The full report is a 728-page analysis of mandatory arbitration in the financial industry and its effects on both lenders and borrowers. The CFPB was mandated, within the Dodd-Frank Wall Street Reform and Consumer Protection Act, to conduct a thorough study of arbitration and the other traditional means of resolving disputes between lenders and borrowers. The agency reviewed extensive data from lending disputes filed during the years 2010, 2011, and 2012.
The results are in. Arbitration overwhelmingly favors lenders while class actions prove to be an effective–and remarkably efficient–way for borrowers to enforce their rights.
Here are some of the key conclusions:
Amount of Litigation
- From 2010 through 2012, an average of 616 individual AAA cases were filed per year for six product markets combined: credit card; checking account/debit cards; payday loans; prepaid cards; private student loans; and auto loans.
- From 2010 to 2012, for the same six product markets covered in the arbitration analysis, and average of 187 putative class cases were filed per year — that is, cases that were filed in federal court or in selected state courts by at least one individual who sought to sue on behalf of a class.
Relative Success Rates of Borrowers
- Of the 341 cases filed in 2010 and 2011 that were resolved by an arbitrator and where the CFPB was able to ascertain the outcome, consumers obtained relief regarding their affirmative claims in 32 disputes. Consumers obtained debt forbearance in 46 cases (in five of which the consumers also obtained affirmative relief). This is a startlingly low total success rate: 22.9% The total amount of affirmative relief awarded was $172,433 and total debt forbearance was $189,107. The average financial relief obtained by each litigating consumer was $4,635.
- Of the class actions filed between 2010 and 2012, 25% resulted in individual settlements and 17% resulted in class settlements for a total success rate of 42%
Speed of Litigation
- Arbitration was relatively fast. Where there was a decision on the merits by an arbitrator or where the record indicates that the case was settled, the decision generally was issued or the settlement reached within five months after the case was initiated.
- When they were not transferred to or filed in MDL proceedings, federal class cases filed in 2010 and 2011 closed in a median of 218 days and 211 days, respectively, from the date of the filing. Class cases transferred to or filed in MDL proceedings in 2010 and 2011 were markedly slower, at a median of 758 days and 538 days, respectively. State class cases filed in 2010 and 2011 were also somewhat slower, at a median of 407 days and 255 days, respectively.
Amount of Compensation Received by Borrowers
- Of the 341 arbitration cases filed in 2010 and 2011 that were resolved by an arbitrator and where the CFPB was able to ascertain the outcome, the total amount of affirmative relief awarded was $172,433 and total debt forbearance was $189,107. The average financial relief obtained by each litigating consumer was $4,635.
- The CFPB could identify class size or a class size estimate in around 78% of class actions filed from 2008 to 2012. Based on these cases only, estimated class membership across all five years was 350 million. Excluding one class action involving 190 million estimated class members, the total class size for the cases where we were able to find data was 160 million. The settlement value of these classes included more than $2 billion in cash relief including fees and expenses and more than $600 million in in-kind relief, for total compensation of $2.6 billion. These figures represent a floor because a number of settlements also required companies to change business practices. The average financial relief obtained by each litigating consumer was $7.43.
- The CFPB was not able to track attorneys fees of individual litigants in arbitration because such fees are not approved by the arbitrating panel. Approximately 60% of litigants in arbitration were represented by counsel, however.
- All class actions analyzed reported attorneys’ fee awards. Across all settlements that reported both fees and gross cash and in-kind relief, fee rates were 21% of cash relief and 16% of cash and in-kind relief. The CFPB was able to compare fees to cash payments in 251 cases (or 60% of the data set). In these cases, of the total amount paid out in cash by defendants (both to class members and in attorneys’ fees), 24% was paid in fees.
The results of this study reveal–quite clearly–why the financial industry would like to use mandatory arbitration agreements to eliminate consumer class actions. Class actions have proven to be vastly more successful than arbitration in terms of relative rates of success and total dollar financial relief obtained. Class actions have also provided a vehicle of relief to consumers with much smaller financial “stakes”–claims which would not economically justify individual litigation before an arbitration panel.
Furthermore, the economies of scale produced by the class action mechanism allow the attorneys’ fees approved by the courts to be about half of that in a traditional individual case (20% to 40%).
Now, the CFPB did conclude that arbitration is a faster means of resolving a dispute. For consumers, however, this almost always means its a faster way to a losing decision.
Graham Newman practices in the areas of class actions, complex litigation, and consumer advocacy with Chappell Smith & Arden, P.A.