by Jeff Sovern
I'm finally getting around to reading the CFPB's December 12 report, Arbitration Study: Preliminary Results, about which Brian blogged here. Though the Bureau does not make much of it, perhaps because the natural experiment has some flaws (as natural experiments often do), the CFPB Study sheds some light on the impact of arbitration clauses on the willingness of consumers to file claims. At page 70, the Study states "consumers filed more than four times as many federal court credit card disputes as AAA credit card arbitrations" from 2010 to 2012. Combine that with two other items noted in the Study. At page 12, the Study reports that "just over 50% of credit card loans outstanding are subject to" arbitration clauses. The other item is how frequently AAA is identified in credit card contracts as the arbitration provider. At page 34, the Study explains:
Nearly half (48.5%) of credit card arbitration clauses in the sample listed AAA as the sole option. Three listed JAMS and three listed NAF as sole options. * * *Counting clauses in which AAA is at least an option yields * * * 83.3% for credit card arbitration clauses . . . .
What does all this mean? To some extent, it allows us to compare the incidence of consumers bringing claims under contracts containing arbitration clauses and under contracts not containing such clauses. If arbitration clauses had no impact on the willingness of consumers to file claims, we would expect to see slightly more consumers filing arbitration claims than consumers filing claims in court, to reflect the fact that slightly more credit card loans are subject to arbitration clauses than aren't. But we don't: in fact, we see four times as many claims filed in federal court as in AAA arbitrations. That seems like a huge difference and suggests that arbitration clauses substantially reduce the willingness of consumers to file credit card cases.
But now we get to the flaws. First, we don't know that the people with credit card loans subject to arbitration clauses are similar to those whose credit cards are not subject to arbitration clauses. For example, if different types of consumers were drawn to different credit card issuers, that could conceivably account for the differences. Second, not all the arbitration clauses designated the AAA as the provider. While nearly half the credit card contracts with arbitration clauses list AAA as the sole arbitration provider, that still leaves about a third who could choose a different provider and nearly a fifth who, if they opt for arbitration, must go with a different provider. But that doesn't fully explain the differences Even if we assume that everyone who has a choice about going to AAA selects an alternative provider, we end up with about half the consumers subject to arbitration clauses filing claims with the AAA (assuming also that the number of consumers filing claims is evenly distributed among those with arbitration clauses)–which explains only half the difference the Bureau found between AAA filings and federal court filings. And how likely is it that consumers with a choice would consistently reject the AAA? Finally–and this suggests that the CFPB comparison understates the scope of the effect–the CFPB compared only federal court filings with arbitration filings, and obviously cases are also filed in state courts. Indeed, many arbitration clauses do not bar consumers from filing claims in state small claims courts.
So it's not a perfect comparison by any means, but it sure suggests that arbitration clauses result in fewer filings than contracts lacking such clauses. That's not a surprise (after all, many in the industry, which benefits from fewer filings, support arbitration clauses, and consumer advocates oppose them), but still it's interesting to have some support for something that many have long suspected.
0 thoughts on “Did the CFPB Discover a Natural Experiment on the Impact of Arbitration Clauses on the Willingness of Consumers to Bring Claims?”
Reply to Ted,
Wow. No offense, but that is some weak logic.
You said: “Unless the reason that people file fewer arbitration claims is that credit-card companies with arbitration clauses have a better incentive to avoid formal dispute resolution.” But the uniform claim of the companies including arbitration clauses in their form contracts is that they believe that arbitration is quicker, easier and cheaper than litigation. Thus, if anything, companies would have LESS “incentive” to avoid a dispute when that dispute has to be brought in arbitration.
You said: “Though again, we don’t know for sure which one is lower cost, though the absence of wasteful class actions suggests it would be arbitration.” Two points: (1) If “we” includes the companies that insert the arbitration clauses, and they don’t know whether arbitration is cheaper or not, then why would they include them in their contracts? Oh yeah – claims suppression. (2) Are you really claiming that one class action on behalf of 100,000 class members (attorneys’ fees and all) is more “wasteful” than 100,000 (or even 1,000) individual arbitration proceedings (including the requisite payments to the arbitrators)?? Of course not. Instead, arbitration saves companies money by drastically limiting whose claims will ever be adjudicated. The real impact of the arbitration provisions is to insure that the claims of the other 99,999 won’t be heard on the merits. So the savings to the company is in claims avoidance/deterrence, not adjudication efficiency.
Unless the reason that people file fewer arbitration claims is that credit-card companies with arbitration clauses have a better incentive to avoid formal dispute resolution. Fewer complaints sometimes means fewer complaints.
Even if one type of dispute resolution over another deters legitimate claims (and without knowing the quality of the claims asserted, we don’t know which is which), one has to offset that with the benefits of the lower-cost method — which, in a competitive industry like credit card issuers, will be passed on to the consumer in the form of rewards, lower annual fees, or lower interest rates. Though again, we don’t know for sure which one is lower cost, though the absence of wasteful class actions suggests it would be arbitration.
Of interest: I can’t find a single consumer website that tells us which credit card is in which bucket. Which suggest that consumers care much more about other terms and conditions. After all, at the end of the day, less than 1% of credit card users will end up litigating against their provider.