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Dong Hong Testimony Before House Financial Services FI Subcommittee
Written Statement of
Vice President, Regulatory Counsel
Consumer Bankers Association
House of Representatives
Committee on Financial Services
Subcommittee on Financial Institutions and Consumer Credit
For the Hearing
“Examining the CFPB’s Proposed Rulemaking on Arbitration: Is it in the Public Interest and for the Protection of Consumers?”
May 18, 2016
Chairman Neugebauer, Ranking Member Clay, and members of the Subcommittee, thank you for the opportunity to discuss to the Consumer Financial Protection Bureau’s (“CFPB” or “Bureau”) activities related to arbitration agreements for consumer financial products and services. My name is Dong Hong and I am Vice President and Regulatory Counsel at the Consumer Bankers Association (“CBA”).
CBA preserves and promotes the retail banking industry as it strives to fulfill the financial needs of the American consumer and small business. As the voice of the retail banking industry, CBA represents nearly 70 members whose products and services provide access to credit for consumers and small businesses. Our members operate in all 50 states, serve more than 150 million Americans and collectively hold two-thirds of the country’s total depository assets.
A fundamental principal of banking is to establish strong relationships with customers and the communities in which they serve. CBA members value their customer relationships and are committed to delivering superior customer service and quality financial products. As service providers, our members heavily rely on customer feedback to resolve issues and understand how best to meet the their financial needs. This customer-centric focus is why our members devote substantial resources responding to customer complaints with the goal of ensuring each customer is satisfied with the resolution.
Dispute Resolution and the Benefits of Arbitration
Overwhelmingly, disputes between CBA member companies and their customers are resolved through informal channels and do not elevate to formal proceedings. Our members have strong business incentives to maintain deep, well-informed, mutually satisfactory relationships with their customers. Disputes rise to the level of a formal action in court or arbitration only a fraction of the time. In fact, it is often in a company’s best interest to avoid litigation or arbitration due to the costs of the proceedings. When a dispute does elevate to this level, arbitration is an efficient alternative to litigation.
In short, arbitration is a procedure wherein two parties involved in a dispute select an unbiased third person(s) or “arbitrator(s)” to hear both sides and issue a decision. Today, arbitration provisions can be found in a wide variety of consumer agreements, including those for credit cards, checking accounts, cell phones, cable television, internet access, and even gym memberships.
Since the Federal Arbitration Act was passed in 1925, federal law has protected—and the Supreme Court has confirmed—the benefits of arbitration as a faster and higher recovery alternative to class action litigation for consumers. In fact, a resolution through arbitration can take just 2-7 months, depending on the format. Consumer fees for arbitration are limited by the American Arbitration Association (“AAA”), and companies often end up footing the total bill. Due in part to consumers paying little to nothing for arbitration proceedings, they recover significantly higher sums than they do through class actions ($5,389 vs. $32.35 average recovery).
In contrast, litigation can be complicated, time-consuming and requires a lawyer to navigate the process. In addition, many consumer claims may be too small to attract contingency fee lawyers.
As Supreme Court Justice Stephen Breyer has said, without arbitration, “the typical consumer who has only a small damage claim (who seeks, say, the value of only a defective refrigerator or television set) [would be left] without any remedy but a court remedy, the costs and delays of which could eat up the value of an eventual small recovery.”
Despite the Supreme Court’s support of arbitration and the clear consumer benefits this form of dispute resolution offers, the CFPB recently issued a notice of proposed rulemaking on arbitration (“Proposal”) which would, among other things, subject covered companies to a higher risk of class action lawsuits and reduce the ability of consumers to take their disputes through arbitration. CBA does not believe the Bureau’s Proposal comports with the requirements set out by Congress in Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). As such, CBA appreciates the Subcommittee’s interest in whether the Proposal serves the best interest of consumers and would encourage efforts to require the Bureau to conduct a more complete analysis of arbitration before finalizing a Proposal which would restrict its use.
Dodd-Frank Mandated Study Did Not Support Proposal’s Conclusions
Section 1028 of the Dodd-Frank Act directs the CFPB to conduct a study of arbitration relating to consumer financial products and services and present a report to Congress on its findings. Importantly, it also authorizes the Bureau to restrict or even prohibit the use of mandatory pre-dispute arbitration agreements for such products or services if, and only if, it is “in the public interest and for the protection of consumers” and consistent with the results of the study. Based on the statutory language it is clear that Congress wanted to ensure that any regulation would be based on a fair, complete study of the real-world implications of restricting the use of arbitration.
In 2013, the CFPB began the study process by failing to accept sufficient input from the public. In fact, on March 22, 2013, the Chairmen and Subcommittee Chairmen of the House Financial Services and Judiciary Committees wrote to the Bureau with suggestions and inquiries regarding the arbitration study, but their requests were ignored. Likewise, CBA offered its comments to the Bureau prior to the start of the study and again on its proposed telephone survey of consumer awareness of arbitration provisions in credit card agreements, which was later incorporated into the study. Unfortunately, several items raised in our letters were left unaddressed.
On March 15, 2015, the CFPB released its study, which was presented as being highly critical of arbitration and unabashed in its preference for class actions lawsuits. However, once the public had an opportunity to read the report, it became clear the research does not support such an aggressive interpretation of the data on the part of the Bureau.
Examination of the CFPB’s Study
A review of the CFPB’s study conducted by experts at the Mercatus Center at George Mason University found that it “fail[s] to support any conclusion that arbitration clauses in consumer credit contracts reduce consumer welfare or that encouraging more class action litigation would be beneficial to consumers and the economy.”
Industry assessments of the Bureau’s study concur with these conclusions. While the Bureau’s study is the most extensive one ever conducted on arbitration, it remains incomplete and fails to prove that restricting arbitration is “in the public interest and for the protection of consumers.” For instance, the study did not consider the context in which formal dispute resolution processes are situated. The vast majority of consumer disputes are handled and resolved through internal company processes, such as a simple conversation with a bank’s customer service representative.
In addition, the study makes a false comparison when it compares class action settlements with arbitration awards. This methodology decision results in a bias towards class action lawsuits as arbitration settlements are not counted in favor of consumers. Succinctly stated, arbitration is more likely to result in settlement when one party has a higher probability of success than the other, and both parties view settlement to be a more efficient outcome than seeking a final decision on the merits. The CFPB’s study indicates that about half of all arbitrations resulted in a settlement, but it provides no data on the terms of the ultimate resolution. Disregarding settlements and focusing on only the 32.2 percent of arbitration decisions resolved on the merits potentially excludes data that would support even higher recoveries for consumers. At a minimum, the exclusion of settlements biases the arbitration results towards the most difficult or contested cases. Recalling the purpose of the study was to examine arbitration alone this is a significant oversight, especially in light of the data collected to support the Bureau’s conclusions on class actions.
As previously mentioned, the study made use of a telephone survey on consumer awareness of dispute resolution provisions in their credit card agreements. Unfortunately, the survey featured lengthy and complex questions which could in no way produce information that is meaningful in determining whether regulation of the use of pre-dispute arbitration would be “in the public interest and for the protection of consumers.” In addition, the survey’s random selection of consumers lacked the sufficient information to assess and compare the merits of arbitration and litigation. In fact, few consumers possess knowledge about the benefits, disadvantages, and costs of arbitration and the various forms of judicial litigation as a part of dispute resolution processes (e.g., small claim litigation, individual, non-small claims litigation, and class action litigation) unless they have had experience with them. Thus, the vast majority of responses to the Bureau’s telephone survey lacked an adequate foundation, and thereby yielded unreliable data.
In addition, the CFPB’s study does not consider the full impact of public supervision and enforcement on consumer welfare and protection. While the study does examine public enforcement activity, it limits such consideration to the years between 2008 and 2012. This seems to be an awkward and odd choice since the CFPB, the agency established to supervise the consumer financial markets, has only been operational since July 21, 2011. Director Cordray has recently been on record stating the Bureau has recovered $11.2 billion for consumers through enforcement actions, and another $300 million through supervisory action. These figures do not even include the actions taken by other federal and state agencies, such as the Department of Justice and State Attorneys General. If the study had been more inclusive of such supervision and enforcement actions, it would have painted a very different picture of how consumers – outside of the regular and informal resolution processes at a financial institution – can obtain restitution when companies are found to be in violation.
Notwithstanding the preliminary nature of the study, it could be fairly interpreted as demonstrating consumers are better served taking their disputes through arbitration than participating in a class action lawsuit. The Bureau’s own study shows 60 percent of class actions produced no benefits for putative class members. Only 15 percent of class actions received final class settlement approval and no class action was actually tried on the merits. In class settlements that required putative class members to submit a claim form, 96 percent of the putative class received nothing since they did not file a claim. And consumers who did obtain cash payments received only $32.35 on average, a trivial amount given the cases took about two years to settle. In comparison, consumers who went through arbitration averaged $5,389 in cash payments in a third of the time.
The conclusions drawn in the study in support of class actions also fail to acknowledge that not every dispute can be incorporated in to a class action. Many disputes have unique facts and circumstances which would require independent litigation. For instance, consider the ATM that failed to appropriately credit the consumer’s deposit. In this case and many others, the dispute is of an individual nature which cannot be resolved through a class action. Eliminating the availability of arbitration would leave these consumers with individual litigation as their only option.
At the very least, the CFPB’s study shows the Bureau does not have a complete understanding about consumer experiences with arbitration. The Bureau concedes as much when it acknowledges in its study that it was unable to gather any significant data on arbitration settlements, which is a critical element of any fair evaluation of arbitration. This absence of data from consumers who have either benefited from arbitration settlements or found the process unsatisfactory highlights the CFPB’s lack of understanding of the true impact on consumers.
In summary, the arbitration study provides an insufficient basis for restricting the use of arbitration, especially in light of the higher recoveries ($5,389 on average) received by consumers through this form of dispute resolution. Eighty-six Members of Congress reached similar conclusions and rebuked the study as lacking in fairness and transparency; they have asked the CFPB to reopen the study and allow for public comment. The House Appropriations Committee has also unanimously agreed a new study is necessary. CBA appreciates Congress’s attention to the study and encourages further engagement with the CFPB to develop additional analysis of arbitration.
The study, which would have benefited from peer review and public comment, lacked some critical elements necessary for a thorough analysis to ultimately determine whether restricting arbitration is “in the public interest and for the protection of consumers.” In a letter to Director Cordray (see attached letter in Appendix A), CBA and other trade associations asked the Bureau to conduct additional research to complete its study before making any final policy decisions on arbitration.
CBA reiterates our request and offer the following suggestions on how the CFPB should re-examine and supplement its study:
- Conduct a comparison between litigation and arbitration on the basis of accessibility, cost, fairness, and efficiency;
- Ascertain if consumers would benefit from becoming more informed about arbitration;
- Survey consumers who have experience with litigation, class actions, and arbitration about their level of statisfaction with these dispute resolution processes;
- Examine the net benefit of class actions to consumers in light of the supervisory or enforcement authorities of State and Federal regulatory and enforcement agencies;
- Determine if prohibiting or restricting the availability of mandatory pre-dispute arbitration provisions would effectively eliminate arbitration as an alternative dispute resolution process for the majority of consumers; and
- Inspect whether prohibiting or restricting the availability of mandatory pre-dispute arbitration provisions would impact the cost and availability of credit to consumers and small businesses.
Strong and effective consumer protection and fair and responsible banking are profoundly important to our member banks. CBA routinely engages with the CFPB and other regulators to promote reasonable and effective regulation that ensures consumers have the ability to choose safe and affordable products and services. It is our concern the CFPB’s Proposal will result in increased costs of financial services and products and inhibit the ability of financial institutions to innovate and better serve their customers. In short, consumers stand to lose from the CFPB’s proposal purportedly meant to provide greater relief.
CBA stands ready to work with Congress and the CFPB to develop a regulatory framework that promotes affordable and innovative financial products and services. In addition, CBA is open to working together to address potential shortcomings in our members’ dispute resolution processes to ensure customers have access to speedy and cost-effective recourse when disputes arise. On behalf of our members, I appreciate the opportunity to testify before the Subcommittee.