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OIG updated work plan includes evaluations of CFPB enforcement-related processes and procedures

Posted in CFPB General

The Office of Inspector General’s (OIG) work plan, updated as of November 7, 2014, indicates that the OIG’s ongoing projects include audits of the CFPB’s information security program, pay and compensation program, distribution of civil penalty funds, public consumer complaint database and headquarters renovation costs.  Such projects also include an evaluation of the CFPB’s hiring process.

Among the OIG’s planned projects are an evaluation of the processes used by the CFPB’s enforcement office for protecting confidential information and an evaluation of the CFPB’s compliance with Dodd-Frank Act requirements for issuing civil investigative demands.  The OIG also plans to conduct an audit of the CFPB’s pay and compensation system, which will include an assessment of the controls around setting employees’ pay.

CFPB highlights alleged credit reporting errors relating to discharged student loans of disabled veterans

Posted in Credit Reports, Military Issues, Student Loans

In a new blog post, the CFPB provides credit reporting advice to service-disabled veterans who take advantage of federal student loan forgiveness available from the Department of Education for veterans who receive a 100 percent disability rating from the Department of Veterans Affairs.  The CFPB encourages veterans who use this benefit to confirm that their student loan servicer is providing correct information about their loan discharge to credit bureaus.  The blog post appears to have been triggered by complaints or reports of alleged credit reporting errors the CFPB has received from service-disabled veterans.

While framed as advice for veterans, the blog post also appears intended to serve as a warning to servicers.  Without providing any information as to the nature of the alleged errors, the CFPB stresses how such errors can negatively impact veterans.  It cites the complaint of a veteran whose credit score allegedly “fell by 150 points as a result of this type of error” and, as an “example of what could happen if a veteran tried to buy a home after a credit reporting error caused similar damage to her credit profile and score,” indicates such veteran could pay $45,000 in additional interest over the life of her mortgage loan.  The CFPB also reminds servicers that, in a bulletin issued earlier this year, companies who furnish information to credit bureaus were put “on notice” of their obligation to investigate disputed information.  The CFPB comments that it “will take appropriate action, as needed” and “will also continue to closely monitor complaints from veterans and other disabled student loan borrowers to make sure student loan servicers are furnishing correct information to the credit bureaus about disability discharges.”

Given the comments made by the CFPB in its blog post, we’re left wondering if the loans in question weren’t simply reported in accordance with the current contractually required standards for reporting discharged Title IV loans, and, if so, if the CFPB isn’t really taking issue with those standards.  In circumstances like this, it would be helpful if the CFPB would discuss its concerns with industry members, perhaps involve the Department of Education in those discussions, and then provide industry members with an opportunity to make changes in their reporting, rather than just asserting that the reporting is incorrect or inaccurate.

CFPB issues bulletin on consideration of public assistance income in credit decisions

Posted in Fair Credit, Mortgages

The CFPB has issued a new bulletin (Bulletin 2014-03) that is intended “to remind creditors” of their ECOA/Regulation B obligations with respect to consideration of public assistance income and relevant standards and guidelines regarding verification of  Social Security Disability Insurance and Supplemental Security Income (together, Social Security disability income).

Based on an accompanying CFPB blog post, the bulletin appears to have been triggered by reports to the CFPB from consumers alleging that lenders were not complying with applicable rules.  While the CFPB’s blog post and bulletin are focused on mortgage lending, it is important to note that similar fair lending concerns apply to non-mortgage consumer credit.

The bulletin recites the ECOA and Reg B ‎rule that prohibits creditors from discriminating in any aspect of a credit transaction because all or part of an applicant’s income derives from a public assistance program, such as Social Security income.  The bulletin also notes that Reg B permits creditors, in a judgmental system of evaluating credit, to consider whether an applicant derives income from public assistance for purposes of determining a pertinent element of creditworthiness.  Accordingly, a creditor can consider how long an applicant will likely remain eligible to receive public assistance income.

The bulletin warns that fair lending concerns may arise if a creditor requires documentation beyond that required by applicable agency or secondary market standards and guidelines to demonstrate that Social Security disability income is likely to continue, such as the nature of an applicant’s disability or a letter from the applicant’s physician.  According to the CFPB, prohibited disparate treatment can exist if a creditor imposes documentation requirements on public assistance recipients beyond those it imposes on other applicants.  The CFPB further comments that disparate impact liability can arise if an income verification standard has a disproportionately negative impact on applicants receiving public assistance income.

The bulletin discusses the consideration of Social Security disability income for purposes of the Regulation Z ability-to- repay/qualified mortgage rule.  It references Appendix Q which allows for verification of such income by means of a Social Security Administration benefit  verification letter and states that a creditor can consider such income as “effective and likely to continue” if the letter does not give a defined expiration date within three years of loan origination.

The bulletin also discusses relevant HUD and VA standards for, respectively, FHA-insured and VA-guaranteed mortgage loans, and Fannie Mae and Freddie Mac guidelines for mortgage loans eligible for purchase.

 

Further Thoughts on the St. John’s Consumer Arbitration Study

Posted in Arbitration

Jeff Sovern, through his Consumer Law & Policy Blog, recently responded to our criticism that the St. John’s study didn’t include arbitration provisions with opt-out features. Jeff makes the point that since consumers don’t understand the significance of arbitration provisions, they would not understand what they are opting out of.

While we (and the more than 20 courts that have found opt-out procedures to be understandable and fair) challenge the premise of their argument, we would urge consumer advocates to strive to increase consumer knowledge about arbitration rather than reflexively criticizing it.

Jeff readily acknowledges that his study did not attempt to weigh the relative merits of arbitration and class actions. That is unfortunate, since that is an area that is critically underserved by empirical analysis. A step in filling that void was a lengthy report released last December by an affiliate of the U.S. Chamber of Commerce that set forth “strong evidence that class actions provide far less benefit to individual class members than proponents of class actions assert.” It concluded that the vast majority of the class actions it studied “produced no benefits to most members of the putative class” but did enrich the attorneys.

Do consumers understand what they may (or more likely, may not) achieve if they resolve their disputes as members of a class and decline to opt out of the class? What is the Flesch-Kincaid score of the typical class action opt-out notice or settlement agreement? Studying questions such as these would help shed light on how consumer arbitration compares to class action litigation in the real world and would provide a more meaningful context for evaluating the results of the St. John’s study.

Finally, Jeff’s co-author, Paul Kirgis, has written separately to make the point that our comments on the study “don’t actually address the core problem we address in our article–that citizens are being unwittingly and unwillingly forced to give up important (and constitutionally guaranteed) procedural rights.” But we did address that point, in stating that: “Typically, if an individual agrees to a contract and receives its benefit, he or she will not be heard to complain that the contract is unenforceable because it could not be understood. If a contract is understandable enough to bind a consumer to its business terms, it should be understandable enough to bind the consumer to the contract’s dispute resolution provision. Contracts as a whole are legal documents that affect the parties’ rights. Taking the arbitration clause out of context ignores that the entire contract is supposed to be based upon consent, a meeting of the minds.”

Congress passed the Federal Arbitration Act in 1925 precisely because arbitration had been treated differently than other contract terms and arbitration agreements were rarely enforced because they were singled out for special treatment.  Paul appears to be advocating a return to those “good old days” when arbitration agreements were routinely discriminated against, even though he acknowledges in his blog comments that it “may very well be true, at least some of the time” that arbitration is better for consumers than litigation.  Given his acknowledgement that arbitration can benefit consumers, we again hope that Paul and his colleagues will assist in implementing constructive solutions.  Paul writes that “[i]t 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.”  We would welcome suggestions from Paul, Jeff and their colleagues on how consumer arbitration language could be drafted in order to pass muster under the criteria they applied in their study.  If wordsmithing is the main issue, there may be a way to bridge the gap between arbitration advocates and consumer advocates.

CFPB issues prepaid account study

Posted in Prepaid Cards

Simultaneously with the release of its 870-page prepaid account proposal last week, the CFPB issued a “Study of prepaid account agreements.”  On December 12, 2014, from 12 p.m. to
1 p.m. ET, Ballard Spahr attorneys will hold a webinar on the proposal.  A link to register is available here.

To conduct the study, the CFPB identified 325 publicly available account agreements for prepaid products that appeared to meet the proposal’s definition of the term “prepaid account.”  The CFPB looked at agreements for general purpose reloadable (GPR) prepaid cards, including GPR cards marketed for specific purposes (such as travel or receipt of tax refunds) or specific users (such as teenagers or students), payroll cards, cards used for the distribution of certain government benefits and prepaid programs specifically used for P2P transfers.  The CFPB did not look at agreements for gift cards and other prepaid programs that would not be covered by its proposal.

In the proposal’s background information, the CFPB states that while it “collected a large number of agreements [for the study], it cautions that this collection is neither comprehensive nor complete.”  It further states that “there does not currently exist any comprehensive listing of prepaid card issuers, program managers, or programs against which the Bureau could compare the completeness of its analysis.”

The study analyzes provisions in the agreements reviewed by the CFPB that dealt with error resolution (including provisional credit), liability limits, access to account information, overdraft and treatment of negative balances and declined transaction fees, deposit insurance, and fee disclosure.  The study contains the CFPB’s findings and observations about what information these provisions did or did not contain and related statistics.  It is interesting that while a significant portion of the CFPB’s proposal deals with prepaid accounts with overdraft and credit features, 96.62% of all of the agreements reviewed by the CFPB offered no formal opt-in overdraft service and 77.54% of all such agreements imposed no fees for negative balances.  (The CFPB did not count an agreement as one imposing no such fees if it did not contain information about negative balance fees.  Agreements without such fee information comprised 12.92% of all agreements reviewed by the CFPB.)

The CFPB also found that 77.85% of the agreements it reviewed contained error resolution provisions (including provisional credit) that substantially tracked Regulation E requirements.  In the proposal’s background information, the CFPB acknowledges that it found “a significant majority of [prepaid] products are already substantially in compliance with existing Regulation E provisions.”  Ironically, the CFPB uses this finding to dismiss objections about the regulatory burdens its proposal imposes, stating “objections about the burden of including various types of products within the ambit of this proposed rule are largely negated by” this finding.

CFPB settles second loan originator compensation case

Posted in CFPB Enforcement, Mortgages

The CFPB entered into a stipulated order and final judgment with Franklin Loan Corporation (Franklin) to settle allegations that Franklin paid its employee loan originators compensation based on the interest rates charged on mortgage loans in violation of the Regulation Z loan originator compensation rule.  Without admitting or denying the allegations, Franklin agreed to pay $730,000 in connection with the settlement.  The CFPB advised in announcing the settlement that it did not seek a civil money penalty based on Franklin’s financial condition and the CFPB’s desire to maximize relief available directly from Franklin to affected customers.

The alleged conduct occurred before January 1, 2014, and was subject to the original loan originator compensation rule adopted by the Federal Reserve Board under Regulation Z.  On January 1, 2014, a revised version of the rule adopted by the CFPB pursuant to Dodd-Frank became effective.

The CFPB alleges that before the original loan originator compensation rule became effective on April 6, 2011, Franklin would pay its employee loan originators a “commission split” that was between 65% and 70% of the gross loan fees, that included the origination fee, discount points and retained cash rebate.  According to the CFPB, the retained cash rebate was the portion of the rebate created by a premium interest rate set by the loan originator that was retained by Franklin and not credited to the borrower.  The CFPB asserts that this compensation method encouraged the loan originators to place consumers in higher interest rate mortgage loans.

The CFPB also asserts that Franklin realized that the loan originator compensation rule would prohibit this compensation method, as the rule does not permit a loan originator to be compensated based on the terms of a mortgage loan (other than compensation based on a fixed percentage of the loan amount).  According to the CFPB, Franklin wanted to continue to pay its loan originators financial incentives to originate high-interest mortgage loans, and devised a new compensation plan.  The CFPB alleges that under the new plan Franklin would pay its loan originators (1) an upfront commission based on a set percentage of the loan amount, and (2) a quarterly bonus paid from the loan originator’s individual “expense account,” and that contributions to the “expense account” were based on a percentage of the retained rebate on each loan.

The CFPB considered the contributions to the expense account, which ultimately were paid to the loan originator as a quarterly bonus, to be based on the interest rates charged on the originator’s loans.  The CFPB viewed the bonus payments as compensation that violated the loan originator compensation rule.  The $730,000 settlement amount was the total amount of quarterly bonuses that the CFPB asserts were paid by Franklin to its loan originators from
June 2011 to October 2013.

This is the second settlement entered into by the CFPB based on alleged violations of the loan originator compensation rule.  (We reported previously on the earlier settlement with
Castle & Cooke Mortgage.)

The mortgage industry should take note of CFPB activity in this area.  The CFPB likely will focus on loan originator compensation during examinations.

 

CFPB holds field hearing on proposed rules for prepaid accounts

Posted in CFPB Rulemaking

Ballard Spahr to hold a webinar on the proposal at 12 p.m. ET on December 12th. A link to register is available here.

Yesterday I attended the Consumer Financial Protection Bureau’s (CFPB) field hearing in Wilmington, Delaware, at which the CFPB unveiled and accepted public comment on its long-awaited proposed rule for prepaid accounts under the Electronic Fund Transfer Act (Regulation E) and the Truth In Lending Act (Regulation Z) (the Rule).  A copy of the 870-page proposal and request for public comment can be found here.  For a detailed discussion of the Rule, please see our legal alert.

CFPB Director Richard Cordray delivered prepared remarks explaining the agency’s desire to afford strong consumer protection for, and to fill “gaps” experienced by, consumers in the prepaid market, and highlighting some of the general protections, obligations and restrictions of the Rule.  Addressing one of the more controversial aspects of the proposal, the extension of certain credit card protections to prepaid customers whose accounts include credit features, the Director recognized that such protections could make “certain credit features impractical for prepaid cards,” but observed such protections to be “very important in this context.”

At the conclusion of Director Cordray’s remarks, a panel of commentators made individual statements. The panelists included CFPB General Counsel Meredith Fuchs; Douglas Bower, Executive Director and President of the Network Branded Prepaid Card Association; Cecilia Frew, the head of U.S. Prepaid Products for Visa, Inc.; Rashmi Rangan, Executive Director at Delaware Community Reinvestment Action Council, Inc.; Lauren Saunders, an Associate Director at the National Consumer Law Center (NCLC); Steven Streit, Chairman of Green Dot Corporation; and Susan Weinstock, Director of Consumer Banking for The Pew Charitable Trusts.  Following such statements, the panelists each fielded directed but general questions from CFPB representatives in attendance, including Ms. Fuchs, Steven Antonakes, Deputy Director and Associate Director for Supervision, Enforcement, and Fair Lending, and William Wade-Gery, Assistant Director for Card and Payments Markets.

Ms. Fuchs described briefly the efforts and consumer testing undertaken by the CFPB since having received some 220 comments on the original ANPR for prepaid card regulation that came out in 2012, and emphasized that the proposed rule is just that— a proposal regarding which the CFPB is actively seeking comment and feedback.

The panelists generally agreed that the proposal represents an important, and even welcome, first step in the right direction.  For example, Mr. Streit of Green Dot fully supported the rulemaking, seeing it as “another milestone” in the “maturation” of the industry.  He believed it to be a very positive development for consumers and the industry that providers will have a uniform set of rules to follow.  Several commentators hoped the rules would serve to ease some of the problems currently associated with such products or encountered by its users, especially the more vulnerable segments of the unbanked and underbanked populations, such as an inability to easily comparison shop among products, or the difficulty experienced by users in accessing information about the terms of their own accounts, or in doing so without incurring inordinate levels of hidden fees.

Other commentators expressed a general uneasiness, or more specific concerns, about the continuing ability for prepaid accounts to link to a credit feature under the proposal or about other aspects of the proposal.  For example, Ms. Weinstock suggested that the CFPB should delineate more specifically how such credit offers can be marketed to ensure consumers are not pressured or misled into accepting such credit features, and suggested that the model disclosure forms do not include certain information points that would be useful to consumers to know.  Ms. Saunders indicated her organization will urge that no link to credit features be permitted for prepaid accounts under the final rule (stating that a separate credit product could be offered by the prepaid provider instead of as a linked product), and, more generally, that the NCLC would be seeking to tighten rules or to extend their reach where in its view the rules do not go far enough as proposed.

Public comment from the audience was invited and several consumers and non-profit group representatives expressed their views, which tended to reflect similar themes and concerns as those raised by the members of the panel.

A further update on state AG/regulator lawsuits using Dodd-Frank authority

Posted in UDAAP

Below is an update on the lawsuits we have been following that state attorneys general and a state regulator have brought using their Dodd-Frank enforcement authority.  Under Dodd-Frank Section 1042, a state AG or regulator is authorized to bring a civil action to enforce provisions of Dodd-Frank Title 10 or regulations issued under Title 10, including the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices (UDAAP).

Illinois.  The Illinois AG has filed two lawsuits using her Section 1042 authority.  In March 2014, the Illinois AG filed a state court lawsuit against a small loan lender alleging violations of the Dodd-Frank UDAAP prohibition as well as state law violations.  In April 2014, the defendant removed the case to an Illinois federal court.  In May 2014, the defendant filed a motion to dismiss and the AG responded to the motion on July 21, 2014.  Since our prior update, the defendant filed a reply memorandum in support of its motion to dismiss on September 18.

The Illinois AG’s second use of Section 1042 was in a lawsuit initially filed in state court against a for-profit college and its owners.  In March 2014, the state court granted the AG’s motion to further amend her complaint to add new counts alleging that the defendants’ practices were unfair and abusive under Dodd-Frank and in May 2014, the defendants removed the case to a federal district court in Illinois.

On June 16, 2014, the defendants filed a motion with the federal district court to dismiss the amended complaint and on June 18, the AG filed a motion asking the court to sever and remand Counts I and II of the amended complaint. Both parties’ motions were denied.

Since our prior update, the AG filed a substantially similar second amended complaint on September 30 to which the defendants filed an answer on October 3.  The court has set a summary judgment motion filing deadline of December 12, 2014 and scheduled a bench trial for June 15, 2015.

New York.  In April 2014, Benjamin Lawsky, the Superintendent of the New York Department of Financial Service, using his Section 1042 authority, brought a civil action in a New York federal court for a violation of the Dodd-Frank UDAAP prohibition against a large subprime auto lender and its CEO and president.  In May 2014, the court entered a preliminary injunction freezing the defendants’ assets and enjoining them from engaging in new loan business and an order appointing a receiver.  On June 10, the court denied the defendants’ motion to modify the preliminary injunction.

On August 1, the court denied a renewed motion by the defendants to modify the preliminary injunction.  As we reported, the defendants have filed an appeal from that order with the U.S. Court of Appeals for the Second Circuit and must file their brief by December 8.

Since our last update, the district court issued a ruling on October 28 that by appealing the August 1 order, the defendants divested the court of jurisdiction to modify that order and denied a request by the defendants to modify the order while the appeal is pending.  On November 6, the court entered an order formally reaffirming that the receiver had absolute discretion to enter into a sale of the lender’s customer loan portfolio and use the proceeds to satisfy amounts owed to the lender’s secured creditors.  On the same day, the lender and its CEO submitted a letter to the court seeking permission to participate in the marketing and sale of the lender’s remaining assets.

Florida/Connecticut.  On July 29, 2014, another Section 1042 lawsuit was filed jointly by the Attorneys General of Florida and Connecticut in a Florida federal court.  The lawsuit alleges that four individuals and their four businesses formulated and participated in a mortgage rescue scam that deceived consumers into paying upfront fees to be included as plaintiffs in so-called “mass-joinder” lawsuits against their mortgage lenders or servicers.

In addition to asserting claims under their states’ unfair trade practices acts, the AGs allege in their amended complaint that the defendants’ conduct violated the federal Mortgage Assistance Relief Services Rule (MARS Rule).  The AGs assert their MARS Rule claim pursuant to Section 1097 of Dodd-Frank (12 USC Section 5538), which authorizes a state AG to bring civil actions on behalf of his or her state’s residents to enforce the MARS Rule.

The AGs also assert a UDAAP claim under Section 1042 of Dodd-Frank.  Dodd-Frank Section 1097 further provides that a violation of the MARS Rule “shall be treated as a violation of a rule prohibiting unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act of 2010.”  The defendants assert that pursuant to Section 1097, a violation of the MARS Rule is a UDAAP under Dodd-Frank.

Contemporaneously with the filing of the original complaint, the court entered a temporary restraining order freezing certain of the defendants’ assets and appointing a receiver and on August 22, 2014, the court entered a preliminary injunction continuing such relief.

Since our initial report, one of the individual defendants filed an answer to the amended complaint on October 7 and the remaining defendants have received extensions to file answers until December 2 and 8.

Mississippi. In May 2014, the Mississippi AG filed a lawsuit against Experian in Mississippi state court alleging widespread federal and state law violations.  (While the AG’s complaint did not expressly allege that his claim of alleged UDAAP violations by Experian was brought under Section 1042, his complaint seeks various remedies under Dodd-Frank Section 1055 (12 U.S.C. 5565).)  In June 2014, Experian removed the case to a federal district court in Mississippi.  There have been no significant developments since our prior update.

 

Some thoughts on the St. John’s School of Law’s analysis of consumer understanding of arbitration agreements

Posted in Arbitration

Following on the heels of the Pew Foundation’s survey of consumer attitudes towards arbitration and the CFPB’s on-going empirical study of consumer arbitration, a group of professors from St. John’s University School of Law recently conducted an empirical study purporting to explore the extent to which consumers are aware of and understand the effect of arbitration clauses in their consumer contracts.  According to the study, which is presently in draft form, 668 consumers completed an online survey in which they were shown a generic but supposedly “typical” credit card contract with an arbitration clause containing a class action waiver and were then asked questions about what they understood and what they thought their legal rights were in various hypothetical situations.

The study concluded that there is “a lack of understanding about the existence and effect of arbitration agreements among consumers.”  It found that there are “troubling issues” about whether consumers’ consent to arbitration is “informed in any sense of the word” and whether “consumers should be bound by agreements they cannot comprehend but which strip them of their constitutional rights.”  “Overall,” the authors state, “of the more than 5,000 answers we recorded to questions offering right and wrong answers [about arbitration], only a quarter were correct.”

In our view, the survey is deeply flawed because it does not even attempt to examine how consumers actually fare in individual arbitrations, or how their experience compares with how class members fare in certified or settled class actions.  Before dismissing consumer arbitration clauses as “Whimsy Little Contracts with Unexpected Consequences” (the title of the study), the St. John’s study should have made a serious effort to canvas individuals who have actual first-hand experience with the arbitration process and individuals who have participated as class members in a class action.  Unfortunately, the study avoids this central issue, stating that: “We will not attempt to resolve the debate over the comparative advantages of arbitration and litigation in this article.”  And, “they express no opinion here about the efficacy of class actions,” although they acknowledge it is “a subject of heated debate.”  Tellingly, the final question out of the 40 questions in the survey (coming after stock demographic questions about age, annual income and ethnicity) is the question that should have been first: “Have you ever been a party to or otherwise involved in an arbitration?”

It is our view that a significant measure of the fairness of arbitration is how it compares to other procedures for resolving disputes, in particular class actions.  A consumer who was able to successfully resolve a dispute in a few months and with minimal expense would likely prefer arbitration (even pre-dispute mandatory arbitration) to a class action in which, after years of litigation, he or she receives a $5 check or a coupon towards a future purchase while the attorneys for the class obtain millions in “class counsel” fees.  Because it focuses myopically on the “understandability” of a hypothetical arbitration clause in a hypothetical contract, the St. John’s study does not further our understanding of the critical question of whether individual arbitration is fair to consumers compared with class action litigation.

In fact, many earlier studies have concluded that consumers do fare well in arbitration, even better than they fare in litigation.  For example, an Ernst & Young empirical study in 2004, which included a telephone survey, found that consumers prevailed more often than businesses in cases that went to an arbitration hearing, with 55% of the cases that faced an arbitration decision being resolved in favor of the consumer; consumers obtained favorable results (including settlements) in 79% of the cases that were reviewed; and 69% of consumers surveyed were satisfied with the arbitration process.  A 2005 Harris Interactive survey of 609 adults who had participated in a binding arbitration that culminated in a decision found that arbitration was widely seen as faster (74%), simpler (63%) and cheaper (51%) than going to court; two-thirds (66%) of the participants said they would be likely to use arbitration again, with nearly half (48%) saying they were extremely likely to do so; even among those who lost, one-third said they were at least somewhat likely to use arbitration again; and most participants were very satisfied with the arbitrator’s performance, the confidentiality of the process and its length.  More recently, a 2009 study by the Northwestern University School of Law of 301 American Arbitration Association consumer arbitrations concluded that arbitration is an expeditious way to resolve disputes (averaging 6.9 months) and that consumers won relief in 53.3% of the cases filed and recovered an average of $19,255.

The ultimate irony here is that even if some consumers in the St. John’s study who never participated in a consumer arbitration may purport to be confused when they are asked hypothetical questions about what arbitration is and what effect it has, consumers who have actually participated in arbitration appear to have very definite opinions about what arbitration is and what it does.  They like arbitration because it works better than the court system.  Eliminating their views skews the analysis and produces an artificial anti-arbitration conclusion.

In our opinion, asking consumers whether they know, based upon reading a hypothetical credit card agreement, whether they agreed to arbitrate or whether they can go to small claims court or participate in a class action does not shed any light on the ultimate question of whether individual arbitration is fair to consumers compared to class action litigation.  Moreover, it is misguided to focus narrowly on whether the consumer has “consented” to the arbitration clause alone.  Had the individuals who claim they were confused about the arbitration clause been quizzed about how the credit card’s daily interest rate is computed, what the parties’ respective rights are in the event of default, what their billing rights are or what information was contained in the Schumer box, they probably would have expressed the same confusion.  But with rare exceptions, the law has always been that contracts are to be viewed objectively.

Typically, if an individual agrees to a contract and receives its benefit, he or she will not be heard to complain that the contract is unenforceable because it could not be understood.  If a contract is understandable enough to bind a consumer to its business terms, it should be understandable enough to bind the consumer to the contract’s dispute resolution provision.  Contracts as a whole are legal documents that affect the parties’ rights.  Taking the arbitration clause out of context ignores that the entire contract is supposed to be based upon consent, a meeting of the minds.  If anything, given 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.  In any event, ask a consumer who has prevailed in an arbitration proceeding a few months after filing a demand if he or she understands what arbitration is.  That person will give a much different, and more meaningful, response than respondents who lack real-world experience with arbitration and are asked hypothetical questions.

Even before the advent of consumer arbitration clauses, many contracts contained jury trial waiver provisions.  Many, if not most, states will enforce such waivers if they are disclosed in a clear and conspicuous fashion.  Relinquishing a jury trial is the only “constitutional right” that is waived when a party agrees to arbitrate.  Bringing or participating in a class action is not a constitutional right.  It is a mere procedural right.  But it is the inclusion of a class action waiver in an arbitration provision that is the root of the frenzied opposition of plaintiffs’ lawyers and consumer advocates to consumer arbitration.  The St. John’s article itself expresses “doubt about the legitimacy of the class action waivers contained in arbitration clauses.”

As noted above, there are statistics that support the conclusion that a consumer fares better in an individual arbitration than as a member of a class.  But even aside from statistics, consumers have much to gain from arbitration that is not reflected in the St. John’s survey questions.  They can have their disputes resolved in a matter of months, not years.  In most cases they pay less than what it costs to file a complaint in court.  They get the opportunity to sit at a conference table with the decision maker and tell their side of the story unconstrained by the formalities of a courtroom or strict evidentiary rules.  Win or lose, they are treated with courtesy and respect by the arbitrator and are given the kind of personal attention that is impossible in a courtroom setting.  If those same consumers had been class members, at best they might have recovered a few pennies on the dollar, or received a coupon for a future purchase, after years of litigation, only to watch their counsel walk away with the lion’s share of the settlement or recovery.  Is that more or less fair to the consumer than arbitration?

And what does a consumer really “understand” about the mechanics of class actions?  When a consumer has to make an opt-out decision based upon the dense legalese in a typical class action notice, and then is referred to a 50-page or longer settlement agreement filled with even more legalese for further details, is the consumer’s understanding of his or her legal rights any clearer than after reading a arbitration clause?  Is the consumer’s understanding of the right to opt out of a class action any clearer than his or her understanding of the right to opt out of an arbitration clause?  Aren’t those the types of questions that the St. John’s study should have explored before castigating arbitration clauses as “whimsy little contracts” that are not “understandable” to some consumers?  (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).

Focusing on just the hypothetical arbitration clause in a hypothetical contract presents an incomplete and distorted picture of how consumers are asked to make choices that affect their legal rights, and how they make those decisions.  We hope that the CFPB takes a more balanced and comprehensive approach as it continues its study of consumer arbitration so that the fairness of consumer arbitration is not decided in a vacuum, but rather in comparison to class actions and other dispute resolution mechanisms.

CFPB “mystery” field hearing is no longer a mystery

Posted in Prepaid Cards

On October 30, Barbara Mishkin reported that the CFPB scheduled a field hearing in Wilmington, Delaware on November 13. Barbara speculated at that time that the field hearing would be the occasion for the CFPB to unveil its long-awaited proposed regulation pertaining to prepaid cards. The CFPB has updated its announcement to state that the hearing will deal with “prepaid accounts.” We await the list of speakers at the event.