Tuesday, December 31, 2013
The Consumer Financial Protection Bureau (CFPB) has issued preliminary results on its evaluation of "pre-dispute arbitration provisions," used in many contracts for consumer financial service products, such as credit cards, checking accounts or pay-day loans. Congress commanded the study as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Consumers probably end up viewing these clauses as triggering "mandatory" arbitration, in that consumers typically "consent" by signing agreements without any real understanding of the implications. The report summarizes both pro and con arguments on the use of pre-dispute arbitration provisions.
The study makes strong use of academic research, including recent work by Peter Rutledge (University of Georgia Law) and Christopher Drahozal (Kansas Law), Jean Sternlight (UNLV Law), and my own colleague and friend, Nancy Welsh (Penn State Law).
Much of the CFPB report focuses on what it calls the "front end" of arbitration issues, identifying a host of arbitration-related factors addressed in corporate contracts, such as opt-out rights, arbitrator selection, limits on recoverable damages, time limits for claims, and allocation of costs.
Reading between the lines of the report's preliminary findings, it seems to me to support the view that companies use arbitration as a procedural barrier to consumer challenges, including class actions. At the same time, statistics cited in the report suggest that companies may dispense with arbitration when pursuing collection from defaulting consumers, instead filing suits in small claims courts (the CFPB will address federal and other state court claims in the future).
This seems consistent with what I observed during my 10+ years with Penn State Law's Elder Protection Clinic, where we frequently represented older clients on debt claims. Many of these claims were "old" debts, where our clients had been making minimum payments for years, but were no longer able to keep up with the payments after retirement, particularly if also confronted with new debt from medical crises. I don't recall any of the collection cases being initiated by arbitration. By filing in court, the companies seemed to hope for a low-cost route to default judgments.
The New York Times cites the CFPB study in a recent editorial, calling for a change in laws to permit consumers an effective legal tool when needed to challenge certain corporate practices, pointing out that:
"In disputes over financial products — involving, say, excessive fees, inflated loan balances, faulty credit reporting, or fraud and discrimination — the damages at stake may be significant for an individual but not enough to warrant the cost of a legal challenge unless grouped in a class action. Forced arbitration also fosters abuse, since there is no check on wrongdoing that takes small amounts of money from potentially millions of customers."
The CFPB notes that its December 2013 findings will be followed by a more complete report, expected in 2014.