Financial Consumers Can Only Avoid Arbitration By Using A Credit Union

CFPBS Preliminary Report

Say it’s twenty degrees below zero outside, and you’d already seen boiling water turn into “snow” immediately upon making contact with the air, what would you do next?  Assuming you were all caught up on your Words With Friends games, you would read the 168-page initial report of the Consumer Finance Protection Bureau about arbitration!  This well-written report is the CFPB’s preliminary findings about consumer financial arbitration, which is that agency’s homework assignment under the Dodd-Frank Act.  In short, the study does a nice job finding statistics where statistics are hard to come by, confirming some things that we all knew from reading the case law in the last few years, and shedding light in a few areas.

The study focused on the “front end” of arbitration — when arbitration is required by contracts, what the arbitration agreement says, who demands arbitration after there is a dispute, the dollar amount at dispute, and who is represented by counsel.  Not, in other words, who won.  It also focused on three specific types of financial contracts that consumers enter into: credit card agreements, checking account agreements, and general purpose reloadable prepaid cards (which I had never heard of before reading the report).

In the “not surprising” category are these findings:

  • “Nearly all” of the arbitration agreements reviewed prohibited class arbitration;
  • The American Arbitration Association is the venue of choice for most consumer financial arbitration agreements;
  • Larger banks are more likely to use arbitration clauses in their credit card and checking agreements than smaller institutions; and
  • Most of the arbitration agreements studied allowed parties to bring low-dollar claims in small claims court.

In the “really? a banana will freeze into something as hard as a hammer” category are these findings:

  • Overall, only 50.2% of outstanding credit card loans were subject to arbitration agreements. (This number may increase markedly in the coming year or so, now that a settlement-induced 42-month hiatus from arbitration agreements has expired for the four biggest issuers.  If those four issuers were using arbitration clauses in this study, 94% of all credit card loans would have been subject to arbitration agreements.)  Only 3.3% of credit unions used arbitration clauses in their credit card agreements;
  • A majority of the arbitration clauses studied explicitly delegated disputes about the enforceability of the arbitration agreement itself to the arbitrator (but a significant minority actually have “anti-delegation” clauses);
  • The average arbitration clause in a credit card agreements was just over 1,000 words and gets a low score on “readability” (but, to be fair, so would this blog…);
  • About 1/4 of arbitration clauses in credit card and checking agreements allow consumers to opt-out of arbitration within an early window of time;
  • Concepcion has had no discernible impact on arbitration clauses in credit card agreements, neither in their overall usage nor in how frequently they preclude class actions.  Both figures have stayed constant over the past three years (although there has been some increase in checking account agreements that provide for arbitration and preclude class arbitration);
  • Roughly half of consumers had counsel at some time during the arbitration proceeding;
  • Almost no individual cases in these categories had less than $1,000 in dispute.  In fact, the average amount in dispute between 2010-2012 was $38,726;
  • The AAA handles an average of 415 cases a year on these topics, the majority of which relate to credit card agreements, and half of those are debt collection disputes (while approx. 80 million credit card holders are subject to arbitration agreements and tens of millions have checking accounts requiring arbitration).  Most of those case are filed by the consumers;
  • About 3/4 of consumers who have counsel are represented by repeat players — lawyers who regularly represent consumers in financial arbitrations; and
  • Similarly, about 4/5 of companies in these disputes are represented by counsel who are repeat players.

This study gives Congress, and the rest of us, a better picture of how arbitration is being used in the financial industry.  The CFPB’s next report will cover these topics more comprehensively, as well as tackling other topics like class arbitration and the disposition of consumer arbitrations.

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By Liz Kramer

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