New rule will raise costs, harming businesses, consumers, and the court system.
The Consumer Financial Protection Bureau (CFPB) issued a final rule this summer that will prohibit financial services companies from including pre-dispute arbitration agreements with class action waivers in their consumer account contracts.
In the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress authorized the CFPB to study the use of arbitration agreements in consumer contracts and then, if necessary, to issue regulations restricting or prohibiting their use. However, Dodd-Frank imposed three express limits on the CFPB’s rule-making authority. Any arbitration rule must be “in the public interest,” “for the protection of consumers,” and “consistent” with the agency’s study of their use.
Unfortunately, the recently issued final arbitration rule vaults over those statutory requirements and promotes an untethered public policy favoring class action litigation that benefits only class action lawyers. Moreover, this is to the detriment of businesses and the very consumers that the CFPB was created to protect. The rule also effectively overrules the U.S. Supreme Court’s landmark 2011 decision in AT&T Mobility, LLC v. Concepcion that held that the Federal Arbitration Act preempts state laws that bar the use of class action waivers in consumer arbitration agreements.
The CFPB’s own statistics reveal the arbitration rule’s fatal flaws. The CFPB’s study found that only 12.3 percent of the 562 class actions studied produced any settlement benefits to the putative class members. Most class actions settle individually, leaving the putative class members to fend for themselves. Only the plaintiffs’ class-action lawyers benefitted in those cases, receiving more than $400 million in attorneys’ fees.
The 12.3 percent of class actions that settled on a class-wide basis produced only minuscule benefits—an average of $32—for the settlement class members who had to wait for two or more years to receive even that paltry sum. In the class settlements that required the putative class members to submit a claim form, the weighted average claims rate was only 4 percent, meaning that 96 percent of the potentially eligible putative class members failed to obtain any benefits because they did not submit claims.
By contrast, the average award to a prevailing consumer in arbitration was $5,389 —166 times what putative class members recover on average in class settlements. Those consumers received their award within five months, instead of in more than two years. And the costs to the consumer were minimal, typically $200, at most, compared to the $400 fee for filing a complaint in federal court. Furthermore, none of the 562 class actions the CFPB studied went to trial. Yet the study found that of the 341 cases resolved by an arbitrator, in-person hearings were held in 34 percent of the cases, and an arbitrator issued an award on the merits in about one-third of the cases. Prior studies showed that consumers prefer arbitration to court litigation, but the CFPB—perhaps to avoid a similar outcome—refused to survey consumers who actually participated in an arbitration about their experiences with and attitudes towards arbitration.
Moreover, the arbitration rule will inflict extreme financial harm on financial services providers, federal and state court systems, and consumers themselves. At the time the CFPB issued its rule, it estimated that it would cause 53,000 providers who currently use arbitration agreements to incur between $2.62 billion and $5.23 billion in costs over a five-year period to deal with the over 6,000 additional federal and state court class actions that would be filed due to the rule’s elimination of class waivers. Consumers will be substantially harmed by these additional class actions because the costs associated with them will be passed through. The public will also incur the additional costs to state and federal courts, or any costs resulting from litigation delays, as the judiciary is already chronically underfunded and seriously overwhelmed.
In addition, the arbitration rule will likely cause consumers with small claims that are not amenable to class-action treatment to abandon their claims altogether, because few consumers will be able to find a lawyer to handle a small claim that cannot be aggregated into a class action. Furthermore, many, if not most, companies, based on a cost-benefit analysis, will likely cease offering even individual arbitration programs if class-action waivers are prohibited. Although the consumer’s arbitration costs may be capped by the arbitration administrator at $200, the company is responsible for the remaining fees and costs, which can run into the thousands. Many companies, in their arbitration agreements, also agree to pay the consumer’s share of the costs.
None of these dire outcomes is necessary. The CFPB itself is far more effective and efficient than class action litigation in addressing alleged consumer harm. Through July of this year, the CFPB had ordered companies to pay more than $11.9 billion to more than 29 million consumers in enforcement actions. That is an average payment of $410 to each consumer, about 13 times the $32 cash payment received by the average putative class member. None of that consumer relief was siphoned off to pay attorneys’ fees.
Earlier this year, the U.S. House of Representatives passed a resolution disapproving the final arbitration rule under the Congressional Review Act. A vote by the U.S. Senate on a similar resolution is anticipated in the fall. Unquestionably, Congress should disapprove the final arbitration rule as it is now certain that the strictures on CFPB regulatory action imposed by the Dodd-Frank Act have been sacrificed on the altar of class action litigation.