The Consumer Financial Protection Bureau has released phase one of its study on the use of mandatory arbitration clauses in connection with consumer financial products and services.
Among the study's preliminary findings, the CFPB determined that larger institutions are more likely to use arbitration clauses, arbitration clauses in account agreements can often be complex, and these agreements often contain class-action waivers. The preliminary study, released in December, read alone might also suggest that arbitration clauses could disadvantage consumers.
However, because it was only a preliminary look, the report failed to paint a complete picture of the costs and benefits of arbitration. For nearly 90 years, arbitration has been a valuable means for consumers to quickly and easily resolve disputes in an efficient and affordable manner. That part of the story was not told.
The Dodd-Frank Act requires the CFPB to conduct a study of the use of pre-dispute arbitration clauses in consumer markets. The Act also provides the CFPB with the authority to issue regulations on the use of arbitration clauses if it believes doing so is in the public interest and for the protection of consumers, consistent with the results of the study.
Arbitration is an alternative to litigation that enables parties to amicably resolve legal disputes outside of the court system. Congress recognized the importance of arbitration as a means of resolving consumer disputes when it enacted the Federal Arbitration Act in 1925. Most states also have laws and procedures for arbitrating disputes.
Consumer financial products that often have arbitration clauses include credit cards and checking accounts. In arbitration, a dispute related to these products can be resolved in a matter of months, where the same dispute might take years to resolve in court. In general, arbitration is also a less costly means of resolving disputes than litigation. The reduction of litigation costs, particularly costs associated with class-action litigation, benefits both consumers and companies. Many of the major organizations that administer consumer arbitrations have rules and procedures to ensure that the consumer will be treated fairly and to require the company to pay all but a small fraction of the costs of arbitration. Businesses have found that arbitration minimizes the disruption and loss of goodwill that often results from litigation.
Several previous empirical studies have concluded consumers fare at least as well in arbitration as they do in court, and in many cases better, and at a fraction of the cost. One study of hundreds of consumer arbitrations found that consumers won some relief in more than half the cases filed. Moreover, the upfront cost to the consumer was far less than the fee required to file a complaint in the federal courts.
For all of these reasons, we are pleased the CFPB now says it will compare the costs and benefits to consumers from arbitration with those derived from individual and class-action litigation. We are confident that a balanced professional study will conclude that arbitration is a fair and efficient way for individuals to resolve disputes with financial services companies. Prohibition or excessive regulation of arbitration could leave consumers with only a slow moving and costly court system, where the consumers often receive little relief.
Steven I. Zeisel is an executive vice president and general counsel at the Consumer Bankers Association.