The CFPB Attempts To Regulate Concepcion

No, the Consumer Financial Protection Bureau (“CFPB”) is not meddling—at least not yet—in the fraught area of reproductive rights. “Concepcion” in this instance refers to the landmark decision of the United States Supreme Court in AT&T Mobility v. Concepcion, ___ U.S. ___, 131 S. Ct. 1740 (2011), that held that traditional one-on-one arbitration as envisioned by the Federal Arbitration Act (“FAA”) trumps the class action procedure recognized under Rule 23 of the Federal Rules of Civil Procedure, or its various state analogs. The self-anointed consumer advocates across the country, especially the class action bar whose gargantuan fee awards are being threatened, howled their disapproval. Unsuccessful in the courts and in their efforts to get Congress to exempt consumer finance contracts from the FAA, they have turned to the CFPB and asked it to do by regulation what those traditional branches of government would not: reopen the great class action motherlode.

So where does the CFPB get the authority to rewrite federal law? In response to the 2008 financial crisis, Congress passed the Dodd-Frank Act, which delegated the real decision making on many policy issues affecting financial services to the CFPB. Section 1028 of the Dodd-Frank Act authorized the CFPB to “prohibit or impose conditions or limitations on the use of an agreement” to arbitrate by consumer financial service providers if it finds that such regulatory action “is in the public interest and for the protection of consumers.” But Congress placed a roadblock before the CFPB—a requirement that it conduct an investigation prior to proposing regulations concerning consumer arbitration. On March 15, 2015, the CFPB issued its 728-page final report on arbitration, and any doubt about its lack of objectivity was confirmed by the title of the CFPB’s official press release: “CFPB Study Finds That Arbitration Agreements Limit Relief for Consumers.” The report might as well have been drafted by the class action bar itself.

The CFPB Report condemns consumer arbitration on two grounds: (1) the small amount of relief awarded to consumers through arbitration verses the collective relief achieved through class actions; and (2) the alleged lack of awareness by consumers of the arbitration clauses contained in the form finance contracts that they regularly sign.

Most of the report is dedicated to creating the illusion that the first point is based on a serious statistical analysis. For example, the CFPB claims to have reviewed 1,060 cases filed with the American Arbitration Association in 2010-2011 concerning such consumer contracts, only 341 of which resulted in decisions by the arbitrators, the net result of which was consumers recovered $400,000 in damages and debt forgiveness while companies recovered $2.8 million against consumers. By comparison, 32 million consumers were “eligible” annually for relief through class actions, most of which resulted in court-approved settlements. Of course, this is a false dichotomy because all the figures were garnered in a period of time when the consumer bar was interested only in pursuing class actions and arbitration of individual claims was routinely denied. To put it bluntly, the plaintiff’s bar had grown fat and happy pursuing class claims without having to deal with the troubling details of individual consumers’ cases.

In making such a comparison between individual arbitration and class actions—assuming such a comparison was really within the Dodd-Frank mandate for an investigation—the better approach would have been to study the results of class actions on individual consumers. The real danger of class actions is that they homogenize class members’ claims, delivering meaningless or token relief both to those who have suffered real harm and those who are perfectly satisfied with their treatment by the defendant. Those consumers who have suffered at the hands of a retailer or creditor want, above all, their “day in court.” Win or lose, the chance to describe their claim to a retired judge or other arbitrator means more in the end than receiving a lengthy notice of class settlement, a complicated claim form and token relief in the form of the forgiveness of a debt the company had long ago ceased trying to collect. As anyone who has practiced in the class action arena knows, the eye-popping figures associated with class settlements usually involve that sort of phantom relief, with the only serious dollars going to class counsel.

Class actions have made a mockery of the judicial system. Most consumers who receive claim forms toss them in the trash, often unopened. Those who bother to open them get the sinking feeling that any real claim they might have from a given transaction is of no consequence. Concepcion has made it possible for arbitration to become the preferred, efficient method of resolving simple disputes by consumers concerning their financial contracts. By constricting class actions, the plaintiff’s bar will once again have to focus on individual consumer complaints, and those consumers whose claims have merit will have an opportunity to have them heard. If the CFPB really had the consumer’s interest in mind, it would compare how the consumer with a genuine beef is treated in an individual arbitration as opposed to a random class member. But such a comparison would not serve the interest of the CFPB’s true constituency, the class action bar.

The CFPB’s second point concerning the average consumer’s awareness of arbitration when entering into a finance contract raises a legitimate, albeit solvable problem. Ironically, the heavy regulation of consumer finance contracts at the state and federal levels has resulted in a prolixity of mandated warnings, disclosures and covenants, the sum total of which make those contracts virtually incomprehensible even to regular practitioners in the area. It is not surprising that an arbitration clause buried in such a contract might be overlooked. But there are numerous fixes for this problem. For example, the arbitration clause could be highlighted with a requirement that it be separately initialed by the consumer. The consumer could also be provided with a simple brochure describing arbitration in lay terms. Finally, the consumer could be given a period of time following the transaction in which to decline the arbitration clause by sending a written notice or email to the creditor. The CFPB’s subordination of this issue to its class action comparison shows the true purpose behind its “investigation” of consumer arbitration: to find an airtight excuse for overruling Concepcion.

In conjunction with its field hearing on October 7, 2015 in Denver, Colorado, the CFPB took the next step in promulgating regulations based on its study. Its proposal makes clear that these regulations will go well beyond merely strengthening the consumer’s awareness of arbitration. They will attempt to ban any mandatory pre-dispute, individual arbitration in consumer financial contracts that precludes class certification. The CFPB has left no doubt that it intends to nullify Concepcion. It may be that the best hope of relief for the financial services industry from the high-handedness of the CFPB will lie in the various challenges being presently mounted against the constitutionality of that agency. Recently the United States Court of Appeal for the District of Columbia reinstated such a challenge, holding that a creditor has standing to complain about the unique way that the CFPB is immunized from control by the traditional branches of government and to question the manner in which its director was appointed. State Nat’l Bank of Big Spring v. Lew, 795 F.3d 48 (D.C. Cir. 2015). In the meantime, the fight to preserve the benefits of Concepcion before the CFPB regulatory onslaught will continue.

For further information about the CFPB’s attack on AT&T Mobility v. Concepcion, please contact Donald J. Querio at djq@severson.com.