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.