December 26, 2013
On December 12, 2013, the Consumer Financial Protection Bureau (CFPB) released the preliminary results of its investigation into the use of arbitration agreements in connection with consumer financial products or services. Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the CFPB to conduct such an investigation and provide a report to Congress summarizing the results. The CFPB noted that its analysis is preliminary and is subject to change as more results are received.
The preliminary report is likely just the first step toward the issuance of regulations by the CFPB prohibiting or regulating the use of arbitration clauses in agreements concerning consumer financial products and services. Section 1028(b) of the Dodd-Frank Act permits the CFPB to impose such regulations, if it finds that they are in the public interest and for the protection of consumers based on the results of its study.
The CFPB focused its initial investigation on the use of arbitration agreements in connection with three consumer financial products and services: credit cards, checking accounts, and general purpose reloadable prepaid cards. The CFPB noted that its investigation going forward may look at additional consumer financial products, such as student loans. For this preliminary report, the CFPB looked only at what it called the “front-end” of disputes involving consumers – “who files these disputes, in what numbers, against whom, and about what.” The report states that the CFPB intends to address the “back-end” in the future – “what happens, in how long, and at what cost.” Additionally, the CFPB notes that it intends to look more deeply at consumer cases filed in federal and state courts other than small claims courts, along with additional investigation into consumer class actions.
The CFPB found that larger bank issuers of credit cards are more likely to include arbitration clauses in their credit card agreements than smaller bank issuers and credit unions. This means that even though most issuers of credit cards do not include arbitration clauses in their credit card agreements, a majority of outstanding credit card loans are subject to arbitration agreements because issuers of large numbers of credits cards use such agreements. The CFPB also found that larger banks tend to include arbitration clauses in their consumer checking contracts more often than do smaller banks and credit unions. The result, again, is that even though most banks and credit unions do not include arbitration clauses in their checking account agreements, a significant percentage of insured deposits in checking accounts are subject to arbitration agreements. As for prepaid cards, arbitration clauses are included in most agreements.
Ninety percent of the arbitration agreements reviewed by the CFPB include provisions prohibiting class arbitration, and the American Arbitration Association is the arbitration administrator most frequently selected. Most of the arbitration agreements also contain small claims court carve-outs, which allow either party to file an action in small claims court, and thus avoid arbitration, where the disputed amount falls within the jurisdiction of the relevant small claims court. Approximately one quarter of the arbitration agreements give consumers the option to opt out of them, and most require the consumer to opt out within either 30 or 60 days. Very few of the arbitration agreements place time limits on the filing of claims in arbitration, while most provide disclosure to consumers of certain important differences between arbitration and litigation, such as the lack of a jury trial, limited discovery, and limited rights to appeal.
We will continue to closely monitor the CFPB’s activity in this area and will be prepared to provide analysis of any regulations the CFPB may issue based on its findings.