FAIRFAX, Va.–The Consumer Financial Protection Bureau’s recent report on arbitration agreements used by financial services providers contains “substantial methodological flaws and does not support a ban on arbitration clauses in consumer credit contracts,” according to a new study.
To the contrary, say two law professors at George Mason University, the data presented in the CFPB report show that consumers on balance are better off if they have the arbitration process available to them for dispute resolution. Rather than relying on flawed methodology and inaccurate data, the CFPB should focus on the actual benefits arbitration provides to consumers, the study adds.
The Dodd-Frank Act requires the Consumer Financial Protection Bureau to provide Congress with a report on the use of arbitration agreements in disputes between consumers and providers of consumer financial products. In March 2015, the CFPB released its final report to Congress, with the report suggesting that the CFPB intends to aggressively regulate arbitration agreements in consumer credit contracts. The CFPB could also implement an outright ban on mandatory arbitration clauses.
But the new study by Jason Scott Johnston and Tood Zywicki of the Mercatus Center at George Mason University criticizes the CFPB report using primarily evidence supplied by the report itself. According to the report, the CFPB’s findings show that arbitration is relatively fair and successful at resolving a range of disputes between consumers and providers of consumer financial products, and that regulatory efforts to limit the use of arbitration will likely leave consumers worse off. Moreover, “owing to flaws in the report’s design and a lack of information, the report should not be used as the basis for any legislative or regulatory proposal to limit the use of consumer arbitration,” said the two professors in the study, “The Consumer Financial Protection Bureau’s Arbitration Study: A Summary and Critique.”
A summary of the findings released by George Mason University notes that “arbitration is often a superior and more efficient type of dispute resolution, yet the CFPB’s study condemns it based on faulty information and analysis.”
Among the key issues the two law professors say they have with the CFPB report:
Comparing class action settlements with arbitration awards is methodologically flawed. “The CFPB was not given access to information about the terms of consumer arbitration settlements. Most consumer arbitrations settle, just as most consumer class actions do. Because of this, the CFPB’s study does not allow a meaningful comparison of how consumers fare in arbitration versus how they fare as members of class actions.”
The CFPB paints a misleading picture of class action outcomes. “Even if the CFPB had data on arbitration settlements, its data on class action settlements—which show attorneys’ fees that are an unexpectedly low percentage of total class recovery and class compensation rates that are unexpectedly high—cannot be used to compare arbitration and class actions. These data reflect primarily settlements in fewer than a dozen huge class actions, and mask much lower class payout rates and higher attorneys’ fees in typical consumer class action settlements. Moreover, most of the class action settlements studied by the CFPB involved debt collection cases, but these rarely involve defendants even covered by an arbitration clause, so they should have been excluded as irrelevant to the issues the CFPB was examining.”
The market’s solution to inaccurate charges works better than either arbitration or litigation. “The CFPB’s survey found that most consumers prefer the market response of canceling a credit card when they feel an issuer has failed to respond fairly to a complaint about charges, and that these consumers do not know much about either arbitration or class actions. This is exactly what should be expected given data showing that banks usually respond to consumer complaints by canceling or reversing charges. For consumers, the market response is far superior to ex post disputing via either arbitration or litigation.”
Consumers perform better in arbitration than in litigation. “The majority of AAA consumer claimants represented by counsel, as well as the majority of AAA consumer claimants in general, realize higher rates of overall success (likely settlements or awards on the merits) compared to individual consumer litigants in federal court.”