Sixteen State Attorneys General Urge CFPB to Limit Pre-dispute Arbitration

State attorneys general from California, Connecticut, Delaware, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, New Mexico, New York, Oregon, Rhode Island, Vermont, and Washington sent a letter to Consumer Financial Protection Bureau Director Richard Cordray urging the agency to issue rules imposing “prohibitions, conditions, or limitations on the use of pre-dispute arbitration clauses” in consumer agreements for financial products or services.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the CFPB to conduct a study and issue a report to Congress on the use of pre-dispute arbitration in consumer financial product and service agreements. The Act grants the CFPB further authority to “impose conditions or limitations” on the use of pre-dispute arbitration agreements if the findings of its study indicate that such action would benefit consumers. In December 2013, the CFPB issued a report summarizing preliminary data from its study of pre-dispute arbitration. Its initial data were highly critical of pre-dispute arbitration, finding that: 90% of arbitration clauses prohibited class arbitration; arbitration sections of credit card agreements were more difficult to read than the rest of the agreement; and very few arbitrated cases were for amounts in dispute under $1,000.

The urging from the 16 attorneys general comes on the heels of the issuance of an empirical academic study titled 'Whimsy Little Contracts' with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements that finds “a profound lack of understanding about the existence and effect of arbitration agreements among consumers.” The study obtains data to support the assertion that consumers generally do not understand or consent to the consequences of pre-dispute arbitration. The 16 attorneys general largely echo these criticism of pre-dispute arbitration in their letter to the CFPB, noting that it “is procedurally unfair to consumers, and jeopardizes one of the fundamental rights of Americas; the right to be heard and seek judicial redress for our claims. [Pre-dispute arbitration terms] are neither voluntary nor readily understandable for most consumers.” They also identify potential conflicts of interest when arbitrators have a financial incentive to rule in favor of corporations that are likely to send them more business. In an interesting conclusion, the attorneys general claim that a “predictable result of such a situation is… unfairness to the harmed consumers”, potentially signaling a willingness to use their existing authority to prevent unfair, deceptive, or abusive acts or practices to combat pre-dispute arbitration agreements.

The flurry of activity on pre-dispute arbitration agreements could indicate that additional action from the CFPB on the topic is near. The CFPB has stated publicly that it intends to issue its study on pre-dispute arbitration agreements by the end of 2014, but it could be delayed into 2015 if the agency needs additional time. We will keep PLA readers apprised of developments in this space.