No Surprises At CFPB's Arbitration Field Hearing

Yesterday the Consumer Financial Protection Bureau (CFPB) held a public field hearing in Denver, Colo. to discuss arbitration. There were no surprises.

The field event followed the pattern of prior field hearings. It started with prepared remarks by CFPB Director Richard Cordray.  A copy of the prepared remarks are located here. The opening remarks clearly outline the CFPB position and direction; mandatory arbitration provisions in consumer contracts are bad and their use should be dramatically reduced.

The opening remarks were followed by a panel discussion with consumer groups and industry representatives, then a short public comment session.

The panelists were:

Alan Kaplinsky, Partner, Ballard Spahr

Ira Rheingold, Executive Director, National Association of Consumer Advocates

Jean Sternlight, Professor of Law, University of Nevada-Las Vegas

Jose Vasquez, Attorney, Colorado Legal Services

Stephen Ware, Professor of Law, University of Kansas School of Law

John Rudy, Senior VP & Chief Lending Officer, Bellco Credit Union

Each panelist made a short opening statement, followed by a Q&A session with questions presented by members of CFPB team to each of the panelists. None of the panelists deviated far from script throughout their opening remarks or the Q&A.  Sternlight, Vasquez, and Rheingold praised the CFPB efforts and the Cordray remarks, though all thought the CFPB could and should go further to completely eliminate arbitration provisions in consumer contracts under CFPB supervision.

Of the other three panelists, Rudy and Ware offered neutral commentary to tepid criticism of the CFPB position and Director Cordray’s remarks. Rudy did comment that he felt the CFPB was not looking to middle ground in attempting to resolve the issue.

On the other hand, Alan Kaplinsky was highly critical of the CFPB’s position, direction and Cordray’s opening remarks. Kaplinsky directed the group to the same CFPB Arbitration study mentioned  throughout Cordray’s opening remarks and the opening statements from other panelists to support their position.

Kaplinksy pointed out that the study showed the average dollar recovery for consumers in the class action cases highlighted in the Arbitration study was $32.35. He also noted that less than 4% of consumers ever benefit from any class action settlement and conversely 96% of all potential consumer claimants do not benefit. His argument was that the consumer’s interests are not best served by class action litigation if only 4% of consumers ever receive any benefit. He did note that all lawyers involved in the class action process were making significant money.

Finally, Kaplinsky chided Director Cordray for using the term “free pass” eight separate times in his prepared remarks when discussing entities using an arbitration clause in their consumer contracts. Kaplinsky thought the term was inflammatory and misleading.

The Public Commentary Session also provided no surprises. Virtually all public comments were in opposition to arbitration provisions.

insideARM Perspective

Based upon the prepared remarks of Director Cordray and the tone of the field hearing, it would appear that the CFPB is going to use their rulemaking to drastically reduce the use of mandatory arbitration provisions in consumer contracts subject to CFPB supervision.

What is being ignored in this debate is the ultimate cost to the consumer if arbitration is eliminated and more class action litigation follows. Businesses will ultimately pass down to all consumers the costs involved defending and settling class action cases. The question is whether an average recovery of $32.35 per impacted consumer in these types of class action proceeding outweighs the class action costs that will ultimately be passed down by businesses to all consumers.

Is the CFPB protecting all consumers by suggesting the virtual elimination of these clauses?

For additional perspective, I’d suggest this outstanding article by Andy Pincus, a partner at Mayer Brown LLP in Washington, D.C. He coins a new name for the CFPB, “The Plaintiff’s Lawyer Protection Bureau.”