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March 25, 2015 Articles

Fascinating Highlights of the CFPB Arbitration Study

By Liz Kramer

In my recent news and development article, I shared some of the highlights from the first half of the new CFPB Arbitration Study. This article covers the second half of the report, with juicy information gleaned from the Consumer Financial Protection Bureau's (CFPB) analysis of almost 2,000 actual consumer arbitrations and its comparison of those results to actual consumer court actions.

Arbitration Outcomes
The American Arbitration Association (AAA) gave the CFPB access to information from about 1850 total disputes filed with it in 2010, 2011, and 2012 relating to credit cards, checking accounts, payday loans, (GPR) prepaid cards, student loans, and auto loans. The average claim made by a consumer was $27,000, and the average claim made by the financial institution was $16,011 (debt collection). The bulk of the claims related to credit cards, with auto loans and students loans following at a distant second and third. Arbitration was usually completed within 5–8 months. Of the disputes resolved by arbitrators, 74 percent were resolved by an arbitrator who also was appointed on at least one other consumer arbitration in the sample set.

Of the consumer arbitrations filed in 2010 and 2011, 32 percent were resolved on the merits. (The rest either settled or ended in another fashion.) Of the 158 cases in which the consumer had an affirmative claim, arbitrators provided consumers with relief in 20 percent of them, with an average award around $5,400. "When consumers were provided relief on their claims, consumers won an average of 57 cents for every dollar they claimed." In contrast, of the 244 affirmative claims by companies that resulted in an award, arbitrators provided the companies relief in 93 percent of those disputes, with an average award of $12,500 ("companies won 98 cents for every dollar claimed" in the cases where companied were provided relief). (That could be read as indicating bias. But, it could also mean that an unpaid debt is inherently easier to prove than a Fair Debt Collection Practices Act (FDCPA) (or other consumer) claim.)

If you've ever wondered how often the AAA appoints a new arbitrator after receiving a "factual objection" to the arbitrator's service, the CFPB found that happened in response to 68 percent of objections in these consumer arbitrations.

With respect to attorneys' fees, consumers who were represented and took their claims all the way to an award received fees in 14 percent of those cases, with an average fee award of $8,148. Companies also received attorneys' fees in 14 percent of disputes resolved by the arbitrators, with an average award of $3,387.

Litigation Outcomes

Individual Federal Court Claims 2010–2012
If approximately 2,000 individual consumer arbitrations filed in these six areas in three years, how many individual federal actions were filed? Exactly 3,462—of which 2,621 related to credit cards. A whopping 87 percent of the individual actions asserted FDCPA claims. And 93 percent of the individual plaintiffs requested a jury. The individual federal cases were concluded in an average of 171 days.

Of those individual claims that were resolved within the study period, 48 percent resolved by settlement, 3.7 percent were dismissed on a dispositive motion, 6.8 percent resulted in a judgment in favor of the consumer (another 41 percent of cases may have settled, but the docket did not clearly indicate). Most of the cases that the consumer won were by default (78 of 82). The average amount awarded the consumer was $13,131. (The CFPB could not calculate the ratio of damages to claim, because unlike arbitration demands, complaints generally have generic statements about their damages like "more than 75,000.")

Class Actions in State and Federal Court 2010–2012
In addition to the individual cases, CFPB found 470 putative class actions filed in federal court (and another 92 filed in state courts with searchable electronic records—Oregon, Utah, Oklahoma, and New York, plus individual counties in Illinois, Texas, Florida, and Caligornia). Juries were requested in 80 percent of the class actions. Almost half of those cases related to credit cards. And the majority of the claims were federal or state statutory claims (FDCPA, TCPA, TILA, Deceptive Trade Practice, etc.) The median time to close a federal class action was around 215 days (though MDL classes took around 600 days). Class actions in state court took longer than federal court—about 400 days on average.

Most class cases settled—either by non-class settlement (CFPB estimates 60 percent) or a class settlement approved by the court (12 percent). Another 10 percent of cases ended when the defendant won a dispositive motion. Consumers obtained a judgment in their favor in only 1.8 percent of class cases, usually through default judgment. No class action in the sample went to trial.

In 94 of those putative class actions, companies moved to compel arbitration, and courts granted the motion half of the time. In the 46 classes that were compelled to arbitration, CFPB was able to identify only 12 that subsequently demanded arbitration, two of which filed as putative classes in arbitration. Similarly, for the six individual cases that were compelled to arbitration, CFPB found only one that subsequently went to arbitration.

Small Claims Court
In an effort to see if consumers are taking advantage of their arbitration carve-outs allowing claims to proceed in small claims court, CFPB searched for filings in jurisdictions where those records are accessible. It found that credit card issuers are filing many debt collection matters in small claims court, but very few consumers are filing affirmative claims. For example, there were 7,905 credit card debt collection cases in Harris County, Texas, alone, but 870 small claims court cases filed by consumers across 31 jurisdictions combined.

Class Action Settlements 2008–2012
To determine the benefit of class litigation, CFPB analyzed consumer financial class action settlements that took place from 2008–2012. The 419 settlements in that time period involved more than 350 million class members (not necessarily 350 million unique people) and resulted in $2.7 billion in total relief. For the 105 settlements where a determination was possible, the average claims rate was 21 percent (i.e., the plaintiffs recovered 21 percent of the dollars they sought). On average, it took the classes 690 days to get to a settlement.

Which Comes First—Private or Public Action?
The report presents findings about whether public enforcement of consumer protection statutes usually comes before or after similar class actions filed by private citizens. It found that where there are overlapping actions, "public enforcement activity was preceded by private activity 71 percent of the time. In contrast, private class action complaints were preceded by public enforcement activity 36 percent of the time." So, don't knock the creativity of the plaintiffs' bar.

Does Arbitration Lead to Cheaper Products?
The final section of the report analyzes whether arbitration agreements in financial products leads to lower prices for consumers. After acknowledging that it is difficult to test that assertion on a broad level, the report looked at one example to test the cause and effect. In that example, a number of credit cards agreed to remove their arbitration clauses for three and a half years as a result of a settlement. The CFPB found no statistically significant evidence that those companies raised their prices more or differently from comparable companies with no change in ADR.

What Have We Learned?
Here are some initial reactions from the information in the report:

• Individual consumer actions settle more often in court than in arbitration. Put differently, more cases get heard on the merits in arbitration (compared to about 10 percent in court, 32 percent of cases are resolved on merits in arbitration).
• Arbitrators are repeat players, just like financial institutions and plaintiffs' lawyers.
• Arbitration is not necessarily faster than litigation (comparing individual arbitrations to individual federal litigation).
• Parties that don't show up will lose—both in arbitration and in court (the volume of defaults surprised me).
• Courts grant more damages to consumers than arbitrators do.
• A large percent of plaintiffs will not bother prosecuting their claims if they have to go to arbitration (instead of remaining in court).
• Eliminating class actions can be a huge financial benefit to the financial institutions. Whether you think that is also a benefit to the economy overall or not likely depends on your politics.

Keywords: alternative dispute resolution, litigation, CFPB, arbitration report, consumer, class actions, credit cards