by Jeff Sovern
Last Friday, I posted a comment on Alan Kaplinsky’s remarks, quoted in the Bloomberg Business story, Bank Customers May Get Their Day in Court, about the CFPB arbitration report. Alan replied in a post captioned “Sovern v. Kaplinsky.” Here I offer a rebuttal.
In my original post, I expressed the view that consumers mostly don’t do anything when they have a problem with a company. Alan noted in response that the Consumer Financial Protection Bureau reports having received more than 558,800 consumer complaints. But that statistic, by itself, says little about the likelihood that consumers will complain when they have an issue because it talks about the absolute number of complaints rather than what percentage of consumers with problems complain. To see what I mean, let’s focus just on credit cards. The CFPB reports that 12% of the complaints are about credit cards, meaning that roughly 67,056 of the complaints involve credit cards. As we reported in our arbitration study, “[e]stimates of the number of Americans with credit cards in recent years vary from 156 million to 226 million.” If we use the smaller figure and assume that only 156 million Americans have credit cards (and if I’ve done the math right and haven’t dropped a decimal point), that means that out of every million Americans with a credit card, about four have complained to the CFPB. Suddenly, the number of complaints doesn’t seem so large. And even that probably overstates the percentage of complaining consumers, first, because it uses a low estimate of the number of credit card holders, and second, it also assumes that no consumer filed more than one complaint. It seems likely that some consumers file multiple complaints, if only because the same issue may trigger complaints against a lender, credit bureaus , debt collectors, and so on. But even the four out of a million number doesn’t tell us much because we don’t know how many consumers have a problem with their credit card issuers. Maybe every unhappy consumer complains or maybe only a fraction of dissatisfied consumers complains. Without knowing how many consumers have an issue, we can’t determine the percentage who complain, but the research I’ve seen says it’s tiny. In that regard, here’s an excerpt from Director Cordray’s speech about the arbitration report:
In [a] survey, we asked consumers what they would do if they were charged a fee by their credit card issuer that they knew to be wrong and they had already exhausted all possible efforts to obtain relief from the company. Only two percent of consumers said they would consider bringing formal legal proceedings or would consult a lawyer. That is almost the same percentage of consumers who said they would simply accept responsibility for the fee. Most people, in fact, say they would simply cancel their card. The research thus indicates that consumers are very unlikely, acting alone, to even consider bringing formal claims against their card issuers – either through arbitration or through the courts.
In other words, consumers mostly don’t do anything—other than cutting off ties with the offending company–when they have a problem with a company.
I also took issue with Alan’s original statement that you don’t see a lot of arbitrations because consumers use other means to assert their grievances. I wrote “Does the benefit of arbitration derive from the fact that it drives consumers to use something else to resolve disputes?” Alan responded to my critique by saying—correctly, I believe—that consumers may prefer informal means of resolving disputes to arbitration or litigation because those means may be “faster, cheaper and more efficient for consumers than either arbitration or litigation.” I was less clear than I should have been and I appreciate that Alan's comment made that apparent. What I should have said is that those informal means of dispute resolution are available for litigation just as they are with arbitration. Consequently, we would expect that the availability of informal means would have the same effect on the amount of litigation as it has on the amount of arbitration. But the CFPB found that individual consumers were more likely to file cases in court than bring arbitrations, suggesting that something other than the availability of informal dispute mechanisms is suppressing the number of arbitrations. Put another way, if Alan’s statement means that consumers subject to arbitration clauses use informal means to resolve disputes more than is true of litigation, that would suggest arbitration drives consumers to use informal means more than litigation does.
My favorite part of Alan’s post is that one “reason why “consumers don’t file arbitration claims” (Professor Sovern’s words) are that . . . Professor Sovern and consumer advocates have railed against arbitration for almost two decades, thereby fostering a negative public perception of arbitration . . . .” Alan is very kind to say that consumers are listening to me–though he is also wrong on this score, of course. And I should add that while I often disagree with Alan, I think his blog is terrific. His clients are lucky to have him.