Consumer Law & Policy Blog

Amy Schmitz Article on Payday Lending and Gender

Amy Schmitz of Colorado has written Females on the Fringe: Considering Gender in Payday Lending Policy, 89 Chicago-Kent Law Review (2014).  Here's the abstract:

Payday lending may provide a much-needed safety net for some consumers in need of quick cash for emergencies. However, data suggest that most payday loan borrowers become repeat users caught in a cycle of high-cost debt. Furthermore, empirical evidence indicates consistent overrepresentation of women, including many single mothers, among payday loan borrowers. This takes a toll not only on these women and their families, but also on society as a whole. Indeed, context matters in payday lending debates. It is thus time to think creatively and consider contextualized programs that aim to increase women’s and all consumers’ safe borrowing options, provide education regarding those options, and ultimately assist them in escaping cycles of debt and poverty. This Article seeks to spark the dialogue regarding such contextualized policymaking.

Kirgis on the CFPB Monitor Post on the St. John's Arbitration Study

by Jeff Sovern

My coauthor, Paul Kirgis, has posted an excellent response to Alan S. Kaplinsky and Mark J. Levin's comments on the CFPB Monitor on our arbitration study. His response also has the virtue of being briefer than mine.  While Paul's post is worth reading in full, here is my favorite part:

 Citizens cannot be forced into alternative processes simply because someone has made a determination that they would in fact be better served by the alternatives. It is certainly true that citizens can choose to give up their adjudicative rights, but those choices have legitimacy only if they are knowing and voluntary. Our research suggests that consent to arbitration is seldom knowing and voluntary.

St. John's Arbitration Study Suggests Opt-Outs Are Not the Answer to Arbitration Clauses

by Jeff Sovern

Alan S. Kaplinsky and Mark J. Levin, in their comments at the CFPB Monitor, wrote about the contract we showed the survey respondents: "The hypothetical card agreement used in the St. John’s study did not even contain an opt-out provision, although a substantial number of arbitration clauses in use today contain such a provision."

Absolutely correct.  We considered using an arbitration clause with an opt-out clause.  But the CFPB Study found that only about a quarter of arbitration clauses included such opt-outs.  In addition, including an opt-out would have made the survey questions more complex than we wanted. Nevertheless, our study suggests that opt-outs are not the answer to arbitration clauses that confuse consumers for two reasons. Quoting now from the study:

First, our study strongly suggests that consumers are not aware of the rights they waive in arbitration clauses. It thus seems unlikely that they are aware of the rights included in arbitration clauses, such as the right to opt out.  If consumers do not know of their right to opt out, they are unlikely to assert it.  Second, even consumers who notice that the contract permits an arbitration opt-out are unlikely to avail themselves of that option if they fail to appreciate that the arbitration clause strips them of any rights.  Many of the respondents seemed to believe arbitration supplements court litigation, rather than supplanting it. Accordingly, it is difficult to see why consumers would bother to prepare and send a letter opting out of arbitration.  But all of this is speculation on our part.  Credit card companies offering opt-outs undoubtedly know how many consumers have opted out. We hope that they will make that information available.

I'm not sure what point Alan and Mark were making by noting that our sample contract did not include an opt-out provision.  But if their point was that consumers protect themselves from arbitration clauses by opting-out, I hope they will prevail upon their clients to let the world know just how many consumers actually do so. If their clients refuse to do so, it seems fair to infer that that is because opt-out rates are so low that opt-outs are not a plausible mechanism for consumer protection, as has turned out to be true in other circumstances.  

A Reply to the CFPB Monitor Comments on the St. John's Arbitration Study

by Jeff Sovern

I am pleased to report that Ballard Spahr’s Alan Kaplinsky and Mark Levin have commented on our arbitration study  at their very informative and useful blog, CFPB Monitor  (We’re still in the stage of soliciting comments and hoping to receive useful feedback which we can use to improve the draft, so if others have comments, please let me know). In this post, I want to respond to four of the Monitor’s claims.

1. The Monitor states:

[G]iven the great care that most drafters make to ensure that the arbitration clause is understandable and clearly and conspicuously disclosed, the arbitration clause is likely one of the most comprehensible parts of a modern-day financial contract.

Well, no.  The Consumer Financial Protection Bureau Study  found that the mean Flesch-Kincaid grade level for credit card arbitration clauses was 14.2 and the median grade level was 14.7. It also reported that the mean Flesch-Kincaid grade level for the non-arbitration term portions of credit card contracts with arbitration clauses was 10.8 with a median of 11. In other words, you need about three and a half more years of education to understand arbitration clauses than to understand the non-arbitration clause part of the same contracts. 

But let’s assume that the Monitor claim is true.   (I want to be clear that I have no trouble believing the statement that most drafters take great care to ensure arbitration clauses are understandable.  Probably the poor reading scores are the result of the difficulty of writing understandable arbitration clauses.)  The arbitration clause we used was conspicuous.  It was referred to in bold on the contract’s second page, and appeared in bold on the sixth and seventh pages, meaning that it was referred to on three of the seven contract pages in bold, with some parts in italics and ALLCAPS.  The contract’s second page even directed consumers to read the arbitration clause carefully.  In addition, it was slightly more readable than the average arbitration clause, and was shorter, meaning that it would have taken less time to read it.  With all that, respondents still couldn’t understand it.  So we are still left with the question: should contracts that consumers can’t understand strip them of constitutional and other key rights?  I address that issue below.

Richard Feynman and Arbitration

by Jeff Sovern

Some readers of our blog will no doubt be familiar with Nobel prize-winning physicist Richard Feynman from his popular books, What Do You Care What Other People Think? or Surely You're Joking, Mr. Feynman! Others will remember him from his service on the panel that investigated the Challenger disaster.  His relevance to arbitration stems from his quote about the difference between knowing the name of something, and actually knowing what that something is. See Richard P. Feynman, What Do You Care What Other People Think? 14 (1988)( “I learned very early the difference between knowing the name of something and knowing something.”). Unfortunately, that appears to describe many of the respondents to the St. John's Arbitration Study.

Here's what I mean.  After showing respondents a contract with an arbitration clause, we asked:

If you and the credit card company have a dispute that is too large to be brought in a small claims court, did the contract you just saw say you have agreed to arbitrate it?

43% said it did, though a majority either didn't know or said the contract did not provide for arbitration.  The contract had included a bold-face reference to the arbitration clause on page two, and the clause itself appeared in bold partly on page six and partly on page seven, so that in all, the arbitration clause was referred to or appeared in bold on three of the seven pages of the contract. In addition, some of its terms were printed in italics and ALLCAPS, making it even more conspicuous.  In light of all that, it may not be surprising that 43% of the consumers noticed the arbitration clause.

But as Feynman noted, that doesn't mean they know what it meant.  Of the 43% who said that the contract provided for arbitration, 61% also believed that consumers would have a right to have a court decide the dispute, despite the fact that the contract said in bold, italics, and ALLCAPS that they wouldn't.  Nearly a fifth of those who believed that the contract mandated arbitration checked “I don’t know” when asked if consumers would have a right to sue in court.  In short, only 59 respondents—less than 9% of the total—realized that the contract both provided for arbitration and precluded litigation in court.  Similarly, of the 43% who understood that the contract specified that disputes would be resolved through arbitration, only 80 realized that they could not obtain a jury trial, meaning than only 12% of the total understood both that the contract provided for arbitration and that it precluded a jury trial of disputes. An even smaller subset of the 43%, 46 (less than 7% of the total), recognized that the contract foreclosed participation in a class action. All this even though the contract instructed respondents in bold that “It is important that you read the entire Arbitration Provision section carefully.” In short, our study,  'Whimsy Little Contracts' with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements suggests some consumers may know the word arbitration, but few know what it means.

 

Overall, How Did Respondents in the St. John's Arbitration Study Do?

by Jeff Sovern

As to the eight questions that had right or wrong answers:

• Only two respondents answered all eight questions correctly out of 663 who answered all eight questions.
• 117 did not answer any of the questions correctly.
• That’s more than answered at least half the questions right.
• If this had been a test with a passing grade of 65%, 96% of the respondents would have failed.
• Not one of the eight questions elicited a majority of correct answers
• On one, a majority of the respondents gave wrong answers 
• More respondents gave correct answers than incorrect answers on only two of the questions
• On four of the questions more respondents gave wrong answers than right, sometimes by margins of three or four to one.

It's hard to argue that the respondents understood the arbitration clause in the face of that.

The entire article can be found at 'Whimsy Little Contracts' with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements.

 

Arbitration Study Shows Many Don't Know They Have Agreed to Arbitrate

by Jeff Sovern

Last week I posted the abstract for our study, 'Whimsy Little Contracts' with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements. I want to discuss today some of what we learned about respondent awareness of arbitration clauses in the contracts they have entered into.

As the abstract noted, we asked the respondents if they had ever entered into a contract with an arbitration clause, and then we gave them a list of companies that include arbitration clauses in their contracts, like Verizon Wireless and PayPal, and asked them if they had agreed to contracts with those companies. The abstract reports that of the 303 respondents who claimed never to have agreed to arbitrate, 264, or 87%, did indeed have at least one account subject to an arbitration clause. That works out to more than 40% of the respondents who answered both questions.  Many respondents who thought they had not agreed to arbitrate disputes had in fact entered into more than one arbitration agreement. In addition, 244 respondents said they did not know whether they had entered into an arbitration agreement. Of  those, 89% had at least one account covered by an arbitration agreement.  Putting those numbers together means that at least 74% of our respondents had unknowingly entered into at least one agreement to arbitrate.  I say "at least" because we don't actually know whether even more had agreed to arbitration clauses in contracts we didn't ask about, like credit card contracts or checking accounts. 

The comments make it even clearer that many respondents believed they had not agreed to arbitrate despite having done so.  For example, one respondent who had entered into two contracts with arbitration clauses that we know of, wrote “i wo uld[sic] never never up my right to [sue the company].”  Another commenter who had agreed to arbitrate  explained: “i [sic] am a person to read about this before signing anything, i have never seen or read anything like this i see n mostly read,very surprising, . . . .”  One respondent rather plaintively wrote “please tell me i haven’t entered into such a contract.” We can't tell him that because he had.

I'll try to post more from the study in the days to come.

Comments from the Arbitration Study Respondents: Contracts Can't Take Away Your Rights as an American Citizen

by Jeff Sovern

Last week I posted the abstract for our study, 'Whimsy Little Contracts' with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements.  The abstract observed that many respondents think that form contracts can't strip consumers of certain rights. That conclusion is obvious from the statistical data, but the written comments make the point more dramatically.  After each multiple choice question, we gave respondents room to comment. Here is some of what they had to say: 

• I don’t see how they could preclude us from filing a class action suit through a whimsy little contract
• You always have a right to pursue legal action when someone has wronged you, it is not up to one party or another to determine whether or not they will take away that right
• It is your right as an American to have a trial by a jury of your peers.
• I believe it is your American right to sue in larger court systems.
• Binding arbitrators are stipulated, right? I GUESS that stipulation could be contested, THEN we’d get a jury trial. It’s also why I avoid putting very much on credit cards.
• I did not read this information but I would expect that [suing in a non-small claims court] would be my right as a free citizen of the US.
• Based on my memory of what I think I’ve read has happened. And an old cliche, “You can’t sign away your rights.”
• I believe that would be my rights as a citizen.

The Supreme Court has a different view of what it means to be an American citizen.

I hope to write more about the article in the days to come.

Arbitration Study Shows That Consumers Who Think They Understand Clauses Twice as Likely to be Wrong

by Jeff Sovern

Last week I posted the abstract for our study, 'Whimsy Little Contracts' with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements.  But the abstract doesn't come close to capturing all the interesting  findings.  I hope to write more about some of them in the days to come. Here's something that didn't make it into the abstract:

Recall that we asked the respondents eight questions that had right and wrong answers. We also asked them how much of the contract they thought they read and had understood.  Respondents who thought they had read and understood more of the contract did get more answers correct than those who didn't.  But those who reported reading and understanding the entire contract still averaged correct responses to only 28% of the questions while those who described themselves as reading and understanding most of the contract clicked the right answer to only 30% of the questions.  In other words, their performance still fell well short of what we would think of as demonstrating understanding. Even worse, those who said they read and understood all the contract were more than twice as likely to record wrong answers as those who reported reading and understanding very little of the contract. Similarly, respondents saying they read and understood all the contract gave twice as many wrong answers as right ones.  It thus appears that those who think they understand arbitration clauses really don't.  That is particularly frightening because consumers who believe they understand the contract may feel more comfortable relying on that supposed understanding--but such confidence would be misplaced.

Our Study Finds Widespread Consumer Misconceptions About the Arbitration Clauses

by Jeff Sovern

Elayne Greenberg, Paul Kirgis, Yuxiang Liu, and I have posted a draft of our article, "Whimsy Little Contracts" with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, to the web.  Here's the abstract:

Arbitration clauses have become ubiquitous in consumer contracts. These arbitration clauses require consumers to waive the constitutional right to a civil jury, access to court, and, increasingly, the procedural remedy of class representation. Because those rights cannot be divested without consent, the validity of arbitration agreements rests on the premise of consent. Consumers who do not want to arbitrate or waive their class rights can simply decline to purchase the products or services covered by an arbitration agreement. But the premise of consent is undermined if consumers do not understand the effect on their procedural rights of clicking a box or accepting a product. 

This article reports on an empirical study exploring the extent to which consumers are aware of and understand the effect of arbitration clauses in consumer contracts.  We conducted an online survey of 668 consumers, approximately reflecting the population of adult Americans with respect to race/ethnicity, level of education, amount of family income, and age.  Respondents were shown a typical credit card contract with an arbitration clause containing a class action waiver and printed in bold and with portions in italics and ALLCAPS. Respondents were then asked questions about the sample contract as well as about a hypothetical contract containing what was described as a “properly-worded” arbitration clause. Finally, respondents were asked about their own experiences with actual consumer contracts. 

The survey results suggest a profound lack of understanding about the existence and effect of arbitration agreements among consumers. While 43% of the respondents recognized that the sample contract included an arbitration clause, 61% of those believed that consumers would, nevertheless, have a right to have a court decide a dispute too large for a small claims court. Less than 9% realized both that the contract had an arbitration clause and that it would prevent consumers from proceeding in court. With respect to the class waiver, four times as many respondents thought the contract did not block them from participating in a class action as realized that it did, even though the class action waiver was printed twice in bold in the sample contract, including one time in italics and ALLCAPS. Overall, of the more than 5,000 answers we recorded to questions offering right and wrong answers, only a quarter were correct. 

Turning to respondents’ own lives, the survey asked if they had ever entered into contracts with arbitration clauses.  Of the 303 respondents who claimed never to have done so and who also answered a question asking whether they had accounts with certain companies that include arbitration clauses in their contracts, 264, or 87%, did indeed have at least one account subject to an arbitration clause. 

These and other findings reported in this Article should cause concern among judges and policy-makers considering mandatory pre-dispute consumer arbitration agreements. Our results suggest that many citizens assume that they have a right to judicial process that they cannot lose as a result of their acquiescence in a form consumer contract. They believe that this right to judicial process will outweigh what one respondent referred to as a “whimsy little contract.” Our results suggest further that citizens are giving up these rights unknowingly, either because they do not realize they have entered into an arbitration agreement or because they do not understand the legal consequences of doing so. Given the degree of misunderstanding the results demonstrate, we question whether meaningful consent is possible in the consumer arbitration context.

To the extent my schedule permits, I will post more about our findings in the days to come.