The CFPB’s Final Arbitration Study: What’s the Real Story?

The Consumer Financial Protection Bureau has now delivered to Congress the final results of its empirical study of consumer arbitration as mandated by Section 1028 of the Dodd-Frank Act. While it has been widely reported that the results show that arbitration agreements are detrimental to consumers, a careful reading of the 728-page study reveals that it would be incorrect for Congress or the CFPB to draw that conclusion. In fact, the study confirms that arbitration does benefit consumers.

Our findings include:

• The data demonstrate that arbitration is faster and more economical than litigation. According to the study, the median desk arbitration (an arbitration based on just a review of relevant documents) was resolved in four months; the median telephone arbitration was resolved in five months; and the median in-person hearing was resolved in seven months. When the case resulted in a settlement, the median arbitration proceeding lasted only two to five months. By contrast, the average class action settlement received final court approval in an average of 690 days (1.89 years); federal multidistrict litigation class actions closed in a median of 758 days (2.07 years) for cases filed in 2010; and state court class actions filed that year had a median time to closure of 407 days (1.11 years).
   
• During the 2010-2012 period studied by the CFPB, the American Arbitration Association (AAA) capped the consumer’s share of administrative and arbitrator costs at $125; the company paid the rest. Under the new AAA Consumer Rules that became effective in September 2014, the consumer’s share is capped at $200. (By comparison, the filing fee for a complaint in federal court is $350). Under the AAA Rules, the consumer can also request a waiver of those fees based on financial hardship, and many arbitration agreements provide that the company will pay the consumer’s share. Even when consumers initially paid a modest share of the fees, in 56 of 123 arbitrations examined by the study, they were reimbursed in the arbitrator’s award for at least some of the fees.
  
  
• In its press release announcing the issuance of the study, the CFPB stated: “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.” However, the statistics actually contradict the CFPB’s concern that arbitration clauses are a barrier to class actions.
   
  • Of the 562 federal and state class action cases filed from 2010 to 2012 analyzed in the study, the defendant company moved to compel arbitration in only 94 (16.7 percent) of the cases. In particular, in 2010, 27 motions to compel arbitration were filed in 172 class actions; in 2011, 40 such motions were filed in 193 class actions; and in 2012, 27 such motions were filed in 197 class actions. Moreover, these motions were granted in only 46 of the 94 cases (49 percent) in which they were filed. According to the CFPB’s own statistics, arbitration was thus a factor in only 8 percent of the class actions studied.
    
    
  • Of the class actions studied, 25 percent were resolved through individual settlements, while 35 percent included a withdrawal by plaintiffs or a failure to prosecute. Approximately 15 percent obtained final settlement approval. No class cases went to trial during the period studied, either on a class or an individual basis. Given that 60 percent of the “class actions” settled individually or just fizzled, it is clear that most were filed primarily to force an individual settlement or were marginal at best. In other words, in 60 percent of the class actions, the putative class members got nothing. And none of the class actions went to trial. By contrast, of 341 cases that were resolved by an arbitrator, in-person hearings were held in 34 percent of the cases, and there were at least 146 cases in which arbitrators reached a decision on the merits of the parties’ claims. The CFPB has it backwards—it is class actions that are a barrier to consumers obtaining meaningful relief in arbitration.
    
    
• In arbitrations where consumers obtained relief on their affirmative claims and the CFPB could determine the award amount, the average grant of relief to the consumer was $5,389, meaning an average recovery of 57 cents for every dollar claimed. Based on 73 of 74 individual federal court claims in which a judgment was entered for the consumer, the average amount awarded to the consumer was $5,245. So consumers fare just as well in arbitration as in court, and perhaps even better.
  
  
  • Regrettably, there are no comparable statistics for individual class members. The financial numbers for class actions are stated in gross terms—e.g., “in the 60% of settlements where there was enough data to report the value of cash relief … the value of cash payments was $1.1 billion.” Or, “some 34 million class members had received or were scheduled to receive cash relief as a result of the filing of a claim or receiving an automatic distribution of relief.” But the critical question is how each class member fared individually compared to how the consumer would have fared in an individual arbitration. Did each one get a few dollars? A coupon? If 10 million consumers receive a few dollars each, that means little to the individual consumer, even though the aggregate numbers look large. Moreover, how many years did consumers have to wait to get that modicum of relief? Did they even bother to cash the tiny checks they received?
    
    
  • Even class members entitled to benefits frequently fail to obtain them. The study found that in “claims made” class action settlements, the unweighted average claims rate was 21 percent and median was 8 percent. The weighted average claim rate was only 4 percent. Moreover, claims rates fell nearly 90 percent if documentary proof was required. Presumably, the funds not distributed to the class members either reverted to the company or were used for a cy pres distribution.
     
  • One thing is clear—class action attorneys were paid well. Attorneys’ fees awarded to class counsel in settlements during the period studied amounted to a whopping $424,495,451.
    
    
• The study is overflowing with statistics. In his prepared remarks, Director Cordray called it “the most comprehensive empirical study of consumer financial arbitration ever conducted.” But as the Scottish scientist James Clerk Maxwell wrote, “If we betake ourselves to the statistical method, we do so confessing that we are unable to follow the details of each individual case …” That is the study’s Achilles’ heel: like the CFPB’s preliminary study issued in December 2013, it fails to examine the actual experiences of consumers who have gone through arbitration. In ascertaining whether consumer arbitration is in the public interest, real consumers’ actual experiences with arbitration and class action proceedings is at least as important as a telephone survey asking randomly selected consumers about their awareness of arbitration clauses in their credit card contracts, if not more so.
  
  

Concerning next steps, Director Cordray stated in his prepared remarks that “[w]e will be meeting with stakeholders after they have had a chance to read our Study,” presumably before the CFPB undertakes any regulation. We agree with Director Cordray that continued discussion and debate is necessary and appropriate at this juncture. We look forward to participating.

Ballard Spahr’s Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. It is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or Mark J. Levin at 215.864.8235 or levinmj@ballardspahr.com.

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