Arbitration Agreements

Federal RegisterJul 19, 2017

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1040

[Docket No. CFPB-2016-0020]

RIN 3170-AA51

Arbitration Agreements

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Final rule; official interpretations.

SUMMARY:

Pursuant to section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Bureau of Consumer Financial Protection (Bureau) is issuing this final rule to regulate arbitration agreements in contracts for specified consumer financial product and services. First, the final rule prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service. Second, the final rule requires covered providers that are involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau and also to submit specified court records. The Bureau is also adopting official interpretations to the regulation.

DATES:

Effective date:

This regulation is effective September 18, 2017.

Compliance date:

Mandatory compliance for pre-dispute arbitration agreements entered into on or after March 19, 2018.

FOR FURTHER INFORMATION CONTACT:

Benjamin Cady and Lawrence Lee Counsels; Owen Bonheimer, Eric Goldberg and Nora Rigby Senior Counsels, Office of Regulations, Consumer Financial Protection Bureau, at 202-435-7700 or

cfpb_reginquiries@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

On May 24, 2016, the Bureau of Consumer Financial Protection published a proposal to establish 12 CFR part 1040 to address certain aspects of consumer finance dispute resolution.

Following a public comment period and review of comments received, the Bureau is now issuing a final rule governing agreements that provide for the arbitration of any future disputes between consumers and providers of certain consumer financial products and services.

Arbitration Agreements, 81 FR 32830 (May 24, 2016).

Congress directed the Bureau to study these pre-dispute arbitration agreements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or Dodd-Frank Act).

In 2015, the Bureau published and delivered to Congress a study of arbitration (Study).

In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the Study, to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers.

Congress also required that the findings in any such rule be consistent with the Bureau's Study.

In accordance with this authority, the final rule issued today imposes two sets of limitations on the use of pre-dispute arbitration agreements by covered providers of consumer financial products and services. First, the final rule prohibits providers from using a pre-dispute arbitration agreement to block consumer class actions in court and requires most providers to insert language into their arbitration agreements reflecting this limitation. This final rule is based on the Bureau's findings—which are consistent with the Study—that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.

Public Law 111-203, 124 Stat. 1376 (2010), section 1028(a).

Bureau of Consumer Fin. Prot., “Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a),” (2015),

available at

http://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf.

Specific portions of the Study are cited in this final rule where relevant, and the entire Study will be included in the docket for this rulemaking at

www.regulations.gov.

Dodd-Frank section 1028(b).

Id.

Second, the final rule requires providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral and court proceedings to the Bureau. The Bureau will use the information it collects to continue monitoring arbitral and court proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action. The Bureau is also finalizing provisions that will require it to publish the materials it collects on its Web site with appropriate redactions as warranted, to provide greater transparency into the arbitration of consumer disputes.

The final rule applies to providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money, including, subject to certain exclusions specified in the rule, providers that are engaged in:

• Extending consumer credit, participating in consumer credit decisions, or referring or selecting creditors for non-incidental consumer credit, each when done by a creditor under Regulation B implementing the Equal Credit Opportunity Act (ECOA), acquiring or selling consumer credit, and servicing an extension of consumer credit;

• extending or brokering automobile leases as defined in Bureau regulation;

• providing services to assist with debt management or debt settlement, to modify the terms of any extension of consumer credit, or to avoid foreclosure, and providing products or services represented to remove derogatory information from, or to improve, a person's credit history, credit record, or credit rating;

• providing directly to a consumer a consumer report as defined in the Fair Credit Reporting Act (FCRA), a credit score, or other information specific to a consumer derived from a consumer file, except for certain exempted adverse action notices (such as those provided by employers);

• providing accounts under the Truth in Savings Act (TISA) and accounts and remittance transfers subject to the Electronic Fund Transfer Act (EFTA);

• transmitting or exchanging funds (except when necessary to another product or service not covered by this rule offered or provided by the person transmitting or exchanging funds), certain other payment processing services, and check cashing, check collection, or check guaranty services consistent with the Dodd-Frank Act; and

• collecting debt arising from any of the above products or services by a provider of any of the above products or services, their affiliates, an acquirer or purchaser of consumer credit, or a person acting on behalf of any of these persons, or by a debt collector as defined by the Fair Debt Collection Practices Act (FDCPA).

Consistent with the Dodd-Frank Act, the final rule applies only to agreements entered into after the end of the 180-day period beginning on the regulation's

effective date.

The Bureau is adopting an effective date of 60 days after the final rule is published in the

Federal Register

. To facilitate implementation and ensure compliance, the final rule requires providers in most cases to insert specified language into their arbitration agreements to explain the effect of the rule. The final rule also permits providers of general-purpose reloadable prepaid cards to continue selling packages that contain non-compliant arbitration agreements, if they give consumers a compliant agreement as soon as consumers register their cards and the providers comply with the final rule's requirement not to use an arbitration agreement to block a class action.

Dodd-Frank section 1028(d).

II. Background

Arbitration is a dispute resolution process in which the parties choose one or more neutral third parties to make a final and binding decision resolving the dispute.

Parties may include language in their contracts, before any dispute has arisen, committing to resolve future disputes between them in arbitration rather than in court or allowing either party the option to seek resolution of a future dispute in arbitration. Such pre-dispute arbitration agreements—which this final rule generally refers to as “arbitration agreements”§

—have a long history, primarily in commercial contracts, where companies historically had bargained to create agreements tailored to their needs.

In 1925, Congress passed what is now known as the Federal Arbitration Act (FAA) to require that courts enforce agreements to arbitrate, including those entered into both before and after a dispute has arisen.

“Arbitration,” Black's Law Dictionary (10th ed. 2014).

Section 1040.2(d) defines the phrase “pre-dispute arbitration agreement.” When referring to the definition, in § 1040.2(d), this final rule uses the full term or otherwise clarifies the intended usage.

See infra

Part II.C.

9 U.S.C. 1

et seq.

In the last few decades, companies have begun inserting arbitration agreements in a wide variety of standard-form contracts, such as in contracts between companies and consumers, employees, and investors. As is underscored by the range of comments received on the proposal, the use of arbitration agreements in such contracts has become a contentious legal and policy issue due to concerns about whether the effects of arbitration agreements are salient to consumers, whether arbitration has proved to be a fair and efficient dispute resolution mechanism, and whether arbitration agreements effectively discourage and limit the filing or resolution of certain claims in court or in arbitration.

In recent years, Congress has taken steps to restrict the use of arbitration agreements in connection with certain consumer financial products and services and other consumer and investor relationships. Most recently, in the 2010 Dodd-Frank Act, Congress prohibited the use of arbitration agreements in connection with mortgage loans,

authorized the Securities and Exchange Commission (SEC) to regulate arbitration agreements in contracts between consumers and securities broker-dealers and investment advisers,

and prohibited the use of arbitration agreements in connection with certain whistleblower proceedings.

Dodd-Frank section 1414(e) (codified as 15 U.S.C. 1639c(e)).

Dodd-Frank sections 921(a) and 921(b) (codified as 15 U.S.C. 78o(o) and 15 U.S.C. 80b-5(f)).

Dodd-Frank section 922(b) (codified as 18 U.S.C. 1514A(e)).

In addition, and of particular relevance here, Congress directed the Bureau to study the use of arbitration agreements in connection with other, non-mortgage consumer financial products and services and authorized the Bureau to prohibit or restrict the use of such agreements if it finds that such action is in the public interest and for the protection of consumers.

Congress also required that the findings in any such rule be consistent with the study.

The Bureau solicited input on the appropriate scope, methods, and data sources for the study in 2012

and released results of its three-year Study in March 2015.

Part III of this final rule summarizes the Bureau's process for completing the Study and its results. To place these results in greater context, this part provides a brief overview of: (1) Consumers' rights under Federal and State laws governing consumer financial products and services; (2) court mechanisms for seeking relief where those rights have been violated, and, in particular, the role of the class action device in protecting consumers; and (3) the evolution of arbitration agreements and their increasing use in markets for consumer financial products and services.

Dodd-Frank section 1028(b).

Id.

Bureau of Consumer Fin. Prot., Request for Information Regarding Scope, Methods and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements, 77 FR 25148 (Apr. 27, 2012) (hereinafter Arbitration Study RFI).

Study,

supra

note 3. The Bureau also delivered the Study to Congress.

See also

Letter from Catherine Galicia, Ass't Dir. of Legis. Aff., Bureau of Consumer Fin. Prot., to Hon. Jeb Hensarling, Chairman, Comm. on Fin. Serv. (Mar. 10, 2015) (on file with the Bureau).

A. Consumer Rights Under Federal and State Laws Governing Consumer Financial Products and Services

Companies typically provide consumer financial products and services under the terms of a written contract. In addition to being governed by such contracts and the relevant State's contract law, the relationship between a consumer and a financial service provider is typically governed by consumer protection laws at the State level, Federal level, or both, as well as by other State laws of general applicability (such as tort law). Collectively, these laws create legal rights for consumers and impose duties on the providers of financial products and services that are subject to those laws and, depending on the contract and the product or service, a service provider to the underlying provider.

Early Consumer Protection in the Law

Prior to the twentieth century, the law generally embraced the notion of

caveat emptor,

or “buyer beware” in consumer affairs.

State common law afforded some minimal consumer protections against fraud, usury, or breach of contract, but these common law protections were limited in scope. In the first half of the twentieth century, Congress began passing legislation intended to protect consumers, such as the Wheeler-Lea Act of 1938.

The Wheeler-Lea Act amended the Federal Trade Commission Act of 1914 (FTC Act) to provide the FTC with the authority to pursue unfair or deceptive acts and practices.

These early Federal laws did not provide for private rights of action, meaning that they could only be enforced by the government.

Caveat emptor

assumed that buyer and seller conducted business face to face on roughly equal terms (much as English common law assumed that civil actions generally involved roughly equal parties in direct contact with each other). J.R. Franke & D.A. Ballam, “New Application of Consumer Protection Law: Judicial Activism or Legislative Directive,” 32 Santa Clara L. Rev. 347, at 351-55 (1992).

Wheeler-Lea Act of 1938, Public Law 75-447, 52 Stat. 111 (1938).

See

FTC Act section 5. Prior to the Wheeler-Lea Act, the FTC had the authority to reach “unfair methods of competition in commerce” but only if they had an anticompetitive effect.

See FTC

Raladam Co.,

283 U.S. 643, 649 (1931).

Modern Era of Federal Consumer Financial Protections

In the late 1960s, Congress began passing consumer protection laws focused on financial products, beginning with the Consumer Credit

Protection Act (CCPA) in 1968.

The CCPA included the Truth in Lending Act (TILA), which imposed disclosure and other requirements on creditors.

In contrast to earlier consumer protection laws such as the Wheeler-Lea Act, TILA permits private enforcement by providing consumers with a private right of action, authorizing consumers to pursue claims for actual damages and statutory damages and allowing consumers who prevail in litigation to recover their attorney's fees and costs.

Public Law 90-321, 82 Stat. 146 (1968).

Id.

at title I.

15 U.S.C. 1640(a).

Congress followed the enactment of TILA with several other consumer financial protection laws, many of which provided private rights of action for at least some statutory violations. For example, in 1970, Congress passed the FCRA, which promotes the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies, as well as providing consumers access to their own information.

In 1974, Congress passed the ECOA to prohibit creditors from discriminating against applicants with respect to credit transactions.

In 1977, Congress passed the FDCPA to promote the fair treatment of consumers who are subject to debt collection activities.

Public Law 91-508, 84 Stat. 1114-2 (1970).

Congress amended that law in 1976. Public Law 94-239, 90 Stat. 251 (1976).

Public Law 95-109, 91 Stat. 874 (1977). Other such Federal consumer protection laws include those enumerated in the Dodd-Frank Act and made subject to the Bureau's rulemaking, supervision, and enforcement authority: Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. 3801; Consumer Leasing Act of 1976, 15 U.S.C. 1667; Electronic Fund Transfer Act (EFTA), 15 U.S.C. 1693 (except with respect to § 920 of that Act); Fair Credit Billing Act, 15 U.S.C. 1666; Home Mortgage Disclosure Act of 1975, 12 U.S.C. 2801; Home Owners Protection Act of 1998, 12 U.S.C. 4901; Federal Deposit Insurance Act, 12 U.S.C. 1831t (b)-(f); Gramm-Leach-Bliley Act 15 U.S.C. 6802-09 (except with respect to section 505 as it applies to section 501(b) of that Act); Home Ownership and Equity Protection Act of 1994 (HOEPA), 15 U.S.C. 1601; Interstate Land Sales Full Disclosure Act, 15 U.S.C. 1701; Real Estate Settlement Procedures Act of 1974 (RESPA), 12 U.S.C. 2601; S.A.F.E. Mortgage Licensing Act of 2008, 12 U.S.C. 5101; Truth in Savings Act (TISA), 12 U.S.C. 4301, and section 626 of the Omnibus Appropriations Act of 2009, 15 U.S.C. 1638. Federal consumer protection laws also include the Bureau's authority to take action to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, and abusive acts or practices, Dodd-Frank section 1031, and its disclosure authority, Dodd-Frank section 1032.

In the 1960s, States began passing their own consumer protection statutes modeled on the FTC Act to prohibit unfair and deceptive practices. Unlike the FTC Act, however, these State statutes typically provide for private enforcement.

The FTC encouraged the adoption of consumer protection statutes at the State level and worked directly with the Council of State Governments to draft the Uniform Trade Practices Act and Consumer Protection Law, which served as a model for many State consumer protection statutes.

Currently, 49 of the 50 States and the District of Columbia have State consumer protection statutes modeled on the FTC Act that allow for private rights of action.

Victor E. Schwartz & Cary Silverman, “Common Sense Construction of Consumer Protection Acts,” 54 U. Kan. L. Rev. 1, at 15-16 (2005).

Id.

at 16. Every State prohibits deception; some prohibit unfair practices as well.

See

Carolyn L. Carter, “Consumer Protection in the States,” Nat'l Consumer L. Ctr., at 5 (2009),

available at

https://www.nclc.org/images/pdf/udap/report_50_states.pdf

Class Actions Pursuant to Federal Consumer Protection Laws

In 1966, shortly before Congress first began passing the wave of consumer financial protection statutes described above, the Federal Rules of Civil Procedure (Federal Rules or FRCP) were amended to make class actions substantially more available to litigants, including consumers. The class action procedure in the Federal Rules, as discussed in detail in Part II.B below, allows an individual to group his or her claims together with those of other, absent individuals in one lawsuit under certain circumstances and to obtain monetary or injunctive relief for the group. Because TILA and the other Federal consumer protection statutes discussed above permitted private rights of action, those private rights of action were enforceable through a class action, unless the statute expressly prohibited class actions.

See, e.g., Wilcox

Commerce Bank of Kansas City,

474 F.2d 336, 343-44 (10th Cir. 1973).

Indeed, Congress affirmatively calibrated enforcement through private class actions in several of the consumer protection statutes by specifically referring to class actions and adopting statutory damage schemes that are capped by a percentage of the defendants' net worth.

For example, when consumers initially sought to bring TILA class actions, a number of courts applying Federal Rule 23 denied motions to certify a class because of the prospect of extremely large damages resulting from the aggregation of a large number of claims for statutory damages.

Congress addressed this by amending TILA in 1974 to cap class action damages in such cases to the lesser of 1 percent of the defendant's assets or $100,000.

Congress has twice increased the cap on class action damages in TILA: To $500,000 in 1976 and $1,000,000 in 2010.

Many other statutes similarly cap damages in class actions.

Further, the legislative history of other statutes indicates a particular intent to permit class actions given the potential for a small recovery in many consumer finance cases for individual damages.

Similarly, many State legislatures contemplated consumers' filing of class actions to vindicate violations of their versions of the FTC Act.

A minority of States expressly prohibit class actions to enforce their FTC Acts.

A minority of Federal statutes provide private rights of action but do not cap damages in class action cases. For example, the Telephone Consumer Protection Act (47 U.S.C. 227(b)(3)), the FCRA (15 U.S.C. 1681n, 1681o), and the Credit Repair Organizations Act (15 U.S.C. 1679g) do not cap damages in class action cases.

See, e.g., Ratner

Chem. Bank N.Y. Trust Co.,

54 FRD. 412, 416 (S.D.N.Y. 1972).

See

Public Law 93-495, 88 Stat. 1518, section 408(a).

Truth in Lending Act Amendments, Public Law 94-240, 90 Stat. 260 (1976); Dodd-Frank section 1416(a)(2).

For example, ECOA provides for the full recovery of actual damages on a class basis and caps punitive damages to the lesser of $500,000 or 1 percent of a creditor's net worth; RESPA limits total class action damages (including actual or statutory damages) to the lesser of $1,000,000 or 1 percent of the net worth of a mortgage servicer; the FDCPA limits class action recoveries to the lesser of $500,000 or 1 percent of the net worth of the debt collector; and EFTA provides for a cap on statutory damages in class actions to the lesser of $500,000 or 1 percent of a defendant's net worth and lists factors to consider in determining the proper amount of a class award.

See

15 U.S.C. 1691e(b) (ECOA), 12 U.S.C. 2605(f)(2) (RESPA), 15 U.S.C. 1692k(a)(2)(B) (FDCPA), and 15 U.S.C. 1693m(a)(2)(B) (EFTA).

See, e.g.,

Electronic Fund Transfer Act, H. Rept. No. 95-1315, at 15 (1978). The Report stated: “Without a class-action suit an institution could violate the title with respect to thousands of consumers without their knowledge, if its financial impact was small enough or hard to discover. Class action suits for damages are an essential part of enforcement of the bill because all too often, although many consumers have been harmed, the actual damages in contrast to the legal costs to individuals are not enough to encourage a consumer to sue. Suits might only be brought for violations resulting in large individual losses while many small individual losses could quickly add up to thousands of dollars.”

The UDAP laws of at least 14 States expressly permit class action lawsuits.

See, e.g.,

Cal. Bus. & Prof. Code 17203 (2016); Haw. Rev. Stat. Ann. sec. 480-13.3 (2015); Idaho Code Ann. sec. 48-608(1) (2015); Ind. Code Ann. sec. 24-5-0.5-4(b) (2015); Kan. Stat. Ann. sec. 50-634(c) and (d) (2012); Mass. Gen. Laws ch. 93A, sec. 9(2) (2016); Mich. Comp. Laws sec. 445.911(3) (2015); Mo. Rev. Stat. sec. 407.025(2) and (3) (2015); N.H. Rev. Stat. sec. 358-A:10-a (2015); N.M. Stat. sec. 57-12-10(E) (2015); Ohio Rev. Code sec. 1345.09(B) (2016); R.I. Gen. Laws sec. 6-13.1-5.2(b) (2015); Utah Code secs. 13-11-19 and 20 (2015); Wyo. Stat. sec. 40-12-108(b) (2015).

See, e.g.,

Ala. Code sec. 8-19-10(f) (2002); Ga. Code Ann. sec. 10-1-399 (2015); La. Rev. Stat. Ann.

sec. 51:1409(A) (2006); Mont. Code Ann. sec. 30-14-133(1) (2003); S.C. Code Ann. sec. 37-5-202(1) (1999).

B. History and Purpose of the Class Action Procedure

The default rule in United States courts, inherited from England, is that only those who appear as parties to a given case are bound by its outcome.

As early as the medieval period, however, English courts recognized that litigating many individual cases regarding the same issue was inefficient for all parties and thus began to permit a single person in a single case to represent a group of people with common interests.

English courts later developed a procedure called the “bill of peace” to adjudicate disputes involving common questions and multiple parties in a single action. The process allowed for judgments binding all group members—whether or not they were participants in the suit—and contained most of the basic elements of what is now called class action litigation.

Ortiz

Fibreboard Corp.,

527 U.S. 815, 832-33 (1999).

For instance, in early English cases, a local priest might represent his parish, or a guild might be represented by its formal leadership. Samuel Issacharoff, “Assembling Class Actions,” 90 Wash U. L. Rev. 699, at 704 (2013) (citing Stephen C. Yeazell, From Medieval Group Litigation to the Modern Class Action 40 (1987)).

7A Charles Alan Wright & Arthur R. Miller, “Federal Practice and Procedure: Civil § 1751” (3d ed. 2002).

The bill of peace was recognized in early United States case law and ultimately adopted by several State courts and the Federal courts.

Nevertheless, the use and impact of that procedure remained relatively limited through the nineteenth and into the twentieth centuries. In 1938, the Federal Rules were adopted to govern civil litigation in Federal court, and Federal Rule 23 established a procedure for class actions.

That procedure's ability to bind absent class members was never clear, however.

Id.

Federal Equity Rule 48, in effect from 1842 to 1912, officially recognized representative suits where parties were too numerous to be conveniently brought before the court, but did not bind absent members to the judgment.

Id.

In 1912, Federal Equity Rule 38 replaced Rule 48 and allowed absent members to be bound by a final judgment.

Id.

See

Fed. R. Civ. P. 23 (1938).

See American Pipe & Constr. Co.

Utah,

414 U.S. 538, 545-46 (1974) (“The Rule [prior to its amendment] . . . contained no mechanism for determining at any point in advance of final judgment which of those potential members of the class claimed in the complaint were actual members and would be bound by the judgment.”).

That changed in 1966, when Federal Rule 23 was amended to create the class action mechanism that largely persists in the same form to this day.

Federal Rule 23 was amended at least in part to promote efficiency in the courts and to provide for compensation of individuals when many are harmed by the same conduct.

The 1966 revisions to Federal Rule 23 prompted similar changes in most States. As the Supreme Court has since explained, class actions promote efficiency in that “the . . . device saves the resources of both the courts and the parties by permitting an issue potentially affecting every [class member] to be litigated in an economical fashion under Rule 23.”

As to small harms, class actions provide a mechanism for compensating individuals where “the amounts at stake for individuals may be so small that separate suits would be impracticable.”

Class actions have been brought not only by individuals, but also by companies, including financial institutions.

See, e.g.,

Robert H. Klonoff, “The Decline of Class Actions,” 90 Wash. U. L. Rev. 729, at 746-47 (2013) (“The Rule 23(a) and (b) criteria, by their terms, have not changed in any significant way since 1966, but some courts have become increasingly skeptical in reviewing whether a particular case satisfies those requirements”). In 1966, a member of the Advisory Committee explained that the class action device was designed to bind all absent class members because “Requiring . . . individuals affirmatively to request inclusion in the lawsuit would result in freezing out the claims of people—especially small claims held by small people—who for one reason or another, ignorance, timidity, unfamiliarity with business or legal matters, will simply not take the affirmative step. The moral justification for treating such people as null quantities is questionable. For them the class action serves something like the function of an administrative proceeding where scattered individual interests are represented by the Government.” Benjamin Kaplan, “Continuing the Work of the Civil Committee: 1966 Amendments of the Federal Rules of Civil Procedure (i),” 81 Harv. L. Rev. 356, at 397-98 (1967).

See American Pipe,

414 U.S. at 553 (“A contrary rule allowing participation only by those potential members of the class who had earlier filed motions to intervene in the suit would deprive Rule 23 class actions of the efficiency and economy of litigation which is a principal purpose of the procedure.”).

Califano

Yamasaki,

442 U.S. 682, 701 (1979).

Amchem Prod., Inc.

Windsor,

521 U.S. 591, 616 (1997),

citing

Fed. R. Civ. P. 23 advisory committee's note, 28 U.S.C. app. at 698 (stating that a class action may be justified under Federal Rule 23 where “the class may have a high degree of cohesion and prosecution of the action through representatives would be quite unobjectionable, or the amounts at stake for individuals may be so small that separate suits would be impracticable”).

See also

Herbert B. Newberg, et al., “Newberg on Class Actions,” at § 7:41 (5th ed. Thomson Reuters 2016); Committee Notes on Rules, 1998 Amendment (“This permissive interlocutory appeal provision is adopted under the power conferred by 28 U.S.C. 1292(e). Appeal from an order granting or denying class certification is permitted in the sole discretion of the court of appeals. No other type of Rule 23 order is covered by this provision.”).

See

28 U.S.C. app. at 163 (2014).

Fed. R. Civ. P. 23(c)(2)(B).

See also

28 U.S.C. app. at 168 (2014) (“Rule 23(c)(2)(B) is revised to require that the notice of class certification define the certified class in terms identical to the terms used in (c)(1)(B).”).

See, e.g.,

Rule 23 Subcomm. Rept., Advisory Committee on Rules of Civil Procedure, at 243-97 (2015),

available at

http://www.uscourts.gov/rules-policies/archives/agenda-books/advisory-committee-rules-civil-procedure-april-2015.

Federal courts have also shaped class action practice through their interpretations of Federal Rule 23. In the last five years, the Supreme Court has decided several major cases refining class action procedure. In

Wal-Mart Stores, Inc.

Dukes,

the Court interpreted the commonality requirement of Federal Rule 23(a)(2), holding that in the absence of a common question among putative class members class certification is not appropriate.

Comcast Corp.

Behrend,

the Court held that district courts must undertake a “rigorous analysis” of whether the damages model supporting a plaintiff's case is consistent with its theory of liability for purposes of satisfying the predominance requirements in Federal Rule 23(b)(3) and that that in the absence of such a model of individual damages may foreclose class certification.

Campbell-Ewald Co.

Gomez,

the Court held that a defendant

cannot moot a class action by offering complete relief to an individual plaintiff before class certification unless the individual plaintiff agrees to accept that relief.

Tyson Foods, Inc.

Bouaphakeo,

the Court held that statistical techniques presuming that all class members are identical to the average observed in a sample can be used to establish classwide liability where each class member could have relied on that sample to establish liability had each brought an individual action.

Finally, in

Spokeo, Inc.

Robins,

a class action alleging a violation of Federal law, the Court reiterated that to have standing in Federal court a plaintiff must allege an injury in fact—specifically, “`an invasion of a legally protected interest' that is `concrete and particularized' and `actual or imminent, not conjectural or hypothetical.'”

The case was remanded to the Ninth Circuit to determine whether the plaintiff had alleged an actual injury under the FCRA.

564 U.S. 338, 131 S. Ct. 2541 (2011);

see also

Klonoff,

supra

note 45, at 775.

133 S. Ct. 1426 (2013).

Campbell-Ewald Co.

Gomez,

136 S. Ct. 663, 670 (2016).

Tyson Foods, Inc.

Bouaphakeo,

136 S. Ct. 1036, 1046-48 (2016).

Spokeo, Inc.

Robins,

135 S. Ct. 1892 (2015).

Id.

Following remand, the

Spokeo

case remains pending in the Ninth Circuit.

See Robins

Spokeo Inc.,

No. 11-56843 (9th Cir).

C. Arbitration and Arbitration Agreements

As described above at the beginning of Part II, arbitration is a dispute resolution process in which the parties choose one or more neutral third parties to make a final and binding decision resolving the dispute.

The typical arbitration agreement provides that the parties shall submit any disputes that may arise between them to arbitration. Arbitration agreements generally give each party to the contract two distinct rights. First, either side can file claims against the other in arbitration and obtain a decision from the arbitrator.

Second, with some exceptions, either side can use the arbitration agreement to require that a dispute that has been filed in court instead proceed in arbitration.

The typical agreement also specifies an organization called an arbitration administrator. Administrators, which may be for-profit or nonprofit organizations, facilitate the selection of an arbitrator to decide the dispute, provide for basic rules of procedure and operations support, and generally administer the arbitration.

Parties usually have very limited rights to appeal from a decision in arbitration to a court.

Most arbitration also provides for limited or streamlined discovery procedures as compared to those in many court proceedings.

See

“Arbitration,”

supra

note 7.

Id.

As described in the Study, however, most arbitration agreements in consumer financial contracts contain a “small claims court carve-out” that provides the parties with a contractual right to pursue a claim in small claims court. Study,

supra

note 3, section 2 at 33-34.

See id.

section 2 at 34-40.

See

9 U.S.C. 9.

see also

Bennet S. Koren, “Our Mini Theme: Class Actions,” 7 Bus. L. Today 18 (1998) (industry attorney recommends adopting arbitration agreements because “[t]he absence of a class remedy ensures that there will be no formal notification and most claims will therefore remain unasserted.”).

Even if a pre-dispute arbitration agreement does not prohibit class arbitration, an arbitrator may not permit arbitration to go forward on a class basis unless the arbitration agreement itself shows the parties agreed to do so.

See Stolt-Nielsen S.A.

AnimalFeeds Int'l Corp.,

559 U.S. 662, 684 (2010) (“[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party

agreed

to do so.”) (emphasis in original). Both the AAA and JAMS class arbitration procedures reflect the law; both require an initial determination as to whether the arbitration agreement at issue provides for class arbitration before a putative class arbitration can move forward.

See

AAA, “Supplementary Rules for Class Arbitrations,” at Rule 3 (effective Oct. 8, 2003) (“Upon appointment, the arbitrator shall determine as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class (the “Clause Construction Award.”); JAMS, “Class Action Procedures,” at Rule 2: Construction of the Arbitration Clause (effective May 1, 2009) (“[O]nce appointed, the Arbitrator, following the law applicable to the validity of the arbitration clause as a whole, or the validity of any of its terms, or any court order applicable to the matter, shall determine as a threshold matter whether the arbitration can proceed on behalf of or against a class.”).

See, e.g.,

Discover Financial Services, Annual Report (Form 10-K) (Feb. 25, 2015) at 43 (“[W]e have historically relied on our arbitration clause in agreements with customers to limit our exposure to consumer class action litigation . . .”); Synchrony Financial, Annual Report (Form 10-K) (Feb. 23, 2015) at 45 (“[H]istorically the arbitration provision in our customer agreements generally has limited our exposure to consumer class action litigation. . . .”).

Since the early 1990s, the use of arbitration agreements in consumer financial contracts has become widespread, as shown by Section 2 of the Study (which is discussed in detail in Part III.D below). By the early 2000s, a few consumer financial companies had become heavy users of arbitration proceedings to obtain debt collection judgments against consumers. For example, in 2006 alone, the National Arbitration Forum (NAF) administered 214,000 arbitrations, most of which were consumer debt collection proceedings brought by companies.

Carrick Mollenkamp, et al., “Turmoil in Arbitration Empire Upends Credit-Card Disputes,” Wall St. J., Oct. 16, 2009.

See also

Public Citizen, “The Arbitration Trap: How Credit Card Companies Ensnare Consumers,” (2007),

available athttps://www.citizen.org/our-work/access-justice/arbitration-trap.

Legal Challenges to Arbitration Agreements

The increase in the prevalence of arbitration agreements coincided with various legal challenges to their use in consumer contracts. One set of challenges focused on the use of arbitration agreements in connection with debt collection disputes. In the late 2000s, consumer groups began to criticize the fairness of debt collection arbitration proceedings administered by NAF, which was the most widely used arbitration administrator for debt collection.

In 2008, the San Francisco City Attorney's office filed a civil action against NAF alleging that NAF was biased in favor of debt collectors.

In 2009, the Minnesota Attorney General sued NAF, alleging an institutional conflict of interest because a group of investors with a 40 percent ownership stake in an affiliate of NAF also had a majority ownership stake in a debt collection firm that brought a number of cases before NAF.

A few days after the filing of the lawsuit, NAF reached a settlement with the Minnesota Attorney General pursuant to which it agreed to stop administering consumer arbitrations completely, although NAF did not admit liability.

100

Further, a series of class actions filed against NAF were consolidated in a multidistrict litigation, and NAF settled those in 2011 by agreeing to suspend $1 billion in pending debt collection arbitrations.

101

See

Mollenkamp,

supra

note 96. In addition to cases relating to debt collection arbitrations, NAF was later added as a defendant to the

Ross

Bank of America

case, a putative class action pertaining to non-disclosure of foreign currency conversion fees; NAF was alleged to have facilitated an antitrust conspiracy among credit card companies to adopt arbitration agreements. NAF settled those allegations.

See

Order Preliminarily Approving Class Action Settlement as to Defendant National Arbitration Forum Inc., In re Currency Conversion Fee Antitrust Litig., No. 1409 (S.D.N.Y. Dec. 13, 2011).

California

National Arbitration Forum, Inc.,

No. 473-569 (S.F. Sup. Ct. Mar. 2009).

See

Complaint at 2,

State of Minnesota

National Arbitration Forum, Inc.,

No. 09-18550 (4th Jud. Dist. Minn. July 14, 2009),

available at https://www.nclc.org/images/pdf/unreported/naf_complaint.pdf.

100

Press Release, State of Minnesota, Office of the Attorney General, “National Arbitration Forum Barred from Credit Card and Consumer Arbitrations Under Agreement with Attorney General Swanson,” (July 19, 2009),

available at

http://pubcit.typepad.com/files/nafconsentdecree.pdf.

NAF settled the City of San Francisco's claims in 2011 by agreeing to cease administering consumer arbitrations in California in perpetuity and to pay a $1 million penalty. Press Release, City Attorney Dennis Herrera, “Herrera Secures $5 Million Settlement, Consumer Safeguards Against BofA Credit Card Subsidiary,” (Aug. 22, 2011),

available at

https://www.sfcityattorney.org/2011/08/22/herrera-secures-5-million-settlement-consumer-safeguards-against-bofa-credit-card-subsidiary/.

101

Memorandum and Order, In re National Arbitration Forum Trade Practices Litig., No. 10-02122 (D. Minn. Aug. 8, 2011), ECF 120.

The American Arbitration Association (AAA) likewise announced a moratorium on administering company-filed debt collection arbitrations, articulating significant concerns about due process and fairness to consumers subject to such arbitrations.

102

Specifically, shortly after the NAF settlement, the AAA offered testimony to Congress that—independent of the NAF settlement—AAA “had independently reviewed areas of the process and concluded that it had some weaknesses” in its own debt collection arbitration program, and noted that generally that “areas needing attention . . . include[d] consumer notification, arbitrator neutrality, pleading and evidentiary standards, respondents' defenses and counterclaims, and arbitrator training and recruitment.”

103

102

See

Press Release, AAA, “The American Arbitration Association Calls for Reform of Debt Collection Arbitration,” (July 23, 2009),

available at

https://www.nclc.org/images/pdf/arbitration/testimonysept09-exhibit3.pdf

See also

AAA, “Consumer Debt Collection Due Process Protocol Statement of Principles,” (2010),

available at

https://www.adr.org/aaa/ShowProperty?nodeId=%2FUCM%2FADRSTG_003865

. JAMS has reported to the Bureau that it only handles a small number of debt collection claims and often those arbitrations are initiated by consumers. 81 FR 32830, 32836 n.97 (May 24, 2016).

103

See

Press Release, AAA,

supra

note 102.

A second group of challenges asserted that the invocation of arbitration agreements to block class actions was unlawful. Because the FAA permits challenges to the validity of arbitration agreements on grounds that exist at law or in equity for the revocation of any contract,

104

challengers argued that

provisions prohibiting arbitration from proceeding on a class basis—as well as other features of particular arbitration agreements—were unconscionable under State law or otherwise unenforceable.

105

Initially, these challenges yielded conflicting results. Some courts held that class arbitration waivers were not unconscionable.

106

Other courts held that such waivers were unenforceable on unconscionability grounds.

107

Some of these decisions also held that the FAA did not preempt application of a State's unconscionability doctrine.

108

104

9 U.S.C. 2 (providing that agreements to arbitrate “shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”).

105

See, e.g.,

Opening Brief on the Merits at 5,

Discover Bank

Superior Court

, No. S113725, 2003 WL 26111906, (Cal. 2005) (“[A] ban on class actions in an adhesive consumer contract such as the one at issue here is unconscionable because it is one-sided and effectively non-mutual—that is, it benefits only the corporate defendant, and could never operate to the benefit of the consumer.”).

106

See, e.g., Strand

U.S. Bank N.A.,

693 NW.2d 918 (N.D. 2005);

Edelist

MBNA America Bank,

790 A.2d 1249 (Sup. Ct. of Del., New Castle Cty. 2001).

107

See, e.g., Brewer

Missouri Title Loans, Inc.,

323 SW.3d 18 (Mo. 2010) (en banc);

Feeney

Dell, Inc.,

908 NE.2d 753 (Mass. 2009);

Fiser

Dell Computer Corp.,

188 P.3d 1215 (N.M. 2008);

Tillman

Commercial Credit Loans, Inc.,

655 SE.2d 362 (N.C. 2008);

Dale

Comcast Corp.,

498 F.3d 1216 (11th Cir. 2007) (holding that class action ban in arbitration agreement substantively unconscionable under Georgia law);

Scott

Cingular Wireless,

161 P.3d 1000 (Wash. 2007) (en banc);

Kinkel

Cingular Wireless LLC,

857 NE.2d 250 (Ill. 2006);

Muhammad

Cnty. Bank of Rehoboth Beach, Del.,

912 A.2d 88 (N.J. 2006);

Discover Bank

Superior Court,

113 P.3d 1100 (Cal. 2005).

108

See, e.g., Feeney,

908 NE.2d at 767-69;

Scott,

161 P.3d at 1008-09;

Discover Bank,

113 P.3d at 1110-17.

Before 2011, courts were divided on whether arbitration agreements that bar class proceedings were unenforceable because they violated a particular State's laws. Then, in 2011, the Supreme Court held in

AT&T Mobility

Concepcion

that the FAA preempted application of California's unconscionability doctrine to the extent it would have precluded enforcement of a consumer arbitration agreement with a provision prohibiting the filing of arbitration on a class basis. The Court concluded that any State law—even one that serves as a general contract law defense—that “[r]equir[es] the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

109

The Court reasoned that class arbitration eliminates the principal advantage of arbitration—its informality—and increases risks to defendants (due to the high stakes of mass resolution combined with the absence of multilayered review).

110

As a result of the Court's holding, parties to litigation could no longer prevent the use of an arbitration agreement to block a class action in court on the ground that a prohibition on class arbitration in the agreement was unconscionable under the relevant State law.

111

The Court further held, in a 2013 decision, that a court may not use the “effective vindication” doctrine—under which a court may invalidate an arbitration agreement that operates to waive a party's right to pursue statutory remedies—to invalidate a class arbitration waiver on the grounds that the plaintiff's cost of individually arbitrating the claim exceeds the potential recovery.

112

109

AT&T Mobility LLC

Concepcion,

563 U.S. 333, 344 (2011).

110

Id.

at 348-51.

111

See

Robert Buchanan Jr., “The U.S. Supreme Court's Landmark Decision in AT&T Mobility v. Concepcion: One Year Later,” Bloomberg Legal News, May 8, 2012,

available at

http://www.bna.com/att-v-concepcion-one-year-later/

(noting that 45 out of 61 cases involving a class waiver in an arbitration agreement were sent to arbitration). The Court did not preempt all State law contract defenses under all circumstances; rather, these doctrines remain available provided that they are not applied in a manner that disfavors arbitration.

112

American Express Co.

Italian Colors Restaurant,

133 S. Ct. 2304, 2309 (2013).

Regulatory and Legislative Activity

As arbitration agreements in consumer contracts became more common, Federal regulators, Congress, and State legislatures began to take notice of their impact on the ability of consumers to resolve disputes. One of the first entities to regulate arbitration agreements was the National Association of Securities Dealers—now known as the Financial Industry Regulatory Authority (FINRA)—the self-regulating body for the securities industry that also administers arbitrations between member companies and their customers.

113

Under FINRA's Code of Arbitration for customer disputes, FINRA members have been prohibited since 1992 from enforcing an arbitration agreement against any member of a certified or putative class unless and until the class treatment is denied (or a certified class is decertified) or the class member has opted out of the class or class relief.

114

FINRA's code also requires this limitation to be set out in any member company's arbitration agreement. The SEC approved this rule in 1992.

115

In addition, since 1976, the regulations of the Commodity Futures Trading Commission (CFTC) implementing the Commodity Exchange Act (CEA) have required that arbitration agreements in commodities contracts be voluntary.

116

In 2004, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—government-sponsored enterprises that purchase a large share of mortgages—ceased purchasing mortgages that contained arbitration agreements.

117

113

See

FINRA, “Arbitration and Mediation,”

https://www.finra.org/arbitration-and-mediation

(last visited Feb. 8, 2017).

114

FINRA, “Class Action Claims,” at Rule 12204(d). For individual disputes between brokers and customers, FINRA requires individual arbitration.

115

See

Self-Regulatory Organizations; National Ass'n of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to the Exclusion of Class Actions from Arbitration Proceedings, Exchange Act Release No. 31371, 1992 WL 324491, (Oct. 28, 1992) (citing Securities and Exchange Act, section 19(b)(1) and Rule 19b-4). In a separate context, the SEC has opposed attempts by companies to include arbitration agreements in their securities filings in order to force shareholders to arbitrate disputes rather than litigate them in court.

See, e.g.,

Carl Schneider, “Arbitration Provisions in Corporate Governance Documents,” Harv. L. Sch. Forum on Corp. Governance and Fin. Reg. (Apr. 27, 2012),

available at

https://corpgov.law.harvard.edu/2012/04/27/arbitration-provisions-in-corporate-governance-documents/

(“According to published reports, the SEC advised Carlyle that it would not grant an acceleration order permitting the registration statement to become effective unless the arbitration provision was withdrawn.”). Carlyle subsequently withdrew its arbitration provision.

116

Arbitration or Other Dispute Settlement Procedures, 41 FR 42942, 42946 (Sept. 29, 1976); 17 CFR 166.5(b).

117

See

Kenneth Harney, “Fannie Follows Freddie in Banning Mandatory Arbitration,” Wash. Post, Oct. 9, 2004,

available at

http://www.washingtonpost.com/wp-dyn/articles/A18052-2004Oct8.html

Since 1975, FTC regulations implementing the Magnuson-Moss Warranty Act (MMWA) have barred the use, in consumer warranty agreements, of arbitration agreements that would result in binding decisions.

118

Some courts in the late 1990s disagreed with

the FTC's interpretation, but the FTC promulgated a final rule in 2015 that “reaffirm[ed] its long-held view” that the MMWA “disfavors, and authorizes the Commission to prohibit, mandatory binding arbitration in warranties.”

119

In doing so, the FTC noted that the language of the MMWA presupposed that the kinds of informal dispute settlement mechanisms the FTC would permit would not foreclose the filing of a civil action in court.

120

118

16 CFR 703.5(j). The FTC's rules do permit warranties that require consumers to resort to an informal dispute resolution mechanism before proceeding in a court, but decisions from such informal proceedings are not binding and may be challenged in court. (By contrast, most arbitration awards are binding and may only be challenged on very limited grounds as provided by the FAA.) The FTC's rulemaking was based on authority expressly delegated by Congress in its passage of the MMWA pertaining to informal dispute settlement procedures. 15 U.S.C. 2310(a)(2). Until 1999, courts upheld the validity of the rule.

See

80 FR 42719;

see also

Jonathan D. Grossberg, “The Magnuson-Moss Warranty Act, the Federal Arbitration Act, and the Future of Consumer Protection,” 93 Cornell L. Rev. 659, at 667 (2008). After 1999, two appellate courts questioned whether the MMWA was intended to reach arbitration agreements.

See

Final Action Concerning Review of the Interpretations of Magnuson-Moss Warranty Act, 80 FR 42710, 42719 and nn.115-116 (July 20, 2015) (citing

Davis

Southern Energy Homes, Inc.,

305 F.3d 1268 (11th Cir. 2002);

Walton

Rose Mobile Homes, LLC,

298 F.3d 470 (5th Cir. 2002).

119

See

80 FR 42710, 42719 (July 20, 2015).

120

See id.

More recently, the Department of Labor finalized a rule addressing conflicts of interest in retirement advice.

121

To be eligible for an exemption from part of that rule, a covered entity cannot employ an arbitration agreement that can be used to block a class action, although agreements mandating arbitration of individual disputes will continue to be permitted.

122

Other agencies are reevaluating their arbitration initiatives. The Department of Education recently sought to postpone implementation of a rule that was intended to limit the impact of arbitration agreements in certain college enrollment agreements by addressing the use of arbitration agreements to bar students from bringing group claims.

123

The Centers for Medicare and Medicaid Services (CMS) have proposed revisions to a rule finalized in late 2016 regarding the requirements that long-term health care facilities must meet to participate in the Medicare and Medicaid programs.

124

121

Best Interest Contract Exemption, 81 FR 21002 (Apr. 8, 2016).

122

81 FR 21002, 21020 (Apr. 8, 2016).

123

See

Student Assistance General Provisions, 82 FR 27621 (June 16, 2017);

see also

Student Assistance General Provisions, 81 FR 75926, 76021-31 (Nov. 1, 2016).

124

The recent proposal seeks to amend the 2016 rule's required terms for the use of arbitration agreements between long-term care facilities and residents of those facilities. 82 FR 26649 (June 5, 2017);

see also

Centers for Medicare & Medicaid Services, Medicare and Medicaid Programs, Reform of Requirements for Long-Term Care Facilities, 81 FR 68688 (Oct. 4, 2016).

Congress has also taken several steps to address the use of arbitration agreements in different contexts. In 2002, Congress amended Federal law to require that, whenever a motor vehicle franchise contract contains an arbitration agreement, arbitration may be used to resolve the dispute only if, after a dispute arises, all parties to the dispute consent in writing to the use of arbitration.

125

In 2006, Congress passed the Military Lending Act (MLA), which, among other things, prohibited the use of arbitration provisions in extensions of credit to active servicemembers, their spouses, and certain dependents.

126

As first implemented by Department of Defense (DoD) regulations in 2007, the MLA applied to “[c]losed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000.”

127

In July 2015, DoD promulgated a final rule that significantly expanded that definition of “consumer credit” to cover closed-end loans that exceeded $2,000 or had terms longer than 91 days as well as various forms of open-end credit, including credit cards.

128

In 2008, Congress amended Federal agriculture law to require, among other things, that livestock or poultry contracts containing arbitration agreements disclose the right of the producer or grower to decline the arbitration agreement; the Department of Agriculture issued a final rule implementing the statute in 2011.

129

125

21st Century Department of Justice Appropriations Authorization Act, Public Law 107-273, section 11028(a)(2), 116 Stat. 1835 (2002), codified at 15 U.S.C. 1226(a)(2). The statute defines “motor vehicle franchise contract” as “a contract under which a motor vehicle manufacturer, importer, or distributor sells motor vehicles to any other person for resale to an ultimate purchaser and authorizes such other person to repair and service the manufacturer's motor vehicles.”

Id.

at section 11028(a)(1)(B), 116 Stat. 1835, codified at 15 U.S.C. 1226(a)(1)(B).

126

John Warner National Defense Authorization Act for Fiscal Year 2007, Public Law 109-364, 120 Stat. 2083 (2006).

127

Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FR 50580 (Aug. 31, 2007) (codified at 32 CFR 232).

128

See

32 CFR 232.8(c). Creditors must comply with the requirements of the rule for transactions or accounts established or consummated on or after October 3, 2016, subject to certain exemptions. 32 CFR 232.13(a). The rule applies to credit card accounts under an open-end consumer credit plan only on October 3, 2017. 32 CFR 232.13(c)(2). Earlier, Congress passed an appropriations provision prohibiting Federal contractors and subcontractors receiving Department of Defense funds from requiring employees or independent contractors to arbitrate certain kinds of employment claims.

See

Department of Defense Appropriations Act of 2010, Public Law 111-118, 123 Stat. 3454 (2010), section 8116.

129

Food, Conservation, and Energy Act of 2008, Public Law 110-234, section 11005, 122 Stat. 1356-58 (2008), codified at 7 U.S.C. 197c; Implementation of Regulations Required Under Title XI of the Food,

Conservation and Energy Act of 2008; Suspension of Delivery of Birds, Additional Capital Investment Criteria, Breach of Contract, and Arbitration, 76 FR 76874, 76890 (Dec. 9, 2011).

As previously noted, Congress again addressed arbitration agreements in the 2010 Dodd-Frank Act. Dodd-Frank section 1414(a) prohibited the use of arbitration agreements in mortgage contracts, which the Bureau implemented in its Regulation Z.

130

Section 921 of the Act authorized the SEC to issue rules to prohibit or impose conditions or limitations on the use of arbitration agreements by investment advisers.

131

Section 922 of the Act invalidated the use of arbitration agreements in connection with certain whistleblower proceedings.

132

Finally, and as discussed in greater detail below, section 1028 of the Act required the Bureau to study the use of arbitration agreements in contracts for consumer financial products and services and authorized this rulemaking.

133

The authority of the Bureau and the SEC are similar under the Dodd-Frank Act except that the SEC does not have to complete a study before promulgating a rule.

130

See

Dodd-Frank section 1414(a) (codified as 15 U.S.C. 1639c(e)(1)) (“No residential mortgage loan and no extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.”); 12 CFR 1026.36(h)(1).

131

Dodd-Frank section 921(b).

132

Dodd-Frank section 922(c)(2).

133

Dodd-Frank section 1028(a).

State legislatures have also taken steps to regulate the arbitration process. Several States, most notably California, require arbitration administrators to disclose basic data about consumer arbitrations that take place in the State.

134

However, States are constrained in their ability to regulate arbitration because the FAA preempts conflicting State law.

135

134

Cal. Civ. Proc. Code sec. 1281.96 (amended effective Jan. 1, 2015); DC Code sec. 16-4430; Md. Comm. L. Code, secs. 14-3901-05; 10 M.R.S.A. sec. 1394 (Maine).

135

See Doctor's Assocs., Inc.

Casarotto,

517 U.S. 681, 687 (1996) (“Courts may not, however, invalidate arbitration agreements under state laws applicable only to arbitration provisions.”);

Perry

Thomas,

482 U.S. 483, 492 n.9 (1987) (“[S]tate law, whether of legislative or judicial origin, is applicable

that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of [FAA] sec. 2.”).

Arbitration Today

Today, the AAA is the primary administrator of consumer financial arbitrations.

136

The AAA's consumer financial arbitrations are governed by the AAA Consumer Arbitration Rules, which includes provisions that, among other things, limit filing and administrative costs for consumers.

137

The AAA also has adopted the AAA Consumer Due Process Protocol, which creates a floor of procedural and substantive protections and affirms that “[a]ll parties are entitled to a fundamentally-fair arbitration

process.”

138

A second entity, JAMS, administers consumer financial arbitrations pursuant to the JAMS Streamlined Arbitration Rules & Procedures

139

and the JAMS Consumer Minimum Standards.

140

These administrators' procedures for arbitration both differ in several respects from the procedures found in court, as discussed in Section 4 of the Study and summarized below at Part III.D.

136

See infra

Part III.D.

137

AAA, “Consumer Arbitration Rules,” (effective Sept. 1, 2014),

available at

https://adr.org/sites/default/files/Consumer%20Rules.pdf

138

AAA, “Consumer Due Process Protocol Statement of Principles,” at Principle 1,

available at

http://info.adr.org/consumer-arbitration/

. Other principles include that all parties are entitled to a neutral arbitrator and administrator (Principle 3), that all parties retain the right to pursue small claims (Principle 5), and that face-to-face arbitration should be conducted at a “reasonably convenient” location (Principle 6). The AAA explained that it adopted these principles because, in its view, “consumer contracts often do not involve arm's length negotiation of terms, and frequently consist of boilerplate language.” The AAA further explained that “there are legitimate concerns regarding the fairness of consumer conflict resolution mechanisms required by suppliers. This is particularly true in the realm of binding arbitration, where the courts are displaced by private adjudication systems.”

Id.

at 4.

139

JAMS, “Streamline Arbitration Rules & Procedures,” (effective July 1, 2014),

available at

http://www.jamsadr.com/rules-streamlined-arbitration/

. If a claim or counterclaim exceeds $250,000, the JAMS Comprehensive Arbitration Procedures, not the Streamlined Rules & Procedures, apply.

Id.

at Rule 1(a).

140

See

JAMS, “JAMS Policy on Consumer Arbitrations Pursuant to Pre-Dispute Clauses: Minimum Standards on Procedural Fairness,” (effective July 15, 2009),

available at

https://www.jamsadr.com/consumer-minimum-standards/

(setting forth 10 standards). This policy explains that “JAMS will administer arbitrations pursuant to mandatory pre-dispute arbitration clauses between companies and consumers1 only if the contract arbitration clause and specified applicable rules comply with the following minimum standards of fairness.”

Id.

Further, although virtually all arbitration agreements in the consumer financial context expressly preclude arbitration from proceeding on a class basis, the major arbitration administrators do provide procedures for administering class arbitrations and have occasionally administered them in class arbitrations involving providers of consumer financial products and services.

141

These procedures, which are derived from class action litigation procedures used in court, are described in Section 4.8 of the Study. These class arbitration procedures will only be used by the AAA or JAMS if the arbitration administrator first determines that the arbitration agreement can be construed as permitting class arbitration. These class arbitration procedures are not widely used in consumer financial services disputes: Reviewing consumer financial arbitrations pertaining to six product types filed over a period of three years, the Study found only three.

142

Industry has criticized class arbitration on the ground that it lacks procedural safeguards. For example, class arbitration generally has limited judicial review of arbitrator decisions, for example, on a decision to certify a class or an award of substantial damages.

143

141

See

AAA, “Class Arbitration Case Docket,”

https://www.adr.org/casedockets

(last visited Feb. 9, 2017).

142

Study,

supra

note 3, section 5 at 86-87. The review of class action filings in five of these markets also identified one of these two class arbitrations, as well as an additional class action arbitration filed with JAMS following the dismissal or stay of a class litigation.

Id.

section 6 at 59.

143

In a recent amicus curiae filing, the U.S. Chamber of Commerce argued that “[c]lass arbitration is a worst-of-all-worlds Frankenstein's monster: It combines the enormous stakes, formality and expense of litigation that are inimical to bilateral arbitration with exceedingly limited judicial review of the arbitrators' decisions.” Brief of the Chamber of Commerce of the United States of America as Amicus Curiae in Support of Plaintiff-Appellants at 9,

Marriott Ownership Resorts, Inc

. v.

Sterman

, No. 15-10627 (11th Cir. Apr. 1, 2015).

III. The Arbitration Study

Section 1028(a) of the Dodd-Frank Act directed the Bureau to study and provide a report to Congress on “the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.” Pursuant to section 1028(a), the Bureau conducted a study of the use of pre-dispute arbitration agreements in contracts for consumer financial products and services and, in March 2015, delivered to Congress its

Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a).

144

Study,

supra

note 3.

This Part describes the process the Bureau used to carry out the Study and summarizes the Study's results. Where relevant, this Part then sets forth comments received in response to the proposal that were specific to the Study and its results. The Bureau generally addresses the outcome of its Study, including analyses of the results of the Study, in Part VI, Findings, below. In some instances, the Bureau has elected to address issues related to both the Study and the Findings in Part VI.

A. April 2012 Request for Information

At the outset of its work, on April 27, 2012, the Bureau published a Request for Information (RFI) in the

Federal Register

concerning the Study.

145

The RFI sought public comment on the appropriate scope, methods, and data sources for the Study. Specifically, the Bureau asked for input on how it should address three topics: (1) The prevalence of arbitration agreements in contracts for consumer financial products and services; (2) arbitration claims involving consumers and companies; and (3) other impacts of arbitration agreements on consumers and companies, such as impacts on the incidence of consumer claims against companies, prices of consumer financial products and services, and the development of legal precedent. The Bureau also requested comment on whether and how the Study should address additional topics. In response to the RFI, the Bureau received and reviewed 60 comment letters. The Bureau also met with numerous commenters and other stakeholders to obtain additional feedback on the RFI.

145

Arbitration Study RFI,

supra

note 16.

The feedback received through this process substantially affected the scope of the Study the Bureau undertook. For example, several industry trade association commenters suggested that the Bureau study not only consumer financial arbitration but also consumer financial litigation in court. The Study incorporated an extensive analysis of consumer financial litigation—both individual litigation and class actions.

146

Commenters also advised the Bureau to compare the relationship between public enforcement actions and private class actions. The Study included extensive research into this subject, including an analysis of public enforcement actions filed over a period of five years by State and Federal regulators and the relationship, or lack of relationship of these cases to private class litigation.

147

Commenters also recommended that the Bureau study whether arbitration reduces companies' dispute resolution costs and the relationship between any such cost savings and the cost and availability of consumer financial products and services. To investigate this, the Study included a “difference-in-differences” regression analysis using a representative random sample of the Bureau's Credit Card Database, to look for price impacts associated with changes relating to arbitration agreements for credit cards, an analysis that had never before been conducted.

148

146

See generally

Study,

supra

note 3, sections 6 and 8.

147

Id.

at section 9.

148

Id.

section 10 at 7-14.

In some cases, commenters to the RFI encouraged the Bureau to study a topic, but the Bureau did not do so because certain effects did not appear

measurable. For example, some commenters suggested that the Bureau study the effect of arbitration agreements on the development, interpretation, and application of the rule of law. The Bureau did not identify a robust data set that would allow empirical analysis of this phenomenon. Nonetheless, legal scholars have subsequently attempted to quantify this effect in relation to consumer law.

149

See

Myriam Gilles, “The End of Doctrine: Private Arbitration Public Law and the Anti-Lawsuit Movement,” (Benjamin N. Cardozo Sch. of L. Faculty Res. Paper No. 436, 2014) (analyzing cases under “counterfactual scenarios” as to “what doctrinal developments in antitrust and consumer law . . . would not have occurred over the past decade if arbitration clauses had been deployed to the full extent now authorized by the Supreme Court”).

B. December 2013 Preliminary Results

In December 2013, the Bureau issued a 168-page report summarizing its preliminary results on a number of topics (Preliminary Results).

150

One purpose of releasing the Preliminary Results was to solicit additional input from the public about the Bureau's work on the Study to date. In the Preliminary Results, the Bureau also included a section that set out a detailed roadmap of the Bureau's plans for future work, including the Bureau's plans to address topics that had been suggested in response to the RFI.

151

150

Bureau of Consumer Fin. Prot., “Arbitration Study Preliminary Results,” (Dec. 12, 2013),

available at

http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf

151

Id.

at 129-131.

In February 2014, the Bureau invited stakeholders for in-person discussions with staff regarding the Preliminary Results, as well as the Bureau's future work plan. Several external stakeholders, including industry associations and consumer advocates, took that opportunity and provided additional input regarding the Study.

C. Comments on Survey Design Pursuant to the Paperwork Reduction Act

In the Preliminary Results, the Bureau indicated that it planned to conduct a survey of consumers. The purpose of the survey was to assess consumer awareness of arbitration agreements, as well as consumer perceptions of, and expectations about, dispute resolution with respect to disputes between consumers and financial services providers.

152

Pursuant to the Paperwork Reduction Act (PRA), the Bureau also undertook an extensive public outreach and engagement process in connection with its consumer survey (the results of which are published in Section 3 of the Study). The Bureau obtained approval for the consumer survey from the Office of Management and Budget (OMB), and each version of the materials submitted to OMB during this process included draft versions of the survey instrument.

153

In June 2013, the Bureau published a

Federal Register

notice that solicited public comment on its proposed approach to the survey and received 17 comments in response. In July 2013, the Bureau hosted two roundtable meetings to consult with various stakeholders including industry groups, banking trade associations, and consumer advocates. After considering the comments and conducting two focus groups to help refine the survey, but before undertaking the survey, the Bureau published a second

Federal Register

notice in May 2014, which generated an additional seven comments.

152

Id.

at 129.

153

The survey was assigned OMB control number 3170-0046.

D. The March 2015 Arbitration Study

The Bureau ultimately focused on nine empirical topics in the Study:

1. The prevalence of arbitration agreements in contracts for consumer financial products and services and their main features (Section 2 of the Study);

2. Consumers' understanding of dispute resolution systems, including arbitration and the extent to which dispute resolution clauses affect consumer's purchasing decisions (Section 3 of the Study);

3. How arbitration procedures differ from procedures in court (Section 4 of the Study);

4. The volume of individual consumer financial arbitrations, the types of claims, and how they are resolved (Section 5 of the Study);

5. The volume of individual and class consumer financial litigation, the types of claims, and how they are resolved (Section 6 of the Study);

6. The extent to which consumers sue companies in small claims court with respect to disputes involving consumer financial services (Section 7 of the Study);

7. The size, terms, and beneficiaries of consumer financial class action settlements (Section 8 of the Study);

8. The relationship between public enforcement and consumer financial class actions (Section 9 of the Study); and

9. The extent to which arbitration agreements lead to lower prices for consumers (Section 10 of the Study).

As described further in each subsection below, the Bureau's research on several of these topics drew in part upon data sources previously unavailable to researchers. For example, the AAA voluntarily provided the Bureau with case files for consumer arbitrations filed from the beginning of 2010, approximately when the AAA began maintaining electronic records, to the end of 2012. Compared to data sets previously available to researchers, the AAA case files covered a much longer period and were not limited to case files for cases resulting in an award. Using this data set, the Bureau conducted the first analysis of arbitration frequency and outcomes specific to consumer financial products and services.

154

Similarly, the Bureau submitted orders to financial service providers in the checking account and payday loan markets, pursuant to its market monitoring authority under Dodd-Frank section 1022(c)(4), to obtain a sample set of agreements of those institutions. Using these agreements, among others gathered from other sources, the Bureau conducted the most comprehensive analysis to date of the arbitration content of contracts for consumer financial products and services.

155

154

Study,

supra

note 3, section 5 at 19-68.

155

See generally id.

section 2.

The results of the Study also broke new ground because the Study, compared to prior research, generally considered larger data sets than had been reviewed by other researchers while also narrowing its analysis to consumer financial products and services. In total, the Study included the review of over 850 agreements for certain consumer financial products and services; 1,800 consumer financial services arbitrations filed over a three-year period; a random sample of the nearly 3,500 individual consumer finance cases identified as having been filed over a period of three years in Federal and selected State courts; and all of the 562 consumer finance class actions identified in Federal and selected State courts of the same time period. The Study also included over 40,000 filings in State small claims courts over the course of a single year. The Bureau supplemented this research by assembling and analyzing all of the more than 400 consumer financial class action settlements in Federal courts over a five-year period and more than 1,100 State and Federal public enforcement actions in the consumer finance area.

156

The Study also included the findings of the Bureau's survey of over 1,000 credit card consumers, focused on exploring their knowledge and understanding of arbitration and other dispute resolution mechanisms. The sections below describe in detail the process the Bureau followed in undertaking each section of the Study, summarize the main results of each section, and then summarizes and addresses criticisms of the Study results.

157

156

Since the publication of the Study, the Bureau determined that 41 FDIC enforcement actions were inadvertently omitted from the results published in Section 9 of the Study. The corrected total number of enforcement actions reviewed in Section 9 was 1,191. Other figures, including the identification of

public enforcement cases with overlapping private actions, were not affected by this omission.

157

Overall, the markets assessed in the Study represent lending money (

e.g.,

small-dollar open-ended credit, small-dollar closed-ended credit, large-dollar unsecured credit, large-dollar secured credit), storing money (

i.e.,

consumer deposits), and moving or exchanging money. The Study also included debt relief and debt collection disputes arising from these consumer financial products and services. Study,

supra

note 3, section 1 at 7-9. While credit scoring and credit monitoring were not included in these product categories, settlements regarding such products were included in the Study's analysis of class action settlements, as well as the Study's analysis of the overlap between public enforcement actions and private class action litigation.

Before doing so, one preliminary observation is in order. With rare exception, the commenters did not criticize the methodologies the Bureau used to assemble the various data sets used in the Study or the analyses the Bureau conducted of these data. Rather, to the extent commenters addressed the Study itself—as distinguished from the interpretation or significance of the Study's findings—in the main the commenters suggested that the Bureau should have engaged in additional analyses.

As explained in more detail below, in many instances the analyses that commenters suggested were not feasible given the limitations on the data available to the Bureau. For example, as discussed below, the Bureau did not have a feasible way of studying the actual costs that financial service providers incur in defending class actions or studying the outcomes of arbitration or individual litigation cases that were settled (or resolved in a manner consistent with a settlement) unless the case records reflected the settlement terms. In other instances, the analyses the commenters suggested—such as studying the satisfaction of the small number of consumers who file arbitration cases—were not, in the Bureau's judgment, relevant to determining whether limitations on arbitration agreements are in the public interest and for the protection of consumers. And, in other instances, resource limitations required the Bureau to deploy random sampling techniques or to limit the number of years under study while still obtaining representative data.

Beyond that, it is worth noting that it is the case with any research—even research as extensive and painstaking as the Study—that it is always possible, ex post, to think of additional questions that could have been asked, additional data that could have been procured, or additional analyses that could have been performed. The Bureau does not interpret section 1028's direction to study the use of arbitration agreements in consumer finance to require the Bureau to research every conceivably relevant question or to exhaust every conceivable data source as a precondition to exercising the regulatory authority contained in that section. As discussed in substantial detail below in Part VI, the Bureau believes that its extensive research provides ample evidence that the restrictions on the use of arbitration agreements contained in this Rule are in the public interest and for the protection of consumers.

1. Prevalence and Features of Arbitration Agreements (Section 2 of Study)

Section 2 of the Study addressed two central issues relating to the use of arbitration agreements: How frequently such agreements appear in contracts for consumer financial products and services and what features such agreements contain. Among other findings, the Study determined that arbitration agreements are commonly used in contracts for consumer financial products and services and that the AAA is the primary administrator of consumer financial arbitrations.

To conduct this analysis, the Bureau reviewed contracts for six product markets: Credit cards, checking accounts, general purpose reloadable (GPR) prepaid cards, payday loans, private student loans, and mobile wireless contracts governing third-party billing services.

158

Previous studies that analyzed the prevalence and features of arbitration agreements in contracts for consumer financial products and services either relied on small samples or limited their study to one market.

159

As a result, the Bureau's inquiry in Section 2 of the Study represents the most comprehensive analysis to date of the arbitration content of contracts for consumer financial products and services.

158

Id.

section 2 at 3.

159

Id.

section 2 at 4-6.

The Bureau's sample of credit card contracts consisted of contracts filed by 423 issuers with the Bureau as required by the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) as implemented by Regulation Z.

160

Taken together, these contracts covered nearly all consumers in the credit card market. For deposit accounts, the Bureau identified the 100 largest banks and the 50 largest credit unions, and constructed a random sample of 150 small and mid-sized banks. The Bureau obtained the deposit account agreements for these institutions by downloading them from the institutions' Web sites and through orders sent to institutions using the Bureau's market monitoring authority.

160

12 CFR 1026.58(c) (requiring credit card issuers to submit their currently-offered credit card agreements to the Bureau to be posted on the Bureau's Web site).

For GPR prepaid cards, the Bureau's sample included agreements from two sources. The Bureau gathered agreements for 52 GPR prepaid cards that were listed on the Web sites of two major card networks and a Web site that provided consolidated card information as of August 2013. The Bureau also obtained agreements from GPR prepaid card providers that had been included in several recent studies of the terms of GPR prepaid cards and that continued to be available as of August 2014.

161

For the storefront payday loan market, the Bureau again used its market monitoring authority to obtain a sample of 80 payday loan contracts from storefront payday lenders in California, Texas, and Florida.

162

For the private student loan market, the Bureau sampled seven private student loan contracts plus the form contract used by 250 credit unions that use a leading credit union service organization.

163

For the mobile wireless market, the Bureau reviewed the wireless contracts of the eight largest facilities-based providers of mobile wireless services

164

which also govern third-party billing services.

165

161

Study,

supra

note 3, section 2 at 18.

162

Id.

section 2 at 21-22. This data was supplemented with a smaller, non-random sample of payday loan contracts from Tribal, offshore, and other online payday lenders, which is reported in Appendix C of the Study.

163

Id.

section 2 at 24.

164

Facilities-based mobile wireless service providers are wireless providers that “offer mobile voice, messaging, and/or data services using their own network facilities,” in contrast to providers that purchase mobile services wholesale from facilities-based providers and resell the services to consumers, among other types of providers. Federal Communications Commission, “Annual Report and Analysis of Competitive Market Conditions with Respect to Mobile Wireless,” at 37-39 (2013),

available at

https://www.fcc.gov/document/16th-mobile-competition-report

165

Study,

supra

note 3, section 2 at 25-26. In mobile wireless third-party billing, a mobile wireless provider authorizes third parties to charge

consumers, on their wireless bill, for services provided by the third parties.

The analysis of the agreements that the Bureau collected found that tens of millions of consumers use consumer financial products or services that are subject to arbitration agreements, and that, in some markets such as checking accounts and credit cards, large providers are more likely to have the agreements than small providers.

166

In the credit card market, the Study found that small bank issuers were less likely to include arbitration agreements than large bank issuers.

167

Likewise, only 3.3 percent of credit unions in the credit card sample used arbitration agreements.

168

As a result, while 15.8 percent of credit card issuers included such agreements in their contracts, 53 percent of credit card loans outstanding were subject to such agreements.

169

In the checking account market, the Study again found that larger banks tended to include arbitration agreements in their consumer checking contracts (45.6 percent of the largest 103 banks, representing 58.8 percent of insured deposits).

170

In contrast, only 7.1 percent of small-and mid-sized banks and 8.2 percent of credit unions used arbitration agreements.

171

In the GPR prepaid card and payday loan markets, the Study found that the substantial majority of contracts—92.3 percent of GPR prepaid card contracts and 83.7 percent of the storefront payday loan contracts—included such agreements.

172

In the private student loan and mobile wireless markets, the Study found that most of the large companies—85.7 percent of the private student loan contracts and 87.5 percent of the mobile wireless contracts—used arbitration agreements.

173

166

Id.

section 1 at 9.

167

Id.

section 2 at 10.

168

Id.

169

Id.

As the Study noted, the

Ross

settlement—a 2009 settlement of an antitrust case in which four of the 10 largest credit card issuers agreed to remove their arbitration agreements—likely impacted these results. Had the settling defendants in

Ross

continued to use arbitration agreements, 93.6 percent of credit card loans outstanding would be subject to arbitration agreements.

Id.

section 2 at 11.

170

Id.

section 2 at 14.

171

Id.

172

Id.

section 2 at 19, 22.

173

Id.

section 2 at 24, 26.

In addition to examining the prevalence of arbitration agreements, Section 2 of the Study reviewed 13 features sometimes included in such agreements.

174

One feature the Bureau studied was which entity or entities were designated by the contract to administer the arbitration. The Study found that the AAA was the predominant arbitration administrator for all the consumer financial products the Bureau examined in the Study. The contracts studied specified the AAA as at least one of the possible arbitration administrators in 98.5 percent of the credit card contracts with arbitration agreements; 98.9 percent of the checking account contracts with arbitration agreements; 100 percent of the GPR prepaid card contracts with arbitration agreements; 85.5 percent of the storefront payday loan contracts with arbitration agreements; and 66.7 percent of private student loan contracts with arbitration agreements.

175

The contracts specified the AAA as the sole option in 17.9 percent of the credit card contracts with arbitration agreements; 44.6 percent of the checking account contracts with arbitration agreements; 63.0 percent to 72.7 percent of the GPR prepaid card contracts with arbitration agreements; 27.4 percent of the payday loan contracts with arbitration agreements; and one of the private student loan contracts the Bureau reviewed.

176

174

Id.

section 2 at 30.

175

Id.

section 2 at 38.

176

Id.

section 2 at 36. The prevalence of GPR prepaid cards with arbitration agreements specifying AAA as the sole option is presented as a range because two GPR prepaid firms studied each used two different form cardholder agreements, with different agreements pertaining to different features. Because of this, it was unclear precisely how much of the prepaid market share represented by each provider was covered by a particular cardholder agreement. As such, for GPR prepaid cards, prevalence by market share is presented as a range rather than a single figure.

In contrast, JAMS is specified in relatively fewer arbitration agreements. The Study found that the contracts specified JAMS as at least one of the possible arbitration administrators in 40.9 percent of the credit card contracts with arbitration agreements; 34.4 percent of the checking account contracts with arbitration agreements; 52.9 percent of the GPR prepaid card contracts with arbitration agreements; 59.2 percent of the storefront payday loan contracts with arbitration agreements; and 66.7 percent of private student loan contracts with arbitration agreements. JAMS was specified as the sole option in 1.5 percent of the credit card contracts with arbitration agreements (one contract); 1.6 percent of the checking account contracts with arbitration agreements (one contract); 63.0 percent to 72.7 percent of the GPR prepaid card contracts with arbitration agreements; and none of the payday loan or private student loan contracts the Bureau reviewed.

177

Id.

The Bureau's analysis also found, among other things, that nearly all the arbitration agreements studied included provisions stating that arbitration may not proceed on a class basis. Across each product market, 85 percent to 100 percent of the contracts with arbitration agreements—covering over 99 percent of market share subject to arbitration in the six product markets studied—included such no-class-arbitration provisions.

178

Most of the arbitration agreements that included such provisions also contained an “anti-severability” provision stating that, if the no-class-arbitration provision were to be held unenforceable, the entire arbitration agreement would become unenforceable as a result.

179

178

Id.

section 2 at 44-47.

179

Id.

section 2 at 46-47.

The Study found that most of the arbitration agreements contained a small claims court “carve-out,” permitting either the consumer or both parties to file suit in small claims court.

180

The Study similarly explored the number of arbitration provisions that allowed consumers to “opt out” or otherwise reject an arbitration agreement. To exercise the opt-out right, consumers must follow stated procedures, which usually requires all authorized users on an account to physically mail a signed written document to the issuer (electronic submission is permitted only rarely), within a stated time limit. With the exception of storefront payday loans and private student loans, the substantial majority of arbitration agreements in each market studied generally did not include opt-out provisions.

181

180

Id.

section 2 at 33-34.

181

Id.

section 2 at 31-32.

The Study analyzed three different types of cost provisions: Provisions addressing the initial payment of arbitration fees; provisions that addressed the reallocation of arbitration fees in an award; and provisions addressing the award of attorney's fees.

182

Most arbitration agreements reviewed in the Study contained provisions that had the effect of capping consumers' upfront arbitration costs at or below the AAA's maximum consumer fee thresholds. These same arbitration agreements took noticeably different approaches to the reallocation

of arbitration fees in the arbitrator's award, with approximately one-fifth of the arbitration agreements in credit card, checking account, and storefront payday loan markets permitting shifting company fees to consumers.

183

The Study also found that only a small number of agreements representing negligible shares of the relevant markets directed or permitted arbitrators to award attorney's fees to prevailing companies.

184

A significant share of arbitration agreements across almost all markets did not address attorney's fees.

185

182

Id.

section 2 at 58. Many contracts—particularly checking account contracts—included general provisions about the allocation of costs and expenses arising out of disputes that were

not

specific to arbitration costs. Indeed, such provisions were commonly included in contracts without arbitration agreements as well. While such provisions could be relevant to the allocation of expenses in an arbitration proceeding, the Study did not address such provisions because they were not specific to arbitration agreements.

183

Id.

section 2 at 62-66.

184

Id.

section 2 at 67.

185

Id.

section 2 at 66-76. As described

supra

when the arbitration agreement did not address the issue, the arbitrator is able to award attorney's fees when permitted elsewhere in the agreement or by applicable law.

Aside from costs more generally, the Study found that many arbitration agreements permit the arbitrator to reallocate arbitration fees from one party to the other. About one-third of credit card arbitration agreements, one-fourth of checking account arbitration agreements, and half of payday loan arbitration agreements expressly permitted the arbitrator to shift attorney's fees to the consumer.

186

However, as the Study pointed out, the AAA's consumer arbitration fee schedule, which became effective March 1, 2013, restricts such reallocation.

187

With respect to another type of provision that affects consumers' costs in arbitration—where the arbitration must take place—the Study noted that most, although not all, arbitration agreements contained provisions requiring or permitting hearings to take place in locations close to the consumer's place of residence.

188

186

Id.

section 2 at 62-66.

187

Id.

section 2 at 61-62.

188

Id.

section 2 at 53.

Further, most of the arbitration agreements the Bureau studied contained disclosures describing the differences between arbitration and litigation in court. Most agreements disclosed expressly that the consumer would not have a right to a jury trial, and most disclosed expressly that the consumer could not be a party to a class action in court.

189

Depending on the product market, between one-quarter and two-thirds of the agreements disclosed four key differences between arbitration and litigation in court: No jury trial is available in arbitration; parties cannot participate in class actions in court; discovery is typically more limited in arbitration; and appeal rights are more limited in arbitration.

190

The Study found that this language was often capitalized or in boldfaced type.

191

189

Id.

section 2 at 72.

190

Id.

section 2 at 72-79.

191

Id.

section 2 at 72 and n.144.

The Study also examined whether arbitration agreements limited recovery of damages—including punitive or consequential damages—or specified the time period in which a claim had to be brought. The Study determined that most agreements in the credit card, payday loan, and private student loan markets did not include damages limitations. However, the opposite was true of agreements in checking account contracts, where more than three-fourths of the market included damages limitations; GPR prepaid card contracts, almost all of which included such limitations; and mobile wireless contracts, all of which included such limitations. A review of consumer agreements

without

arbitration agreements revealed a similar pattern, albeit with damages limitations being somewhat less common.

192

Id.

section 2 at 49. More than one-third (35 percent) of large bank checking account contracts without arbitration agreements included either a consequential damages waiver or a consequential damages waiver together with a punitive damages waiver. Similarly, one-third of GPR prepaid card contracts without arbitration agreements included a consequential damages waiver, a punitive damages waiver, or both. The only mobile wireless contract without an arbitration agreement limited any damages recovery to the amount of the subscriber's bill.

Id.

The Study also found that a minority of arbitration agreements in two markets set time limits other than the statute of limitations that would apply in a court proceeding for consumers to file claims in arbitration. Specifically, these types of provisions appeared in 28.4 percent and 15.8 percent of the checking account and mobile wireless agreements by market share, respectively.

193

Again, a review of consumer agreements without arbitration agreements showed that 10.7 percent of checking account agreements imposed a one-year time limit for consumer claims.

194

No storefront payday loan, private student loan, or mobile wireless contracts in the sample without arbitration agreements had such time limits.

195

193

Id.

section 2 at 50.

194

Id.

section 2 at 51.

195

Id.

The Study assessed the extent to which arbitration agreements included contingent minimum recovery provisions, which provide that consumers would receive a specified minimum recovery if an arbitrator awards the consumer more than the amount of the company's last settlement offer. The Study found that such provisions were uncommon; they appeared in three out of the six private student loan agreements the Bureau reviewed, but, in markets other than student loans, they appeared in 28.6 percent or less of the agreements the Bureau studied.

196

Id.

section 2 at 70-71 (albeit covering 43.0 percent of the storefront payday loan market subject to arbitration agreements and 68.4 percent of the mobile wireless market subject to arbitration agreements).

Comments received regarding the scope of Section 2 are addressed in Part III.E below.

2. Consumer Understanding of Dispute Resolution Systems, Including Arbitration (Section 3 of Study)

Section 3 of the Study presented the results of the Bureau's telephone survey of a nationally representative sample of credit card holders.

197

The survey examined two main topics: (1) The extent to which dispute resolution clauses affected consumer's decisions to acquire credit cards; and (2) consumers' awareness, understanding, and knowledge of their rights in disputes against their credit card issuers. In late 2014, the Bureau's contractor completed telephone surveys with 1,007 respondents who had credit cards.

198

197

The Bureau focused its survey on credit cards because credit cards offer strong market penetration with consumers across the nation. Further, because major credit card issuers are required to file their agreements with the Bureau (12 CFR 1026.58(c)), limiting the survey to credit cards permitted the Bureau to verify the accuracy of many of the respondents' default assumptions about their dispute resolution rights by examining the actual credit card agreements to which the consumers were subject to at the time of the survey.

Id.

section 3 at 2.

198

Based on the size of the Bureau's sample, its results were representative of the national population, with a sampling error of plus or minus 3.1 percent, though the sampling error is larger in connection with sample sets of fewer than the 1,007 respondents.

Id.

section 3 at 10.

The consumer survey found that when presented with a hypothetical situation in which the respondents' credit card issuer charged them a fee they knew to be wrongly assessed and in which they exhausted efforts to obtain relief from the company through customer service, only 2.1 percent of respondents stated that they would seek legal advice or consider legal proceedings.

199

Almost the same proportion of respondents stated that they would simply pay for the improperly assessed fee (1.7 percent).

200

A majority of respondents (57.2 percent) said that they would cancel their cards.

201

199

Id.

section 3 at 18.

200

Id.

201

Id.

Respondents also reported that factors relating to dispute resolution—such as the presence of an arbitration agreement—played little to no role when they were choosing a credit card. When asked an open-ended question about all the factors that affected their decision to obtain the credit card that they use most often for personal use, no respondents volunteered an answer that referenced dispute resolution procedures.

202

When presented with a list of nine features of credit cards—features such as interest rates, customer service, rewards, and dispute resolution procedures—and asked to identify those features that factored into their decision, respondents identified dispute resolution procedures as being relevant less often than any other option.

203

202

Id.

section 3 at 15.

203

Id.

As for consumers' knowledge and default assumptions as to the means by which disputes between consumers and financial service providers can be resolved, the survey found that consumers generally lacked awareness regarding the effects of arbitration agreements. Of the survey's 1,007 respondents, 570 respondents were able to identify their credit card issuer with sufficient specificity to enable the Bureau to find the issuer's standard credit card agreement and thus to compare the respondents' beliefs with respect to the terms of their agreements with the agreements' actual terms.

204

Among the respondents whose credit card contracts did not contain an arbitration agreement, when asked if they could sue their credit card issuer in court, 43.7 percent answered “Yes,” 7.7 percent answered “No,” and 47.8 percent answered “Don't Know.”

205

At the same time, among the respondents whose credit card agreements

did

contain arbitration requirements, 38.6 percent of respondents answered “Yes,” while 6.8 percent answered “No,” and 54.4 percent answered “Don't Know.”

206

Even the 6.8 percent of respondents who stated that they could not sue their credit card issuers in court may not have had knowledge of the arbitration agreement: As noted above, a similar proportion of respondents

without

an arbitration agreement in their contract—7.7 percent compared to 6.8 percent—reported that they could not sue their issuers in court.

207

When asked if they could participate in class action lawsuits against their credit card issuer, more than half of the respondents whose contracts had pre-dispute arbitration agreements thought they could participate (56.7 percent).

208

204

Id.

section 3 at 18.

205

Id.

section 3 at 18-20.

206

Id.

These respondents were asked additional questions to account for the possibility that respondents who answered “Yes” meant suing their issuers in small claims court; that meant they could bring a lawsuit even though they are subject to an arbitration agreement; or that they had previously “opted out” of their arbitration agreements with their issuers. With those caveats in mind and after accounting for demographic weighting, the Study found that the consumers whose credit cards included arbitration requirements were wrong at least 79.8 percent of the time.

Id.

section 3 at 20-21.

207

Id.

section 3 at 18-20.

208

Id.

section 3 at 25.

Respondents were also generally unaware of any opt-out opportunities afforded by their issuer. Only one respondent whose current credit card contract permitted opting out of the arbitration agreement recalled being offered such an opportunity.

209

Id.

section 3 at 21 and n.44. Eighteen other respondents recalled being offered an opportunity to opt out of their arbitration requirements. But, for the respondents whose credit card agreements the Bureau could identify, none of their 2013 agreements actually contained opt-out provisions. In fact, four of the agreements did not even contain pre-dispute arbitration provisions.

Comments Received on Section 3 of the Study

An industry commenter suggested that the Bureau should conduct further analyses to gain a better understanding of consumer comprehension with respect to arbitration agreements. The commenter asserted that this was appropriate given statements from the Bureau that many consumers do not even know that they are bound by an arbitration agreement. A different industry commenter thought the Bureau should have asked consumers if they would decline to file a class action against their credit card issuer because the presence of an arbitration agreement would substantially lower their likelihood of classwide relief. This commenter also said that, rather than asking consumers hypothetical questions about what they would do if an improper charge appeared on their account in the future, the Bureau should have asked whether such a charge had appeared on a consumer's account in the past and, if so, what the consumer did about it. Relatedly, an industry commenter suggested that the Bureau should have surveyed consumers about their baseline level of understanding of other key provisions of their card agreements. With such a baseline, the commenter said that the Bureau could have evaluated whether consumers pay greater, less, or the same attention to dispute resolution clauses as to other clauses important to them—and why that might be so. Absent such data, the commenter said that the survey is meaningless.

A law firm commenter writing on behalf of an industry participant suggested that the Study's consumer survey was flawed because the Bureau only surveyed credit card consumers and that the Bureau should not draw general conclusions about consumers' understanding of dispute resolution systems from survey results in a single market in part because credit card agreements are often provided simultaneously with an access device rather than when a consumer applies for a card. This is because, the commenter suggested, that credit card contracts are unique, because consumers do not receive the complete loan agreement until they receive the card itself.

Response to Comments Received on Section 3

The Bureau disagrees with the commenter that suggested that the Bureau should have conducted further analyses of consumer comprehension. The Bureau, in Section 3 of the Study, explored in detail consumer comprehension issues with respect to arbitration agreements using a nationally representative telephone survey. As is discussed in the Study, among other findings, the Bureau determined that a majority of respondents whose credit cards include pre-dispute arbitration agreements did not know if they could sue their issuers in court. Nor does the Bureau agree that asking consumers about their likelihood to file a class action given an arbitration agreement would result in useful information. As the Study showed, the proposal and this final rule discuss, and several industry commenters acknowledged, regardless of the level of individual consumer awareness, arbitration agreements do in fact have the effect of blocking class actions that are filed and suppressing the filing of many more cases, consumers' awareness of this fact does not seem relevant. Insofar as cases are blocked, further focus on consumers' comprehension of this fact is unnecessary.

The Bureau acknowledges it did not develop a baseline of understanding of other key credit card agreement terms. However, the Bureau disagrees that the failure to do so renders the survey “meaningless.” The survey found that consumers do not shop for credit cards based on the type of dispute resolution process provided in the credit card agreement and that consumers do not understand the consequences of choosing a card with an arbitration provision. Whether consumers have greater or lesser understanding of other

provisions of credit card agreements does not seem to the Bureau to be relevant in assessing whether limitations on the use of arbitration agreements is for the protection of consumers and in the public interest.

210

As is noted in Section 2 at 72 of the Study, many arbitration agreements are already printed in bolded text or with all capital letters.

Regarding the commenter that suggested that the survey of credit card customers cannot be extrapolated to other markets because credit card agreements are often provided simultaneously with an access device (and not at the time of application), the Bureau disagrees that this is a relevant reason not to extrapolate the results of the survey. Even if consumers do not receive the terms at the time of application, they do receive them before they activate a credit card. At that point, they are free to reject the credit card and its terms. The survey showed that few make that choice; the Bureau has no reason to believe that such a decision is different in other markets. Nor has this or any other commenter provided evidence to the contrary.

3. Comparison of Procedures in Arbitration and in Court (Section 4 of Study)

While the Study generally focused on empirical analysis of dispute resolution, Section 4 of the Study provided a brief qualitative comparison between the procedural rules that apply in court and in arbitration. Particularly given changes to the AAA consumer fee schedule that took effect March 1, 2013, the procedural rules are relevant to understanding the context from which the Study's empirical findings arise.

The Study's procedural overview described court litigation as reflected in the Federal Rules and, as an example of a small claims court process, the Philadelphia Municipal Court Rules of Civil Practice. It compared those procedures to arbitration procedures as set out in the rules governing consumer arbitrations administered by the two leading arbitration administrators in the United States, the AAA and JAMS. The Study compared arbitration and court procedures according to eleven factors: The process for filing a claim, fees, legal representation, the process for selecting the decision maker, discovery, dispositive motions, class proceedings, privacy and confidentiality, hearings, judgments and awards, and appeals.

Filing a Claim and Fees.

The Study described the processes for filing a claim in court and in arbitration. With respect to fees, the Study noted that the fee for filing a case in Federal court is $350 plus a $50 administrative fee—paid by the party filing suit, regardless of the amount being sought—and the fee for a small claims filing in Philadelphia Municipal Court ranges from $63 to $112.38.

211

In arbitration, under the AAA consumer fee schedule that took effect March 1, 2013, the consumer pays a $200 administrative fee, regardless of the amount of the claim and regardless of the party that filed the claim; in JAMS arbitrations, when a consumer initiates arbitration against the company, the consumer is required to pay a $250 fee.

212

Prior to March 1, 2013, arbitrators in AAA consumer arbitrations had discretion to reallocate fees in the final award. After March 1, 2013, arbitrators can only reallocate arbitration fees in the award if required by applicable law or if the claim “was filed for purposes of harassment or is patently frivolous.”

213

211

Study,

supra

note 3, section 4 at 10. As the Study noted, a Federal statute permits indigent plaintiffs filing in Federal court to seek to have the court waive the required filing fees.

Id.

(citing 28 U.S.C. 1915(a)).

212

Id.

section 4 at 11-12.

213

Id.

Parties in court generally bear their own attorney's fees, unless a statute or contract provision provides otherwise or a party is shown to have acted in bad faith. However, under several consumer protection statutes, providers may be liable for attorney's fees.

214

For example, under the AAA's Consumer Rules, “[t]he arbitrator may grant any remedy, relief, or outcome that the parties could have received in court, including awards of attorney's fees and costs, in accordance with the law(s) that applies to the case.”

215

214

See, e.g.,

15 U.S.C. 1640(a)(3) (TILA).

215

Study,

supra

note 3, section 4 at 12.

Representation.

The Study noted that in most courts, individuals can either represent themselves or hire an attorney as their representative.

216

In arbitration, the rules are more flexible than in many courts about the identity of party representatives. For example, the AAA Consumer Rules permit a party to be represented “by counsel or other authorized representative, unless such choice is prohibited by applicable law.”

217

Some States, however, prohibit non-attorneys to represent parties in arbitration.

218

216

Id.

section 4 at 13.

217

Id.

section 4 at 13-14.

218

Id.

section 4 at 14.

Selecting the Decisionmaker.

The Study noted that court rules generally do not permit parties to reject the judge assigned to hear their case.

219

In arbitration, if the parties agree on the individual they want to serve as arbitrator, they can choose that person to decide their dispute; if the parties cannot agree on the arbitrator, the arbitrator is selected following the procedure specified in their contract or in the governing arbitration rules.

220

219

Id.

220

Id.

section 4 at 15.

Discovery.

The Study stated that the Federal Rules provide a variety of means by which a party can discover evidence in the possession of the opposing party or a third party, while the right to discovery in arbitration is more limited.

221

Arbitration rules on discovery give the arbitrator authority to manage discovery “with a view to achieving an efficient and economical resolution of the dispute, while at the same time promoting equality of treatment and safeguarding each party's opportunity to present its claims and defenses.” AAA Commercial Rules, Rule R-22,

cited in

Study,

supra

note 3, section 4 at 16-17. Arbitration rules do not allow for broad discovery from third parties, which were not parties to the underlying agreement to arbitrate disputes. Section 7 of the FAA, however, grants arbitrators the power to subpoena witnesses to appear before them (and bring documents). 9 U.S.C. 7. Appellate courts are split on whether section 7 of the FAA authorizes subpoenas for discovery

before

an arbitral hearing. Study,

supra

note 3, section 4 at 17 n.78. As described above, many arbitration agreements highlighted the difference in discovery practices in arbitration proceedings as compared to litigation.

See id.

Dispositive Motions.

The Study noted that the Federal Rules provide for a variety of motions by which a party can seek to dispose of the case, either in whole or in part, while arbitration rules typically do not expressly authorize dispositive motions.

222

Study,

supra

note 3, section 4 at 18.

Class Proceedings.

The Study described the procedural rules for class actions under Federal Rule 23 and noted that the Bureau was unaware of a class action procedure for small claims court.

223

The Study further noted that the AAA and JAMS have adopted rules, derived from Federal Rule 23, for administering arbitrations on a class basis.

224

223

Id.

section 4 at 18-20.

224

Id.

section 4 at 20.

Privacy and Confidentiality.

The Study stated that court litigation (including small claims court) is a public process, with proceedings conducted in public courtrooms and the record generally available for public review; by comparison, arbitration is a private process in that there is no particular mechanism for public transparency. Absent an agreement by the parties, however, it is not by law required to be confidential.

225

Id.

section 4 at 21-22. A small minority of arbitration agreements, primarily in the checking account market, included provisions requiring that the proceedings remain confidential.

Id.

section 2 at 51-53.

Hearings.

The Study stated that if a case in court does not settle before trial or get resolved on a dispositive motion, it will proceed to trial in the court in which the case was filed. A jury may be available for these claims. On the other hand, if an arbitration filing does not settle, the arbitrator can resolve the parties' dispute based on the parties' submission of documents alone, by a telephone hearing, or by an in-person hearing.

226

Id.

section 4 at 22-24.

Judgments/Awards.

The Study further noted that the outcome of a case in court is reflected in a judgment, which the prevailing party can enforce through various means of post-judgment relief, and that the outcome of a case in arbitration is reflected in an award, which, once turned into a court judgment, can be enforced the same as any other court judgment.

227

Id.

section 4 at 24.

Appeals.

The Study stated that parties in court can appeal a judgment against them to an appellate court; by comparison, parties can challenge arbitration awards in court only on the more limited grounds set out in the FAA.

228

Courts may vacate arbitration awards under the FAA only in limited circumstances. 9 U.S.C. 10 (arbitration awards can be vacated (1) where the award was procured by corruption; the arbitrator is partial or corrupt, the arbitrator was guilty of misconduct in certain specified ways, the arbitrator exceeded his powers or the arbitrator so imperfectly executed his powers that an award was not made).

Cf. supra

notes 104-112 and accompanying text (identifying the narrow grounds upon which a court may determine an arbitration agreement to be unenforceable).

Comments Received on Section 4 of the Study

A nonprofit commenter criticized the Bureau's analysis of arbitration procedures by noting that it is the shortest section of the Study and that the Bureau did not attempt to estimate the actual transaction cost for consumers in pursuing claims in court as compared to arbitration. A research center commenter suggested that the Bureau should have performed a more detailed analysis of how judges supervise arbitration and how many businesses have adopted provisions similar to that at issue in the

Concepcion

case

229

because this information would aid the Bureau's analysis of the effectiveness of arbitration clauses for consumers.

229

The arbitration provision at issue in

Concepcion

provided that the company would pay all costs of the arbitration for the consumer; that the arbitration would take place in the county where the consumer resided or could take place by telephone or document submission; that the arbitrator was not limited in the damages it could award the consumer; that if the consumer received an award that was higher than the company's last written settlement offer, the company would have to pay $7,500 in addition to the award; and that if the consumer prevailed he could seek double the amount of his attorney's fees.

AT&T Mobility LLC

Concepcion,

563 U.S. 333, 337 (2011).

Response to Comments Received on Section 4

While the review of arbitration procedures was shorter than other chapters that report on the results of empirical analyses undertaken for the Study, the Bureau believes its analysis to be fulsome; the commenter—other than offering the transaction cost criticism as discussed in the rest of this paragraph—did not explain what more the Bureau's analysis could have done nor did it identify other specific topics for analysis. With regard to the comparison of costs, the Bureau notes that the Study provided a detailed discussion of the fees a consumer would need to pay in (a) Federal court; (b) small claims court, using Philadelphia Municipal Court as an example; and (c) arbitration, using the AAA and JAMS as examples.

230

The Bureau notes that the Study included a discussion regarding available fee waivers for indigent plaintiffs, as well as the ability of the arbitrator to reallocate the initial fee distribution.

231

The Study also assessed the frequency with which consumers proceeded without counsel in arbitration proceedings and in court proceedings.

230

See

Study,

supra

note 3, section 4 at 10.

231

See id.

section 4 at 10 n.40 (citing 28 U.S.C. 1915(a)).

As for the commenter that suggested that the Bureau should have looked at how judges supervise arbitration, the commenter did not explain what additional insights could be gained from such an analysis. As for the commenter's contentions regarding

Concepcion

-like clauses, the Bureau notes that Section 2 found such clauses to be rare in consumer finance.

232

Study,

supra

note 3, section 2 at 70-71 and tbl. 15.

4. Consumer Financial Arbitrations: Frequency and Outcomes (Section 5 of Study)

Section 5 of the Study analyzed arbitrations of consumer finance disputes between consumers and consumer financial services providers. This section tallied the frequency of such arbitrations, including the number of claims brought and a classification of which claims were brought. It also examined outcomes, including how cases were resolved and how consumers and companies fared in the relatively small share of cases that an arbitrator resolved on the merits. The Study performed this analysis for arbitrations concerning credit cards, checking accounts, payday loans, GPR prepaid cards, private student loans, and automobile purchase loans. To conduct this analysis, the Bureau used electronic case files from the AAA.

233

Pursuant to a non-disclosure agreement, the AAA voluntarily provided the Bureau its electronic case records for consumer disputes filed during the years 2010, 2011, and 2012.

234

Because the AAA provided the Bureau with case records for all disputes filed in arbitration during this period, Section 5 of the Study provided a reasonably complete picture of the frequency and typology of claims that consumers and companies file in arbitration.

235

233

See

Christopher R. Drahozal & Samantha Zyontz, “An Empirical Study of AAA Consumer Arbitrations,” 25 Ohio St. J. on Disp. Res. 843, 845 (2010) (reviewing 301 AAA consumer disputes covering a nine-month period in 2007, but limiting analysis to disputes actually resolved by arbitrators); Christopher R. Drahozal & Samantha Zyontz, “Creditor Claims in Arbitration and in Court,” 7 Hastings Bus. L. J. 77 (2011) (follow-on study that compared debt collection claims by companies in AAA consumer arbitrations with debt collection claims in Federal court and in State court proceedings in jurisdictions in Virginia and Oklahoma).

234

Study,

supra

note 3, section 5 at 17.

235

While the analysis did not provide a window into how arbitrations are resolved in other arbitral fora, the AAA is the predominant administrator of consumer financial arbitrations.

Id.

section 2 at 35.

The Study identified about 1,847 filings in total—about 616 per year—with the AAA for the six product markets combined.

236

According to the standard AAA claim forms, about 411 arbitrations per year were designated as having been filed by consumers alone; the remaining filings were designated as having been filed by companies or filed as mutual submissions by both the consumer and the company.

237

Forty percent of the arbitration filings involved a dispute over the amount of debt a consumer allegedly owed to a

company, with no additional affirmative claim by either party; in 31 percent of the filings, parties brought affirmative claims with no formal dispute about the amount of debt owed; in another 29 percent of the filings, consumers disputed alleged debts but also brought affirmative claims against companies.

238

236

Id.

section 5 at 9.

237

Id.

section 1 at 11. Under the AAA policies that applied during the period studied, a company could unilaterally file a debt collection dispute against a consumer in arbitration only if a preceding debt collection litigation had been dismissed or stayed in favor of arbitration. Companies could file disputes mutually with consumers; they could also file counterclaims in dispute filed by consumers against them.

Id.

section 5 at 27 n.56. As noted in the Study, the Bureau did not attempt to verify whether the representation on the claim forms as to the party filing the case was accurate. For example, in a number of cases that were designated as having been filed by a consumer, the record indicates that the consumer failed to prosecute the action and that the company actually paid the fees and obtained a quasi-default judgment. In other cases, a law firm representing consumers filed a number of student loan disputes but indicated on the checkbox that the action was being filed by the company.

Id.

section 5 at 19 n.38.

238

Id.

section 1 at 11.

Although claim amounts varied by product, in disputes involving affirmative claims by consumers, the average amount of such claims was approximately $27,000 and the median amount of such claims was $11,500.

239

In debt disputes, the average disputed debt amount was approximately $15,700; the median was approximately $11,000.

240

Across all six product markets, about 25 cases per year involved affirmative claims of $1,000 or less.

241

239

Id.

section 5 at 10.

240

Id.

241

Id.

Overall, consumers were represented by counsel in 63.2 percent of arbitration cases.

242

The rate of representation, however, varied widely based on the product at issue; in payday and student loan disputes, for example, consumers had counsel in about 95 percent of all cases filed.

243

242

Id.

section 5 at 29.

243

Id.

section 5 at 28-32.

To analyze the outcomes in arbitration, the Bureau confined its analysis to claims filed in 2010 and 2011 in order to limit the number of cases that were pending at the close of the period for which the Bureau had data. The Bureau's analysis of arbitration outcomes was limited by a number of factors that are unavoidable in any review of dispute resolution.

244

Among other issues, settlement terms were rarely known in cases in which the parties settled their disputes. Indeed, in many cases, even the fact that a settlement occurred was difficult to discern because the parties were not required to notify the AAA of a settlement.

245

Accordingly, on the one hand, an incomplete file could indicate a settlement, or, on the other hand, that the proceeding was still in progress but relatively dormant. Because parties settled claims strategically, disputes that

did

reach an arbitrator's decision on the merits were not a representative sample of the disputes that were filed.

246

For example, if parties settled all strong consumer (or company) claims, then consumers (or companies) may appear to do poorly before arbitrators because only weak claims are heard at hearings. As the Study explained, these limitations are inherent in a review of this nature and unavoidable.

244

Id.

section 5 at 4-7. As a result, the Bureau was only able to determine a substantive outcome in 341 cases.

245

Id.

section 5 at 6.

246

Id.

section 5 at 7 (noted that it is “quite challenging to attempt to answer even the simple question of how well do consumers (or companies) fare in arbitration”). The Study noted further that the same selection bias concerns apply to disputes filed in litigation and that “[t]hese various considerations warrant caution in drawing conclusions as to how well consumers or companies fare in arbitration as compared to litigation.”

Id.

For example, the Study found that the disputes that parties filed in arbitration differ from the disputes filed in litigation.

Id.

With those significant caveats noted, the Study determined that in 32.2 percent of the 1,060 disputes filed during the first two years of the Study period (341 disputes) arbitrators resolved the dispute on the merits. In 23.2 percent of the disputes (246 disputes), the record showed that the parties settled. In 34.2 percent of disputes (362 disputes), the available AAA case record ended in a manner that was consistent with settlement—for example, a voluntary dismissal of the action—but the Bureau could not definitively determine that settlement occurred. In the remaining 10.5 percent of disputes (111 disputes), the available AAA case record ended in a manner that suggested the dispute is unlikely to have settled; for example, the AAA may have refused to administer the dispute because it determined that the arbitration agreement at issue was inconsistent with the AAA's Consumer Due Process Protocol.

247

Id.

section 5 at 11.

As noted above, only a small portion of filed arbitrations reached a decision. The Study identified 341 cases filed in 2010 and 2011 that were resolved by an arbitrator and for which the outcome was ascertainable.

248

Of these 341 cases, 161 disputes involved an arbitrator decision on a consumer's affirmative claim. Of the cases in which the Bureau determined the results, consumers obtained relief on their affirmative claims in 32 disputes (20.3 percent).

249

Consumers obtained debt forbearance in 19.2 percent of the cases in which an arbitrator could have provided some form of debt forbearance (46 cases).

250

The total amount of affirmative relief awarded in all cases was $172,433 and total debt forbearance was $189,107.

251

Of the 52 cases filed in 2010 and 2011 that involved consumer affirmative claims of $1,000 or less, arbitrators resolved 19, granting affirmative relief to consumers in four such cases.

252

With respect to disputes that involved company claims in 2010 and 2011, the Bureau determined the terms of arbitrator awards relating to company claims in 244 of the 421 disputes.

253

Arbitrators provided companies some type of relief in 227, or 93.0 percent, of those disputes. In those 227 disputes, companies won a total of $2,806,662.

254

248

Id.

section 5 at 13.

249

Id.

250

Id.

251

Id.

section 5 at 41, 43.

252

Id.

section 5 at 13.

253

This includes cases filed by companies as well as cases in which companies asserted counterclaims in consumer-initiated disputes.

Id.

section 5 at 14.

254

Of the 244 cases in which companies made claims or counterclaims that the Bureau determined were resolved by arbitrators, companies obtained relief in 227 disputes. The total amount of relief in those cases was $2,806,662. These totals included 60 cases in which the company advanced fees for the consumer and obtained an award without participation by the consumer. Excluding those 60 cases, the total amount of relief awarded by arbitrators to companies was $2,017,486.

Id.

section 5 at 43-44.

The Study found that consumers appealed very few arbitration decisions and companies appealed none. Specifically, it found four arbitral appeals filed between 2010 and 2012. Consumers without counsel filed all four. Three of the four were closed after the parties failed to pay the required administrator fees and arbitrator deposits. In the fourth, a three-arbitrator panel upheld an arbitration award in favor of the company after a 15-month appeal process.

255

Id.

section 5 at 85.

The Study also found that very few class arbitrations were filed. The Study identified only two filed with AAA between 2010 and 2012. One was still pending on a motion to dismiss as of September 2014. The other file contained no information other than the arbitration demand that followed a State court decision granting the company's motion seeking arbitration.

256

Id.

section 5 at 86-87. The Study's analysis of class action filings identified a third class action arbitration filed with JAMS following the dismissal or stay of a class litigation.

Id.

section 6 at 59.

The Study also found that, when there was a decision on the merits by an arbitrator, the average time to resolution was 179 days, and the median time to resolution was 150 days. When the record definitively indicated that a case had settled, the median time to settlement was 155 days from the filing of the initial claim.

257

Further, the Study found that more than half of the filings that reached a decision were resolved by “desk arbitrations,” meaning that the proceedings were resolved solely on the basis of documents submitted by the parties (57.8 percent). Approximately one-third (34.0 percent) of proceedings were resolved by an in-person hearing, 8.2 percent by telephonic hearings, and 2.4

percent through a dispositive motion with no hearing.

258

When there was an in-person hearing, the Study estimated that consumers travelled an average of 30 miles and a median of 15 miles to attend the hearing.

259

257

Id.

section 5 at 71-73.

258

Id.

section 5 at 69-70.

259

Id.

section 5 at 70-71.

Comments Received on Section 5 of the Study

An industry commenter criticized the Study's review of arbitration processes for its failure to assess whether the AAA due process protocol was effective in ensuring arbitrator neutrality. The commenter suggested that the Bureau could have reviewed decisions of individual arbitrators to see if they had a pattern of favoring the companies over consumers. This commenter further criticized the Bureau for making no effort to evaluate whether arbitrators' decisions were properly decided.

Similarly, a Congressional commenter expressed concern that the Study failed to thoroughly analyze and compare arbitration programs and program features. The commenter suggested that the Bureau should have reviewed whether certain features of arbitration programs produce better consumer outcomes and enhance the consumer experience as compared to others, but did not identify specifically which features warranted additional analysis.

An industry commenter took issue with the Bureau's assertion that the disputes it reviewed involving AAA represent substantially all consumer finance arbitration disputes that were filed during the Study period, noting that JAMS was named as the administrator at least 50 percent as often as AAA in the agreements reviewed by the Bureau.

Another industry commenter suggested that the Study's data regarding disputes reached on the merits were not representative of the sample because only 32 percent of cases had a judgment on the merits, while the rest remained dormant or settled on unknown terms.

Response to Comments on Section 5 of the Study

With respect to the commenter that criticized the Bureau for not evaluating whether certain arbitration programs (such as those that limit consumer costs, allow for “bonus” awards,

260

or other benefits) provide better consumer outcomes, the Bureau notes that the case records available for the Study did not necessarily include the terms of the arbitration agreement and that, except for the cases that were decided by an arbitrator, the case records also did not include the terms of the outcomes. Thus, the analysis of arbitration programs (as expressed in arbitration agreements) suggested by this commenter was not feasible and, in any event, would not have impacted the central finding, discussed below, that an extremely small number of consumers avail themselves of any arbitration process under any scheme.

260

An example “bonus” provision in an arbitration agreement would require a company to pay a consumer double or triple the company's highest settlement offer if the consumer wins on his or her arbitration claim in an amount that exceeds that settlement offer.

As to the commenter that criticized the Bureau for not evaluating whether arbitrators deciding AAA consumer cases were biased, the Bureau notes that, for those cases that were resolved with a written opinion, the Study reported whether the decision favored the consumer or the financial institution and the amount of the award, if any. The Study also explored whether arbitrators favored parties that were repeat players before them.

261

As the Study noted, commentators have long raised concerns that such a repeat player bias may occur given incentives some arbitrators may have to curry favor while seeking future appointments.

262

The Bureau could not evaluate outcomes in cases that settled or cases that were resolved in a manner consistent with a settlement. The Bureau also did not evaluate whether arbitrators' decisions were “properly decided” as the Bureau does not believe it would have a basis for making such a determination. As discussed in Part VI below, this rulemaking does not rely on a finding that arbitration proceedings are fair (or not) but rather that consumers do not use arbitration to resolve disputes in any meaningful volume.

261

Id.

section 5 at 56-68.

262

Id.

With respect to the industry commenter that suggested the Study undercounted individual arbitration because it studied only those filed with the AAA and not JAMS, the Bureau noted in the Study and the proposal that JAMS appears to handle a relatively small number of consumer finance arbitrations per year. For example, it reported to the Bureau that it handled 115 consumer finance arbitrations in 2015

(an unknown number of which were filed by consumers as opposed to providers),

263

significantly fewer than the approximately 600 per year the Bureau found filed with the AAA in the Study. Thus, the Bureau believes that the relevant data supports a conclusion that the AAA cases represent a substantial majority of consumer finance arbitrations that occur. Further, even if the Bureau were to assume that JAMS handled a consumer finance caseload equal to half of the AAA caseload (based on the fact that JAMS was named as an administrator about 50 percent as often as AAA), that would still suggest that there are fewer than 900 consumer financial services cases per year as between the two largest administrators.

263

See

81 FR 32830, 32856 (May 24, 2016); Study,

supra

note 3, section 5 at 9.

As for the commenter that contended that the decisions reached on the merits are not representative of the whole, the Bureau notes that it does not contend otherwise. It noted in the Study that a merits-decision occurred less

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