Early in October, the Consumer Financial Protection Bureau unleashed its latest effort to remake the American consumer credit system. This time, the bureau is targeting the provisions in consumer credit contracts that require disputes to be handled through arbitration rather than class action lawsuits. Our recent Mercatus Center working paper suggests that-despite the consumer protection rhetoric-class action lawyers, not consumers, will benefit from the bureau's anti-arbitration efforts.
Congress and courts have long supported the use of arbitration instead of litigation to resolve disputes. The Supreme Court forcefully upheld arbitration in its 2011 decision in AT&T v. Concepcion, which involved a binding arbitration provision in cell phone contract, and then again in 2013 in American Express v. Italian Colors, an antitrust case.
The CFPB purports to provide a basis for overturning this longstanding consensus support for arbitration. Contrary to Bureau Director Richard Cordray's assessment, however, the CFPB's work is not "the most rigorous and comprehensive study of consumer finance arbitration ever undertaken." The study is riddled with methodological flaws and does not provide evidence supporting a ban on mandatory arbitration. Instead, the study shows that arbitration works for consumers.
Critics assert that consumers are forced to accept arbitration clauses on a take-it-or-leave-it basis. The CFPB's study found that 84 percent of credit card issuers do not require arbitration and only 8 percent of banks require it. The study also confirms that arbitration is such an inexpensive, fast, and efficient process that self-represented consumers do almost as well in arbitration as consumers represented by attorneys. The study shows that most consumer arbitration claimants either get settlements or arbitral awards. Arbiters sometimes determine that complaints are meritless, but the study provides no basis for second-guessing these experts.
Director Cordray touted the fact that class action litigation returns approximately $220 million to 6.8 million consumers each year. That impressive-sounding number amounts to a less-than-impressive average of $32.38 per person. Moreover, of the 350 million consumers the CFPB reported as receiving relief in a class settlement, 190 million were part of the settlement by credit reporting agency Transunion. Class action lawyers received over $18 million in that case, but all consumers got was six months of credit monitoring and credit reports, which are free anyway. Attorneys are often the big winners. During the 2010-12 period examined in the study, class action attorneys raked in $424,495,451.
Director Cordray stressed that even if class action returns for consumers are somewhat trivial, class actions still vindicate the "core American principle" of giving consumers their "day in court." Yet not a single class case went to trial during the study period, and fewer than 2 percent ended in either a class or individual judgment.
Whereas class actions work best for lawyers, arbitration serves consumers well. The CFPB reports that less than 10 percent of consumers are even aware of whether their consumer credit agreements mandate arbitration. Maybe that's because consumers really don't object to arbitration.
If arbitration is so effective, why don't more consumers pursue arbitration with their banks? According to a CFPB survey, the majority of consumers said they would simply shift to another credit card provider if an issuer refused to refund a wrongfully imposed fee. Financial institutions feel the pressure from consumers. According to data provided to us by a mid-sized regional bank, almost two thirds of customer fee complaints were voluntarily resolved in favor of the customer with a full refund. The average refund was $55.09 per customer (compared to just $32 per person for class actions).
Because many small dollar complaints against financial institutions are resolved consensually, the CFPB found relatively few consumer arbitrations involving small (less than $1000) claims. The CFPB's own data do not support the conclusion that the paucity of small dollar consumer arbitration claims suggests that such claims are cost prohibitive. The CFPB's report shows that over 70 percent of all consumer arbitrations are brought under statutes that permit consumers to claim up to $1500 in statutory damages per violation without proof of harm. If financial companies resolve most meritorious small-dollar claims internally, the remaining claims are likely of dubious merit.
The CFPB has not demonstrated that arbitrating disputes harms consumers or that class actions would make things better. The weight of evidence to the contrary calls into question the CFPB's legal authority to override the Federal Arbitration Act and raises fresh questions about how well the CFPB is serving consumers.