Consumer Finance Litigation

The Consumer Financial Protection Bureau ("CFPB" or "Bureau") released a study last week regarding the financial industry's use of pre-dispute arbitration agreements. This is the CFPB's third study on the issue since 2013, and, like the first two studies, reveals the Bureau's negative assessment of pre-dispute arbitration agreements. The Bureau initiated its investigation into the issue pursuant to Congress's authorization in the Dodd-Frank Act to analyze the impact of arbitration clauses in consumer contracts for financial products and services. Specifically, the 728-page study reported that 75% of consumers surveyed did not know that their financial service and product agreements contained arbitration clauses, and furthermore, that only 7% of those surveyed were aware that theses arbitration clauses restricted them from filing suit in court. Industry groups interpret the results as indicative of the public's lack of education on arbitration agreements and alternative dispute resolution, explaining that, in comparison to the nation's judicial system, consumer arbitration is in its infancy. Conversely, consumer advocates assert that the results present incontrovertible evidence that new regulations are needed to clarify when arbitration clauses can, and should, be included in financial agreements with consumers. While the CFPB has yet to comment on how it will proceed in response to the study, given the most recent study's markedly negative evaluation of arbitration agreements, it appears likely that new limitations on pre-dispute arbitration clauses in financial service and product agreements are forthcoming. At the least, these new rules will require agreements to include an option for consumers to file a class action lawsuit in addition to arbitration, and at the most, it will ban pre-dispute arbitration provisions entirely. Meanwhile, industry groups continue to scrutinize the report's underlying data and work to convince the Bureau that new regulations are unnecessary, citing arbitration's expediency, efficiency, and affordability. Based on the figures cited in the study, restriction, and certainly prohibition, of arbitration clauses would likely signal an upswing in consumer finance litigation and could lead to increased recovery for consumers. Specifically, the Bureau reviewed 419 consumer class action settlements for the study between 2008 and 2012, and concluded that more than 34 million consumers had or would receive an automatic distribution from these class actions, for a payout totaling at least $200 million a year. This greatly exceeds the $263,000 in cash and forbearance awarded to consumers pursuant to claims brought with the American Arbitration Association from 2010 to 2012. However, as industry representatives are quick to point out, the CFPB's comparison of class action litigation and consumer arbitration fails to take all variables into account, including the respective costs and benefits of each of the respective forums. Specifically, the CFPB's study does not address the significant legal costs incurred by financial institutions forced to defend large class action suits; the individual, as opposed to class-wide, benefits realized by members of class action suits; or the effectiveness of dispute resolution mechanisms. With respect to dispute resolution mechanisms in particular, the low number of arbitrations initiated each year could reflect effective resolution by informal means facilitated by customer service departments or third party services. While it seems likely that the CFPB will use last week's study to support the adoption of new regulations restricting, if not entirely banning, the use of pre-dispute arbitration clauses in consumer contracts for financial products and services, the effects of these regulations remains to be seen as well as whether industry representatives will be able to convince the Bureau to reassess its conclusions before these new regulations are implemented. For more information, contact: Mignon A. Lunsford, in Mobile at (251) 345-8214 or mlunsford@burr.com Or a member of Burr & Forman LLP's Financial Services Litigation Group.