CFPB Shows That Arbitration Doesn’t Work for Consumers

The front page of the New York Times today tells this sad tale:

Charles Beard, a sergeant in the Army National Guard, says he was on duty in the Iraqi city of Tikrit when men came to his California home to repossess the family car. Unless his wife handed over the keys, she would go to jail, they said.

The men took the car, even though federal law requires lenders to obtain court orders before seizing the vehicles of active duty service members.

Sergeant Beard had no redress in court: His lawsuit against the auto lender was thrown out because of a clause in his contract that forced any dispute into mandatory arbitration, a private system for resolving complaints where the courtroom rules of evidence do not apply. In the cloistered legal universe of mandatory arbitration, the companies sometimes pick the arbiters, and the results, which cannot be appealed, are almost never made public.

As I reported last year in this magazine, companies use binding arbitration clauses to insulate themselves from lawsuits brought by workers and consumers. Thanks to a suite of recent Supreme Court decisions, corporations can now couple these arbitration clauses with class action bans, effectively eliminating courts as a means for ordinary Americans to hold corporations accountable under the law.

Last week the Consumer Financial Protection Bureau issued a report documenting the prevalence and effects of arbitration clauses in consumer financial products. CFPB’s report captures the effects of arbitration clauses in financial products and services, based on data from the American Arbitration Association, which handles the vast majority of consumer financial arbitration cases. A few main takeaways from the study:

• Companies have taken full advantage of the Supreme Court’s 2011 and 2013 decisions: 85-100 percent of contracts with arbitration clauses now include class action bans.
• Concentration among big banks means that the policies of a few have an outsized effect: only 16 percent of banks have these clauses in their contracts, but they affect 50 percent of outstanding credit card loans. Were it not for a 2009 antitrust settlement that required some banks to eliminate arbitration clauses, 94 percent of outstanding credit card loans would be subject to mandatory arbitration.
• Low-income consumers are especially vulnerable to arbitration clauses: 84 percent of payday loan agreements and 92 percent of prepaid card agreements included arbitration clauses. (CFPB also found that payday loan arbitration clauses almost always were more complex and written at a higher grade-level than the rest of the contract.)
• Most consumers are unaware of whether their contracts deprive them of the right to sue in court or as a class: in a survey conducted by CFPB, over 90 percent of respondents whose contracts included mandatory arbitration clauses either mistakenly believed they could still sue, or had no idea.
• The amounts at stake for consumers in arbitration proceedings is not trivial: the average claim was for around $27,000.
• Arbitration tends to work out better for companies than it does for individual consumers: in cases initiated by consumers, arbitrators awarded them some relief in around 20 percent of cases. By contrast, arbitrators provided companies some type of relief in 93 percent of cases that they filed.
• Even the degree of relief varies notably: within the slice of arbitration outcomes that CFPB could assess, consumers won an average of 12 cents for every dollar they claimed. By contrast, companies on average won 91 cents for every dollar they claimed. In total, consumers received less than $400,000 from arbitrators in 2010 and 2011. Companies won $2 million over that same period.
• Notably, CFPB found evidence undercutting a favorite pro-mandatory arbitration trope: that nixing arbitration clauses would burden companies with greater litigation costs, which they would be forced to pass on to consumers in the form of higher prices for their goods. CFPB found that the banks that had to drop arbitration clauses from their contracts as part of an antitrust settlement in 2009 did not subsequently raise prices for consumers.

CFPB’s data advances the argument that arbitration is a starkly inferior way for consumers to win appropriate relief when they’ve been wronged by financial institutions. It’s predicted the agency will likely propose a rule limiting mandatory arbitration clauses in these take-it-or-leave-it contracts, and this report will help its case.

Just as important, however, is what CFPB wasn’t able to study. It notes in the report that its data captures a tiny slice of all arbitration outcomes — because many cases settle before reaching an arbitrator, and settlement records (and arbitration records generally) are kept private. “Because our ability to review substantive outcome is generally limited to arbitration decisions on the merits, the substantive outcomes of most consumer financial arbitration disputes are unknown and largely unknowable to reviews,” the agency states. “These considerations make it quite challenging to attempt to answer even the simple question of how well do consumers (or companies) fare in arbitration.”

This underscores one of the biggest problems with mandatory arbitration: it de facto privatizes what used to be public processes and records, with no public accountability. Parties of vastly unequal bargaining power and sophistication are left to resolve their legal disputes entirely in the dark. If companies are so confident that mandatory arbitration clauses leave consumers better off, it’s hard to understand why they’re intent on keeping the outcomes secret.

Lina Khan

Lina Khan is a reporter and policy analyst with the Markets, Enterprise and Resiliency Initiative at the New America Foundation.