CFPB Initiates Arbitration Rulemaking Process; Collectors Invited to Be on SBRFA Panel

As insideARM previously reported, the Consumer Financial Protection Bureau (CFPB) will hold a Field Hearing today in Denver, Colorado, at 11am MDT. The CFPB has released Director Cordray’s prepared remarks, which detail the thinking that led to today’s announcement that the CFPB will launch a rulemaking process related to arbitration. The next step is to convene a SBRFA Panel (named for the Small Business Regulatory Enforcement Fairness Act of 1996), which will occur on October 28.

As background, he describes the story of two hypothetical women, customers of two different banks, who both have experienced unexpected overdraft fees due to unexplained bank processing policies. Both end up paying hundreds in fees. After consulting with attorneys, who explain that there are likely many other consumers who have been affected by the same practices, both pursue action. One of the banks had an arbitration clause in their agreement with the consumer (that case was dismissed) and the other didn’t (that case successfully won a large settlement).

Cordray also described the CFPB’s Arbitration study, released in March 2015, which found that arbitration clauses are pervasive, yet more than 75% of consumers are aware that they exist. The study concluded that group lawsuits can be an effective way to provide relief to consumers when they are allowed to proceed.

The proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well.

Cordray explains that they are not proposing a complete ban on all pre-dispute arbitration agreements for consumer financial products and services; Companies could still have an arbitration clause, but they would have to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court. He cites that this approach is consistent with rules that the Financial Industry Regulatory Authority has applied to broker-dealers for years.

The proposal would require companies to send to the Bureau all filings made by or against them in consumer financial arbitration disputes and any decisions that stem from those filings (and these filings may be made public). The Bureau’s expectation is that by developing comprehensive data on these matters, over time they will be able to refine their evaluation of how such proceedings may affect consumer protection, if at all.

Cordray highlights three expected benefits of their proposed approach:

Consumers would have the opportunity to get their day in court.
Companies would be held accountable for misdeeds, thereby discouraging broad-scale wrongdoing.
The process of arbitration would become subject to public scrutiny, which will improve understanding of how arbitration clauses affect resolutions for individuals who don’t pursue group claims. This would, in turn, produce better informed and more precise policy making.

This is an outline of the proposals under consideration.

This is a list of questions on which the Bureau will seek input from the small business representatives providing feedback to the Small Business Review Panel.

This is a factsheet summarizing the Small Business Review Panel process.

This is the agenda for today’s hearing, which is also available by livestream at the CFPB’s website.

11 a.m. MDT/1 p.m. EDT Opening Remarks

Zixta Martinez, Associate Director of External Affairs, Consumer Financial Protection Bureau

11:05 a.m. MDT/1:05 p.m. EDT Remarks by CFPB Director

Richard Cordray, Director, Consumer Financial Protection Bureau

11:20 a.m. MDT/1:20 p.m. EDT Panelist Remarks and Discussion

Alan Kaplinsky, Partner, Ballard Spahr

Ira Rheingold, Executive Director, National Association of Consumer Advocates

Jean Sternlight, Professor of Law, University of Nevada-Las Vegas

Jose Vasquez, Attorney, Colorado Legal Services

Stephen Ware, Professor of Law, University of Kansas School of Law

John Rudy, Senior VP & Chief Lending Officer, Bellco Credit Union

12:15 p.m. MDT/2:15 p.m. EDT Audience Testimony

Open microphone for public participation

1 p.m. MDT/3 p.m. EDT Hearing Concludes

insideARM Perspective

You may recall that following the CFPB’s release of its study, many industry groups and some academics criticized it, including a Mercatus Center at George Washington University report which argued that the methodology and conclusions were flawed. The authors concluded,

Public policy in the United States has long supported the use of arbitration and other means of dispute resolution as an alternative to litigation. Indeed, broad regulatory action by the CFPB that might nullify or discourage consumer arbitration could preempt what has become quite precise judicial supervision and fine-tuning of consumer arbitration clauses. Such ex post judicial supervision seems already to have changed the way that companies such as AT&T draft arbitration clauses, leading to arbitration procedures that are cheap and easy for consumers to pursue and that offer consumers large payments (in AT&T’s case, $10,000) when the consumer wins. Consumer arbitration is only in its infancy. It has tremendous promise. The CFPB’s Report provides no evidence for this promise to be aborted by expansive new CFPB regulation.

An additional perspective not articulated by Director Cordray is the economics of who actually wins in most class action cases. The reality is that consumers traditionally get next to nothing in almost every class action case while the lawyers that file these cases become multi-millionaires. It’s clear that the CFPB views these economics as fair pay for attorneys who providing the service of holding companies accountable.

Arbitration has proven to a quicker, cheaper, simpler, and less expensive method to resolve disputes. That would seem beneficial not harmful to consumers.

In addition to the Mercatus report above, a few sources supporting this claim include:

A 2011 World Bank report titled Settling Out of Court; How Effective is Alternative Dispute Resolution
An April 2015 Wall Street Journal article titled “In Federal Courts, the Civil Cases Pile Up”
…And for good measure — a 1985 speech by Chief Justice Warren Burger urged lawyers at an American Arbitration Association meeting to use arbitration and mediation efforts as a way of reducing the backlog of cases in the overburdened federal and state court systems.

insideARM has already learned of two 3rd party collection agencies that have been asked to testify in the CFPB’s SBREFA hearing on this matter, scheduled for October 28. Arbitration clauses become relevant to the ARM industry in the event a collection agency is named as a defendant with their creditor client in any class action litigation. Among other things, the Bureau will seek input on the following from the SBREFA participants:

Have you ever compelled a case to arbitration or been involved in an arbitration proceeding?
If so, what were the benefits? Any cons?
Was the dispute resolved via settlement or a decision from the arbitrator?
Any other concerns regarding CFPB proposals precluding arbitration clauses in creditor agreements?
Did including an arbitration agreement change your business’s investment in compliance with consumer protection laws?
If your business is a debt collector or a debt buyer: Does the presence (or absence) of an arbitration agreement in a consumer credit agreement affect which accounts you collect or purchase or how you structure your services? Does it affect your charge for collecting, or the price for purchasing, accounts? If so, how? If not, why not?