We have previously blogged about the comment letter concerning the CFPB’s March 10, 2015 Study on consumer arbitration that we submitted to the CFPB on behalf of the American Bankers Association, the Consumer Bankers Association and The Financial Services Roundtable. That comment letter was highly critical of the conclusions drawn by the CFPB from its own data.
Earlier this month, Professor Jason Scott Johnston of the University of Virginia School of Law and Professor Todd Zywicki of the George Mason University School of Law published a lengthy and important Critique of the CFPB’s Study. The authors conclude that “the CFPB’s findings actually undermine several key arguments that are often asserted to justify restrictions on arbitration, such as the supposed unfairness of arbitration procedures.” For example, they observe, “the CFPB found that arbitration is such a simple and cheap process (now only requiring a $200 filing fee) that consumers achieve good outcomes even when they are not represented by counsel.” Indeed, “arbitration may be the only way for consumers to successfully seek outside redress without resort to hiring costly legal counsel.” According to the Critique, the CFPB’s findings also show that consumer arbitrations are resolved “very quickly.”
Johnston and Zywicki further conclude that the CFPB’s Study “provides no foundation for imposing new restrictions or prohibitions on mandatory arbitration clauses in consumer contracts.” Among other things, the authors address the Study’s finding that few of the arbitrations examined involved small-dollar claims of $1,000 or less, from which the CFPB “implies that the absence of these small-dollar claims from the dataset suggests that arbitration is not a feasible dispute resolution for many consumers,” especially when compared to class actions. They observe that the CFPB failed to consider that many if not most consumer disputes are resolved “without arbitration or litigation” through informal dispute resolution procedures. As an example, Johnston and Zywicki cite “data provided by one financial institution indicat[ing] that it grants refunds to 68% of customers who complain, suggesting that the bank has a well-established internal system for resolving meritorious small-dollar consumer claims, pretermitting either arbitration or litigation.” The refunds for just this one institution totaled more than $2.275 million in 2014 alone. (It is interesting that the CFPB, which had the authority under Dodd-Frank to obtain such information under 12 U.S.C.§ 5512(c), failed to do so). The authors link this data to the CFPB’s own data obtained from its consumer telephone survey:
When consumers were asked what they would do if a credit card company failed to remove a fee that the consumer complained had been wrongly assessed, very few said that they would resort to calling a lawyer. Instead, the vast majority of consumers said that they would simply cancel their accounts and take their business elsewhere. Our data indicate that this consumer market response is credible and real: as economic theory predicts, financial institutions seem to respond to the threat of losing a consumer’s business by waiving various fees and charges on a case-by-case basis. For the vast majority of consumer disputes involving small claims, the market creates incentives for firms to resolve such disputes internally.
Thus, they conclude, “[t]ogether with the CFPB’s survey evidence showing that consumers … punish firms that try to attach unreasonable charges and fees by taking their business elsewhere, it may well be that truly small-dollar claims are increasingly being eliminated by the market itself.”
Johnston and Zywicki fault the CFPB for using the relatively low number of small-dollar consumer arbitrations as a proxy for whether arbitration benefits consumers. Under the CFPB’s logic, they contend, consumers would be better off if companies resolved fewer claims using internal complaint-resolution processes and thereby forced more consumers to bring arbitrations. Such a result would end up burdening consumers, not helping them. The Study is deficient, the authors assert, because while it notes the relative absence of small-dollar arbitrations, it does not attempt to rule out other potential explanations, such as companies resolving such disputes pursuant to internal dispute resolution processes. (Your authors add that most consumer arbitration agreements are required to permit consumers to go to small claims court to resolve small-dollar claims, which obviates the need for the consumer to commence an arbitration).
Another significant observation made by Johnston and Zywicki is that the CFPB Study “makes no attempt to assess the merit of consumer class actions that end in the class action settlements it reports.” They call this a “glaring omission” since the Study “sheds no light on what is perhaps the key public policy question: whether class action settlements often represent a deal struck by defendants to avoid massive discovery costs threatened in lawsuits of questionable substantive merit, whereas arbitration may resolve individual claims more accurately in terms of the substantive merits of the dispute.”
Johnston and Zywicki also examine the CFPB’s conclusion, based upon its telephone survey, that most consumers do not pay attention to whether their credit card contract contains a mandatory arbitration clause. They note that the CFPB seems to imply that for arbitration to benefit consumers, consumers must observe and shop among contract clauses that specify the method by which ex post disputes with the firm will be resolved. Such an implication would be mistaken, the authors state, because the CFPB found that consumers do consider terms such as what interest rate is offered and whether companies fairly resolve consumer complaints. The authors continue:
A firm’s required method of ex post dispute resolution is not something that consumers specifically consider while shopping, but the matters that consumers do consider—prices and how firms resolve complaints—are likely directly influenced by whether a firm can require arbitration. If by requiring arbitration a firm reduces its expected costs of ex post dispute resolution and increases the benefits of accuracy in internal dispute resolution (meaning, it grants consumers a refund when the firm really has made a mistake and denies refunds when no mistake has been made), then arbitration reduces the firm’s costs while increasing its payoff to investing in internal dispute resolution. Arbitration’s likely influence is under the hood, as it were, but potentially it is just as great as if consumers did shop directly considering arbitration clauses.
Johnston and Zywicki also criticize the Study for “not provid[ing] much of the key information necessary to fully evaluate the relative roles of arbitration and class actions as ex post dispute resolution mechanisms for consumer cases.” They explain: “Substantially more and different evidence would be necessary to conclude that consumers are harmed by arbitration or that they would benefit from unleashing class action litigation more routinely. The propriety of caution in moving to restrict arbitration agreements on the basis of the CFPB’s findings is especially appropriate in light of the well-established public policy favoring the use of alternative dispute resolution techniques.”
Professors Johnston and Zywicki have provided valuable information for the CFPB to consider as it begins rulemaking on consumer arbitration agreements.