, as is declaring the sale of such junk debt to be a UDAP.  Perhaps in the current political climate, that is all we can hope for.  But the only way to stop these practices altogether is to invert the current model: mandate that banks sell only legitimate accounts, and institute an outright ban on the sale of the bogus, "dirty" accounts.

Effective Disclosure of Arbitration Clauses and the CFPB's Power to Regulate Them

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.

* * *

(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.

 

Joint Enforcement Action: Maryland Attorney General and CFPB Act On Illegal Mortgage Kickbacks

By guest blogger Peter A. Holland

In a time of limited resources, perhaps a new model is emerging of joint CFPB/State Attorney General enforcement actions.  The recent joint action by the Bureau and Maryland Attorney General Brian Frosh provides a nice case study.

Recently, Maryland Attorney General Brian Frosh and the Consumer Financial Protection Bureau took an action against a mortgage kickback scheme involving former Maryland title company Genuine Title, LLC and employees at national banks Wells Fargo and JPMorgan Chase. “Homeowners were steered toward this title company, not because they were the best or most affordable, but because they were providing kickbacks to loan officers . . . this type of quid pro quo is illegal, and it's unfair to other businesses." Said Maryland Attorney General Brian Frosh. The complaint in the case is available here.

Between 2009 and 2013, Genuine Title swapped marketing services and cash payments for referrals of business by loan officers to Genuine Title.

Loan officers typically are paid by commission. Through the Marketing Services Scheme, Genuine Title offered loan officers valuable services to increase the amount of business they generated, and thus the commissions they would earn. The scheme was also intended to increase the amount of business generated by the participating loan officers and, through referrals, to increase Genuine Title’s profits.

In some cases Genuine Title:

not only analyzed and purchased leads from a third-party vendor, it also paid for marketing letters directed to the consumer leads to be printed, folded, stuffed into envelopes, and mailed.

Genuine Title even attempted to conceal its involvement by having the company which printed the marketing materials provide “fake” invoices to the loan officers, so that it could pretend that the loan officers had paid for the materials themselves. Genuine Title went out of business in April 2014, which is why they are not named in the joint enforcement action.

Over 100 loan officers at Wells Fargo were involved in the scheme, along with 6 at the JPMorgan Chase, and an unknown number at other, unnamed banks. The enforcement action led to consent orders with Wells Fargo and JPMorgan Chase. Wells Fargo will pay over $10 million in redress to affected consumers, $21 million in penalties to the CFPB and $3 million to the Maryland Attorney General’s office. Chase will pay less than $1 million in redress and penalties.

Maryland’s First Co-Operative Action with the CFPB

This is the first case in which the Maryland Attorney General’s office and the CFPB have acted jointly to enforce the law. The investigation seems to have started in Maryland, with the Office of the Attorney General stating:

The case was referred to the Consumer Protection Division by the Maryland Insurance Administration and the investigation was conducted jointly with the Consumer Financial Protection Bureau.

The CFPB made a similar statement in its press release. The CFPB takes most of the responsibility for monitoring compliance with the consent orders and handling the payments to affected consumers. CFPB will also receive most of the penalties to be paid – which may reflect the degree of the CFPB’s involvement in the investigation and enforcement action. This case appears to be an excellent example of state-federal co-operation making a major enforcement action possible. The CFPB can only examine so many businesses and follow up on so many reports of wrongdoing on its own. Likewise, state attorneys-general may not always have the resources to take on huge market players like Wells Fargo and Chase on their own.

In a time of contracting state budgets, joint federal/state actions of consumer protection laws seems to make good sense, and seems to be an excellent way to use the Dodd Frank act to pursue both local and national actors when they engage in fraud and abuse in the area of consumer financial services.

Times: Consumer Protection Agency Seeks Limits on Payday Lenders

Here.  An excerpt:

At the center of the regulations being considered, the people familiar with the matter said, is a requirement that lenders assess whether borrowers can repay loans — interest and principal — at the end of a two-week period by examining their income, other debts and their payment history.

Few people can, the data suggest, leaving borrowers to either roll over their loans, heaping on more fees, or take out new ones altogether. The bureau found that during a 12-month period, borrowers took out a median of 10 loans. Borrowers paid median fees of $458. The median amount borrowed was $350. And more than 80 percent of loans were rolled over or renewed within two weeks.