Arbitration Ban Harms Consumers

Today, the Consumer Financial Protection Bureau (CFPB) issued a final rule prohibiting the use of class action waivers in arbitration clauses. AFSA has been in constant communication with the CFPB and Congress, advocating for alterations to the rule in the best interest of both consumers and the industry. Unfortunately, the Bureau moved ahead with a rule that ignores its mandate to protect consumers in favor of plaintiff’s attorneys.

Section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act specifically authorizes the CFPB to “prohibit or impose conditions or limitations on the use of a pre-dispute arbitration agreement between covered persons and consumers, only if the CFPB finds that doing so is in the public interest and for the protection of consumers.”

The Bureau has not proven that this prohibition is in the public interest. In fact, quite the opposite is true. Numerous research studies show that pre-dispute arbitration is actually more beneficial to consumers than are class-action lawsuits. In fact, the CFPB’s own internal research of pre-dispute arbitration outcomes show that they serve as a positive form of reparation, particularly when compared to class-action lawsuits.

As a matter of public policy, Congress and the Supreme Court have long favored arbitration agreements. The Supreme Court wrote an opinion in AT&T Mobility, LLC. v. Concepcion (2011), that it favored arbitration agreements because they “facilitate streamlined proceedings.” A working paper by the Mercatus Institute noted that the Court’s treatment of arbitration agreements “ma[kes] clear that the strong presumption in federal law in support of arbitration rests in large part on the idea that consumers benefit from the speed, simplicity, and low costs of arbitration.

Despite the CFPB’s argument, the bureau’s own internal study indicates that pre-dispute arbitration is bad for consumers. A careful, unbiased reading of the study shows that arbitration massively benefits consumers. For example:

  1. Arbitration is cheaper. Consumers paid an average of $206 in total fees in arbitration cases reviewed by the Bureau, compared to the several thousand dollars consumers face in attorney fees in civil court.
    1. Financial institutions often end up covering the entirety of the fee based upon the decision of the arbitrator. Waivers are also available for consumers in need. No such waivers exist in civil proceedings.
  2. Arbitration is more convenient. Hearings are held, on average, within 15 miles of the consumer’s home, and sometimes by phone. Class-action lawsuits may require the consumer to travel hundreds of miles.
  3. Arbitration is quick. Telephone arbitrations are generally resolved within five months while in-person arbitration is generally settled within seven. Class-action settlements, on average, do not receive final court approval for 690 days, or more than two years.
  4. Arbitration results in higher monetary relief. The average amount received by consumers through arbitration is $5,389. The average received by consumers through class-action lawsuits is $32.

The last bullet is the most important here. The big winners of class-action lawsuits are plaintiff’s attorneys who, on average, receive millions of dollars per settled case. Consumers receive just $32.