CFPB arbitration study a powerful vindication of consumer class actions

March 10, 2015

The big frustration in the debate over the relative merits of arbitration and consumer class actions has always been the scarcity of hard data. Sure, the U.S. Chamber of Commerce and the class action bar could talk all day about why the other side’s ideology is dead wrong, but neither side had convincing empirical information. So the Consumer Financial Protection Bureau set out in 2012 to collect it.

In the Dodd-Frank Act, Congress assigned the CFPB to analyze the impact of mandatory arbitration clauses in consumer contracts for financial products and services like credit cards and checking accounts. The bureau spent two years crunching numbers on arbitration, class actions and individual claims against financial services companies. It released its report to Congress on Tuesday morning.

The study’s findings are unequivocal: Class actions deliver cash relief to vastly more consumers – especially those with small dollar claims – than individual arbitration. The CFPB hasn’t yet proposed a rule to restrict financial services companies from requiring consumers to arbitrate their cases, but that’s almost sure to come. Whatever limitations the CFPB proposes will be hotly contested by banks and other businesses before a final rule goes into effect.

That said, let’s look at the data. Proponents of arbitration portray it as a quicker and less expensive alternative to litigation, for businesses and ordinary people alike. Consumers, however, haven’t taken advantage of arbitration’s purported benefits, according to the CFPB. The study found that between 2010 and 2012, only about 410 individual consumers a year brought arbitration claims against financial services companies at the American Arbitration Association, which handles the majority of such cases. Arbitrators ended up deciding 341 cases in which a consumer claimed money from a bank. Consumers won 32. Another 46 people were granted debt forgiveness. A grand total of four – four! – consumers with a claim of less than $1,000 obtained relief in an AAA arbitration in 2010 and 2011.

In all, AAA arbitrators awarded less than $173,000 in cash and about $190,000 in forbearance to consumers in those two years. Companies, meanwhile, fared much better. They were awarded about $2 million in arbitration against consumers, winning awards in 227 of the 244 cases in which their claims were decided by arbitrators.

Class actions, by contrast, delivered cash benefits to millions of people, according to the CFPB report. The rap on class actions is that they’re conducted for the benefit of plaintiffs’ lawyers, not consumers. There’s been a lot of attention paid recently, for instance, to the minuscule claims rates in these cases, which one expert in claims administration described as “almost always  less than one percent.”

The CFPB looked at 419 consumer class action settlements between 2008 and 2012. It was able to calculate a claims rate in 105 cases. The average rate, according to its report, was 21 percent and the median was 8 percent – much higher than I expected.

When the bureau added up class action claimants and class members who received automatic distributions, it concluded that 34 million consumers had received or were due to receive cash from classwide litigation. The total payout to consumers from class action settlements, the CFPB said, was at least $200 million a year, more than $1.1 billion over the timeframe the bureau studied.

To recap (in a ruthlessly reductive way): According to CFPB, four financial services consumers with small claims received cash compensation through arbitration. Thirty-four million received compensation through class actions. (Granted, the CFPB looked at two years of arbitration and five years of class actions, but still.)

CFPB director Richard Cordray said at a public hearing Tuesday that the study showed the difference between class actions and arbitration as a vehicle for providing relief to consumers to be “stark.” I asked Ballard Spahr partner Alan Kaplinsky, who criticized the CFPB report at Tuesday’s hearing, why he believes the CFPB’s conclusion is flawed.

His email response raised some good points. Kaplinsky pointed out, for example, that only 15 percent of the class actions in the CFPB data set reached final settlement approval. A quarter were resolved through an individual settlement. Plaintiffs just dropped another 35 percent of the filed cases. “In other words,” Kaplinsky said, “in 60 percent of the class actions, the putative class members got zero.”

The CFPB data doesn’t show how individuals fared even in the settled cases. “If 10 million consumers receive a $1 each, that means nothing to the individual consumer even though the gross numbers look large,” Kaplinsky said. He also said the low rate of claims by consumers in settled cases shows that “most class members do not care about, read and/or understand the class notices.”

Kaplinsky pulled out two other stats from the report that deserve attention. According to the CFPB, judges sent class actions to arbitration in only 49 percent of the cases in which defendants filed motions to compel – and defendants made the motion in only 17 percent of the cases the bureau analyzed. Both of those figures are surprisingly low, considering the U.S. Supreme Court’s deference to arbitration clauses that prohibit classwide litigation.

I’m sure we’ll see more criticism from class action detractors if (or, more likely, when) the CFPB formally proposes a rule restricting mandatory arbitration clauses. But the bureau has definitely thrown down a challenge.

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