Via Federal Express
The Honorable Richard Cordray
Bureau of Consumer Financial Protection
1275 First Street, NE
Washington, DC 20002
Re: Comments on the Bureau’s Consumer Arbitration Study
Dear Director Cordray:
The American Bankers Association, 1 the Consumer Bankers Association, 2 and The
Financial Services Roundtable 3 (collectively, the Associations) appreciate the opportunity to
provide comments regarding the Bureau of Consumer Financial Protection’s (Bureau) March 10, The American Bankers Association is the voice of the nation’s $15 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $11 trillion in deposits, and extend more than $8 trillion in loans.
Founded in 1919, the Consumer Bankers Association (CBA) is the trade association for today’s leaders in retail banking – banking services geared toward consumers and small businesses. The nation’s largest financial institutions, as well as many regional banks, are CBA corporate members, collectively holding well over half of the industry’s total assets.
CBA’s mission is to preserve and promote the retail banking industry as it strives to fulfill the financial needs of the American consumer and small business.
As advocates for a strong financial future™, the Financial Services Roundtable (FSR) represents 100 integrated financial services companies providing banking, insurance, and investment products and services to the American consumer. Member companies participate through the Chief Executive Officer and other senior executives nominated by the CEO. FSR member companies provide fuel for America’s economic engine, accounting directly for $98.4 trillion in managed assets, $1.1 trillion in revenue, and 2.4 million jobs.
DMEAST #22199841 v1 2015, Study on Consumer Arbitration (Study). 4 In accordance with Section 1028 of the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Bureau, having completed its Study of the use of arbitration provisions in consumer financial services contracts, is now considering whether a regulation prohibiting or limiting such provisions would be “in the public interest and for the protection of consumers.” Under Section 1028, any such regulation must be “consistent with the [S]tudy.” Many of the Associations’ members, constituent organizations, and affiliates (collectively, Members) utilize arbitration agreements in their consumer contracts, and many of those contracts were included in the Study’s data set. The Associations’ Members are major stakeholders in the Bureau’s examination of consumer arbitration and will be affected negatively by any regulation of consumer arbitration adopted bythe Bureau. Although the Bureau has not formally requested comment on the Study, we believe that, considering its potential impact on consumers and the business of banking as well as the misleading conclusions that have been drawn and reported about the Study, it is critical that the Bureau consider another perspective.
Accordingly, we submit this analysis of the Study, which analysis we believe supports a conclusion that pre-dispute arbitration clauses benefit customers and that those benefits should not be restricted or prohibited.
The Study clearly illustrates that arbitration has significant, demonstrable benefits over litigation in general and class action litigation in particular. It is faster, less expensive, and more effective than class action litigation. Customers who prevail in an individual arbitration recover monetary benefits that, on average, are approximately 166 times greater than the sums received by the average class member in a class action settlement.
Simply put, there are insufficient data in the Study to support a conclusion that mandatory pre-dispute customer arbitration provisions in financial services contracts, or the inclusion of class action waivers therein, should be prohibited; in fact, there are abundant data in the Study that contradict such a conclusion. Because such regulation would not be “consistent with the Study,” in the public interest, or necessary for the protection of consumers, it would exceed the Bureau’s authority under Section 1028 of the Dodd-Frank Act.
Moreover, if the Bureau were to over-regulate arbitration agreements or prohibit the use of class action waivers in such agreements, as some parties advocate, many companies are likely to discontinue offering arbitration to consumers. That outcome would harm consumers, as they would be deprived of a valuable and time-tested procedure for economically, expeditiously, This is the Associations’ third submission to the Bureau in connection with its study of consumer arbitration. On June 22, 2012, the Associations submitted comments in response to the Bureau’s Request for Information Regarding Scope, Methods, and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements. And, on August 6, 2013, the Associations submitted comments in response to the Bureau’s request for comments on its proposed telephone survey of consumers.
DMEAST #22199841 v1 conveniently, and efficiently resolving individual consumer disputes. Instead, consumers would be relegated to a procedure (class action litigation) in which they are likely to receive either no benefits at all or minuscule benefits that are awarded years after the initiation of the lawsuit. New regulatory limitations on arbitration agreements are likely also to result in increased costs to consumers for financial products and services. Rather than regulating consumer arbitration in financial services contracts, the Associations believe the Bureau should concentrate its efforts on educating consumers about arbitration, including how to make best use of arbitration terms that a contract may contain and the differences between arbitration and litigation, particularly class action litigation, so that consumers gain a better understanding of the many benefits that arbitration offers.
In addition, we identify numerous additional issues the Bureau should research and analyze before any meaningful final conclusions regarding the efficacy of customer arbitration provisions can be reached. These include customer satisfaction with arbitration and whether the creation of the Bureau and its own regulatory, enforcement, and supervisory activities are supplanting what consumer activists contend are the main justification for class actions—i.e., providing redress to large numbers of consumers and regulating corporate behavior.
Finally, we urge the Bureau to solicit public comment on the Study so that all interested stakeholders will have an opportunity to express their views on the important issues at hand before the Bureau decides whether to initiate a rulemaking proceeding. It would be premature for the Bureau to promulgate any regulation at this time considering the relatively brief time period that customer arbitration provisions have been used by companies.
The data reported in the Study clearly demonstrate that arbitration is more beneficial to consumers than class action or individual litigation in a number of important ways. As discussed in detail in Section II.A. of this letter—
1. Arbitration is faster, less expensive, and more effective than litigation, including class action litigation, and customers are far more likely to obtain a decision on the merits and more meaningful relief.
2. The Bureau’s statistics are consistent with the conclusion of the U.S. Chamber of Commerce in its December 2013 statistical analysis of class actions that the vast majority of class actions “produce no benefits to most members of the putative class” but “can (and do) enrich [their] attorneys.” With respect to the 562 class actions examined by the Bureau in the Study—
• At least 60% of the class actions studied produced no benefits at all for the putative class members, because they were settled individually or withdrawn by the plaintiff.
• Only 15% of the class actions received final class settlement approval.
• No class action was actually tried on the merits.
DMEAST #22199841 v1
• Consumers who received cash payments in class action settlements obtained an average of only $32.35.
• In class settlements that required putative class members to submit a claim form, the weighted average claims rate was only 4%, meaning that 96% of the putative class members failed to obtain any benefits because they did not submit claims.
• Notwithstanding the foregoing statistics, attorneys’ fees awarded to class counsel in settlements totaled $424,495,451.
By contrast, customers who prevailed in arbitration recovered an average of $5,389, compared to the $32.35 obtained by the average class member in class action settlements. Thus, the average customer who prevailed in arbitration received 166 times more in financial payments than the average class member in class action settlements.
3. The Study dispels the misconception that arbitration is a barrier to class actions.
Arbitration was not even a factor—and therefore presented no barrier—in 92% of the 562 class actions studied by the Bureau, because so few defendants moved to compel arbitration and only about half of those few motions were granted. Moreover, there is abundant competition in the financial services marketplace to accommodate customers who prefer to resolve disputes via litigation as opposed to arbitration. The data show that 85% of credit card issuers and 92.3% of banks do not include arbitration provisions in their customer contracts. At least 25% of customers whose credit card and deposit account contracts contain arbitration provisions have a contractual right to reject the arbitration provision within 30 to 60 days of entering the contract without affecting any other provision in their contracts.
4. The Study also dispels the misconception that companies have an unfair advantage over customers in arbitration. The Study found that almost all of the arbitration proceedings involved companies with repeat experience in the forum. However, that was counterbalanced by the fact that counsel for the consumers were also usually repeat players in arbitration. 5 Moreover, in 81% of the arbitrations in which customers were awarded affirmative relief, the company was a “repeat player,” but the customer prevailed anyway. 6
5. Many of the other statistics recited in the Study also reflect favorably on arbitration when placed in the proper context. For example—
• The Study’s finding that customers initiated only 1,847 arbitration proceedings from 2010 through 2012 7 does not reflect customer dissatisfaction with arbitration nor Study, § 1, p. 12; § 5, p. 10 & n. 16.
Id. § 5, p. 67.
Id. § 5, p. 9.
DMEAST #22199841 v1 suggest that it is an ineffective remedy. In context, this statistic is reasonable given the multitude of other factors that materially affect the number of arbitrations filed by customers. Those factors include, inter alia, that (a) the vast majority of customers resolve their disputes with businesses informally without the need for arbitration or litigation, 8 (b) customer arbitration is still in its infancy compared to civil litigation, (c) plaintiffs’ lawyers and consumer advocacy groups (many funded by plaintiffs’ lawyers) have sent consistently negative messages about arbitration to customers for many years to dissuade them from using it; (d) government enforcement and supervisory actions have eliminated much of the need for customers to bring private arbitration actions; and (e) individuals are turning increasingly to on-line arbitration and mediation resources to resolve small dollar customer complaints, which the Bureau chose not to include in the Study. 9
• The Study’s finding that 75% of consumers surveyed telephonically did not know whether their contracts contain an arbitration provision underscores the need for the Bureau to concentrate its efforts on educating customers about the differences between arbitration and litigation (including class actions) and the many benefits that arbitration can offer customers for resolving their disputes with companies.