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Arbitration Agreements

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AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Final rule; official interpretations.

SUMMARY:

Pursuant to section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Bureau of Consumer Financial Protection (Bureau) is issuing this final rule to regulate arbitration agreements in contracts for specified consumer financial product and services. First, the final rule prohibits covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service. Second, the final rule requires covered providers that are involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau and also to submit specified court records. The Bureau is also adopting official interpretations to the regulation.

DATES:

Effective date: This regulation is effective September 18, 2017.

Compliance date: Mandatory compliance for pre-dispute arbitration agreements entered into on or after March 19, 2018.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Benjamin Cady and Lawrence Lee Counsels; Owen Bonheimer, Eric Goldberg and Nora Rigby Senior Counsels, Office of Regulations, Consumer Financial Protection Bureau, at 202-435-7700 or cfpb_reginquiries@cfpb.gov.

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SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

On May 24, 2016, the Bureau of Consumer Financial Protection published a proposal to establish 12 CFR part 1040 to address certain aspects of consumer finance dispute resolution.[1] Following a public comment period and review of comments received, the Bureau is now issuing a final rule governing agreements that provide for the arbitration of any future disputes between consumers and providers of certain consumer financial products and services.

Congress directed the Bureau to study these pre-dispute arbitration agreements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or Dodd-Frank Act).[2] In 2015, the Bureau published and delivered to Congress a study of arbitration (Study).[3] In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the Study, to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers.[4] Congress also required that the findings in any such rule be consistent with the Bureau's Study.[5] In accordance with this authority, the final rule issued today imposes two sets of limitations on the use of pre-dispute arbitration agreements by covered providers of consumer financial products and services. First, the final rule prohibits providers from using a pre-dispute arbitration agreement to block consumer class actions in court and requires most providers to insert language into their arbitration agreements reflecting this limitation. This final rule is based on the Bureau's findings—which are consistent with the Study—that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.

Second, the final rule requires providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral and court proceedings to the Bureau. The Bureau will use the information it collects to continue monitoring arbitral and court proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action. The Bureau is also finalizing provisions that will require it to publish the materials it collects on its Web site with appropriate redactions as warranted, to provide greater transparency into the arbitration of consumer disputes.

The final rule applies to providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money, including, subject to certain exclusions specified in the rule, providers that are engaged in:

  • Extending consumer credit, participating in consumer credit decisions, or referring or selecting creditors for non-incidental consumer credit, each when done by a creditor under Regulation B implementing the Equal Credit Opportunity Act (ECOA), acquiring or selling consumer credit, and servicing an extension of consumer credit;
  • extending or brokering automobile leases as defined in Bureau regulation;
  • providing services to assist with debt management or debt settlement, to modify the terms of any extension of consumer credit, or to avoid foreclosure, and providing products or services represented to remove derogatory information from, or to improve, a person's credit history, credit record, or credit rating;
  • providing directly to a consumer a consumer report as defined in the Fair Credit Reporting Act (FCRA), a credit score, or other information specific to a consumer derived from a consumer file, except for certain exempted adverse action notices (such as those provided by employers);
  • providing accounts under the Truth in Savings Act (TISA) and accounts and remittance transfers subject to the Electronic Fund Transfer Act (EFTA);
  • transmitting or exchanging funds (except when necessary to another product or service not covered by this rule offered or provided by the person transmitting or exchanging funds), certain other payment processing services, and check cashing, check collection, or check guaranty services consistent with the Dodd-Frank Act; and
  • collecting debt arising from any of the above products or services by a provider of any of the above products or services, their affiliates, an acquirer or purchaser of consumer credit, or a person acting on behalf of any of these persons, or by a debt collector as defined by the Fair Debt Collection Practices Act (FDCPA).

Consistent with the Dodd-Frank Act, the final rule applies only to agreements entered into after the end of the 180-day period beginning on the regulation's Start Printed Page 33211effective date.[6] The Bureau is adopting an effective date of 60 days after the final rule is published in the Federal Register. To facilitate implementation and ensure compliance, the final rule requires providers in most cases to insert specified language into their arbitration agreements to explain the effect of the rule. The final rule also permits providers of general-purpose reloadable prepaid cards to continue selling packages that contain non-compliant arbitration agreements, if they give consumers a compliant agreement as soon as consumers register their cards and the providers comply with the final rule's requirement not to use an arbitration agreement to block a class action.

II. Background

Arbitration is a dispute resolution process in which the parties choose one or more neutral third parties to make a final and binding decision resolving the dispute.[7] Parties may include language in their contracts, before any dispute has arisen, committing to resolve future disputes between them in arbitration rather than in court or allowing either party the option to seek resolution of a future dispute in arbitration. Such pre-dispute arbitration agreements—which this final rule generally refers to as “arbitration agreements”§ [8] —have a long history, primarily in commercial contracts, where companies historically had bargained to create agreements tailored to their needs.[9] In 1925, Congress passed what is now known as the Federal Arbitration Act (FAA) to require that courts enforce agreements to arbitrate, including those entered into both before and after a dispute has arisen.[10]

In the last few decades, companies have begun inserting arbitration agreements in a wide variety of standard-form contracts, such as in contracts between companies and consumers, employees, and investors. As is underscored by the range of comments received on the proposal, the use of arbitration agreements in such contracts has become a contentious legal and policy issue due to concerns about whether the effects of arbitration agreements are salient to consumers, whether arbitration has proved to be a fair and efficient dispute resolution mechanism, and whether arbitration agreements effectively discourage and limit the filing or resolution of certain claims in court or in arbitration.

In recent years, Congress has taken steps to restrict the use of arbitration agreements in connection with certain consumer financial products and services and other consumer and investor relationships. Most recently, in the 2010 Dodd-Frank Act, Congress prohibited the use of arbitration agreements in connection with mortgage loans,[11] authorized the Securities and Exchange Commission (SEC) to regulate arbitration agreements in contracts between consumers and securities broker-dealers and investment advisers,[12] and prohibited the use of arbitration agreements in connection with certain whistleblower proceedings.[13]

In addition, and of particular relevance here, Congress directed the Bureau to study the use of arbitration agreements in connection with other, non-mortgage consumer financial products and services and authorized the Bureau to prohibit or restrict the use of such agreements if it finds that such action is in the public interest and for the protection of consumers.[14] Congress also required that the findings in any such rule be consistent with the study.[15] The Bureau solicited input on the appropriate scope, methods, and data sources for the study in 2012[16] and released results of its three-year Study in March 2015.[17] Part III of this final rule summarizes the Bureau's process for completing the Study and its results. To place these results in greater context, this part provides a brief overview of: (1) Consumers' rights under Federal and State laws governing consumer financial products and services; (2) court mechanisms for seeking relief where those rights have been violated, and, in particular, the role of the class action device in protecting consumers; and (3) the evolution of arbitration agreements and their increasing use in markets for consumer financial products and services.

A. Consumer Rights Under Federal and State Laws Governing Consumer Financial Products and Services

Companies typically provide consumer financial products and services under the terms of a written contract. In addition to being governed by such contracts and the relevant State's contract law, the relationship between a consumer and a financial service provider is typically governed by consumer protection laws at the State level, Federal level, or both, as well as by other State laws of general applicability (such as tort law). Collectively, these laws create legal rights for consumers and impose duties on the providers of financial products and services that are subject to those laws and, depending on the contract and the product or service, a service provider to the underlying provider.

Early Consumer Protection in the Law

Prior to the twentieth century, the law generally embraced the notion of caveat emptor, or “buyer beware” in consumer affairs.[18] State common law afforded some minimal consumer protections against fraud, usury, or breach of contract, but these common law protections were limited in scope. In the first half of the twentieth century, Congress began passing legislation intended to protect consumers, such as the Wheeler-Lea Act of 1938.[19] The Wheeler-Lea Act amended the Federal Trade Commission Act of 1914 (FTC Act) to provide the FTC with the authority to pursue unfair or deceptive acts and practices.[20] These early Federal laws did not provide for private rights of action, meaning that they could only be enforced by the government.

Modern Era of Federal Consumer Financial Protections

In the late 1960s, Congress began passing consumer protection laws focused on financial products, beginning with the Consumer Credit Start Printed Page 33212Protection Act (CCPA) in 1968.[21] The CCPA included the Truth in Lending Act (TILA), which imposed disclosure and other requirements on creditors.[22] In contrast to earlier consumer protection laws such as the Wheeler-Lea Act, TILA permits private enforcement by providing consumers with a private right of action, authorizing consumers to pursue claims for actual damages and statutory damages and allowing consumers who prevail in litigation to recover their attorney's fees and costs.[23]

Congress followed the enactment of TILA with several other consumer financial protection laws, many of which provided private rights of action for at least some statutory violations. For example, in 1970, Congress passed the FCRA, which promotes the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies, as well as providing consumers access to their own information.[24] In 1974, Congress passed the ECOA to prohibit creditors from discriminating against applicants with respect to credit transactions.[25] In 1977, Congress passed the FDCPA to promote the fair treatment of consumers who are subject to debt collection activities.[26]

In the 1960s, States began passing their own consumer protection statutes modeled on the FTC Act to prohibit unfair and deceptive practices. Unlike the FTC Act, however, these State statutes typically provide for private enforcement.[27] The FTC encouraged the adoption of consumer protection statutes at the State level and worked directly with the Council of State Governments to draft the Uniform Trade Practices Act and Consumer Protection Law, which served as a model for many State consumer protection statutes.[28] Currently, 49 of the 50 States and the District of Columbia have State consumer protection statutes modeled on the FTC Act that allow for private rights of action.[29]

Class Actions Pursuant to Federal Consumer Protection Laws

In 1966, shortly before Congress first began passing the wave of consumer financial protection statutes described above, the Federal Rules of Civil Procedure (Federal Rules or FRCP) were amended to make class actions substantially more available to litigants, including consumers. The class action procedure in the Federal Rules, as discussed in detail in Part II.B below, allows an individual to group his or her claims together with those of other, absent individuals in one lawsuit under certain circumstances and to obtain monetary or injunctive relief for the group. Because TILA and the other Federal consumer protection statutes discussed above permitted private rights of action, those private rights of action were enforceable through a class action, unless the statute expressly prohibited class actions.[30]

Indeed, Congress affirmatively calibrated enforcement through private class actions in several of the consumer protection statutes by specifically referring to class actions and adopting statutory damage schemes that are capped by a percentage of the defendants' net worth.[31] For example, when consumers initially sought to bring TILA class actions, a number of courts applying Federal Rule 23 denied motions to certify a class because of the prospect of extremely large damages resulting from the aggregation of a large number of claims for statutory damages.[32] Congress addressed this by amending TILA in 1974 to cap class action damages in such cases to the lesser of 1 percent of the defendant's assets or $100,000.[33] Congress has twice increased the cap on class action damages in TILA: To $500,000 in 1976 and $1,000,000 in 2010.[34] Many other statutes similarly cap damages in class actions.[35] Further, the legislative history of other statutes indicates a particular intent to permit class actions given the potential for a small recovery in many consumer finance cases for individual damages.[36] Similarly, many State legislatures contemplated consumers' filing of class actions to vindicate violations of their versions of the FTC Act.[37] A minority of States expressly prohibit class actions to enforce their FTC Acts.[38]

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B. History and Purpose of the Class Action Procedure

The default rule in United States courts, inherited from England, is that only those who appear as parties to a given case are bound by its outcome.[39] As early as the medieval period, however, English courts recognized that litigating many individual cases regarding the same issue was inefficient for all parties and thus began to permit a single person in a single case to represent a group of people with common interests.[40] English courts later developed a procedure called the “bill of peace” to adjudicate disputes involving common questions and multiple parties in a single action. The process allowed for judgments binding all group members—whether or not they were participants in the suit—and contained most of the basic elements of what is now called class action litigation.[41]

The bill of peace was recognized in early United States case law and ultimately adopted by several State courts and the Federal courts.[42] Nevertheless, the use and impact of that procedure remained relatively limited through the nineteenth and into the twentieth centuries. In 1938, the Federal Rules were adopted to govern civil litigation in Federal court, and Federal Rule 23 established a procedure for class actions.[43] That procedure's ability to bind absent class members was never clear, however.[44]

That changed in 1966, when Federal Rule 23 was amended to create the class action mechanism that largely persists in the same form to this day.[45] Federal Rule 23 was amended at least in part to promote efficiency in the courts and to provide for compensation of individuals when many are harmed by the same conduct.[46] The 1966 revisions to Federal Rule 23 prompted similar changes in most States. As the Supreme Court has since explained, class actions promote efficiency in that “the . . . device saves the resources of both the courts and the parties by permitting an issue potentially affecting every [class member] to be litigated in an economical fashion under Rule 23.” [47] As to small harms, class actions provide a mechanism for compensating individuals where “the amounts at stake for individuals may be so small that separate suits would be impracticable.” [48] Class actions have been brought not only by individuals, but also by companies, including financial institutions.[49]

Class Action Procedure Pursuant to Federal Rule 23

A class action can be filed and maintained under Federal Rule 23 in any case where there is a private right to bring a civil action in Federal court, unless otherwise prohibited by law.[50] Pursuant to Federal Rule 23(a), a class action must meet all of the following requirements: (1) A class of a size such that joinder of each member as an individual litigant is impracticable; (2) questions of law or fact common to the class; (3) a class representative whose claims or defenses are typical of those of the class; and (4) that the class representative will adequately represent those interests.[51] The first two prerequisites—numerosity and commonality—focus on the absent or represented class, while the latter two tests—typicality and adequacy—address the desired qualifications of the class representative. Pursuant to Federal Rule 23(b), a class action also must meet one of the following requirements: (1) Prosecution of separate actions risks either inconsistent adjudications that would establish incompatible standards of conduct for the defendant or would, as a practical matter, be dispositive of the interests of others; (2) defendants have acted or refused to act on grounds generally applicable to the class; or (3) common questions of law or fact predominate over any individual class member's questions, and a class action is superior to other methods of adjudication.

These and other requirements of Federal Rule 23 are designed to ensure Start Printed Page 33214that class action lawsuits safeguard absent class members' due process rights because they may be bound by what happens in the case.[52] Further, the courts may protect the interests of absent class members through the exercise of their substantial supervisory authority over the quality of representation and specific aspects of the litigation.[53] In the typical Federal class action, an individual plaintiff (or sometimes several individual plaintiffs), represented by an attorney, files a lawsuit on behalf of that individual and others similarly situated against a defendant or defendants.[54] Those similarly situated individuals may be a small group (as few as 40 or even less) or as many as millions that are alleged to have suffered the same injury as the individual plaintiff. That individual plaintiff, typically referred to as a named or lead plaintiff, cannot properly proceed with a class action unless the court certifies that the case meets the requirements of Federal Rule 23, including the requirements of Federal Rule 23(a) and (b) discussed above. If the court does certify that the case can go forward as a class action, potential class members who do not opt out of the class are bound by the eventual outcome of the case.[55] If not certified, the case proceeds only to bind the named plaintiff.

A certified class case proceeds similarly to an individual case, except that the court has an additional responsibility in a class case, pursuant to Federal Rule 23 and the relevant case law, to actively supervise classes and class proceedings and to ensure that the lead plaintiff keeps absent class members informed.[56] Among its tasks, a court must review any attempts to settle or voluntarily dismiss the case on behalf of the class,[57] may reject any settlement agreement if it is not “fair, reasonable and adequate,”T [58] and must ensure that the payment of attorney's fees is “reasonable.” [59] The court also addresses objections from class members who seek a different outcome to the case (e.g., lower attorney's fees or a better settlement). These requirements are designed to ensure that all parties to class litigation have their rights protected, including defendants and absent class members.

In addition to proceedings in Federal court, every State except Virginia and Mississippi has established procedures permitting individuals to file a class action; almost all of these States have adopted class action procedures analogous to Federal Rule 23.[60]

Developments in Class Action Procedure Over Time

Since the 1966 amendments, Federal Rule 23 has generated a significant body of case law as well as significant controversy.[61] In response, Congress and the Advisory Committee on the Federal Rules of Civil Procedure (which has been delegated the authority to change Federal Rule 23 under the Rules Enabling Act) have made a series of targeted changes to Federal Rule 23 to calibrate the equities of class plaintiffs and defendants. Meanwhile, the courts have also addressed concerns about Federal Rule 23 in the course of interpreting the rule and determining its application in the context of particular types of cases.

For example, Congress passed the Private Securities Litigation Reform Act (PSLRA) in 1995. Enacted partially in response to concerns about the costs to defendants of litigating class actions, the PSLRA reduced discovery burdens in the early stages of securities class actions.[62] In 2005, Congress again adjusted the class action rules when it adopted the Class Action Fairness Act (CAFA) in response to concerns about abuses of class action procedure in some State courts.[63] Among other things, CAFA expanded the subject matter jurisdiction of Federal courts to allow them to adjudicate most large class actions.[64] The Advisory Committee also periodically reviews and updates Federal Rule 23. In 1998, the Advisory Committee amended Federal Rule 23 to permit interlocutory appeals of class certification decisions, given the unique importance of the certification decision, which can dramatically change the dynamics of a class action case.[65] In 2003, the Advisory Committee amended Federal Rule 23 to require courts to define classes that they are certifying, increase the amount of scrutiny that courts must apply to class settlement proposals, and impose additional requirements on class counsel.[66] In 2015, the Advisory Committee further identified several issues that “warrant serious examination” and presented “conceptual sketches” of possible further amendments.[67]

Federal courts have also shaped class action practice through their interpretations of Federal Rule 23. In the last five years, the Supreme Court has decided several major cases refining class action procedure. In Wal-Mart Stores, Inc. v. Dukes, the Court interpreted the commonality requirement of Federal Rule 23(a)(2), holding that in the absence of a common question among putative class members class certification is not appropriate.[68] In Comcast Corp. v. Behrend, the Court held that district courts must undertake a “rigorous analysis” of whether the damages model supporting a plaintiff's case is consistent with its theory of liability for purposes of satisfying the predominance requirements in Federal Rule 23(b)(3) and that that in the absence of such a model of individual damages may foreclose class certification.[69] In Campbell-Ewald Co. v. Gomez, the Court held that a defendant Start Printed Page 33215cannot moot a class action by offering complete relief to an individual plaintiff before class certification unless the individual plaintiff agrees to accept that relief.[70] In Tyson Foods, Inc. v. Bouaphakeo, the Court held that statistical techniques presuming that all class members are identical to the average observed in a sample can be used to establish classwide liability where each class member could have relied on that sample to establish liability had each brought an individual action.[71] Finally, in Spokeo, Inc. v. Robins, a class action alleging a violation of Federal law, the Court reiterated that to have standing in Federal court a plaintiff must allege an injury in fact—specifically, “`an invasion of a legally protected interest' that is `concrete and particularized' and `actual or imminent, not conjectural or hypothetical.'” [72] The case was remanded to the Ninth Circuit to determine whether the plaintiff had alleged an actual injury under the FCRA.[73]

C. Arbitration and Arbitration Agreements

As described above at the beginning of Part II, arbitration is a dispute resolution process in which the parties choose one or more neutral third parties to make a final and binding decision resolving the dispute.[74] The typical arbitration agreement provides that the parties shall submit any disputes that may arise between them to arbitration. Arbitration agreements generally give each party to the contract two distinct rights. First, either side can file claims against the other in arbitration and obtain a decision from the arbitrator.[75] Second, with some exceptions, either side can use the arbitration agreement to require that a dispute that has been filed in court instead proceed in arbitration.[76] The typical agreement also specifies an organization called an arbitration administrator. Administrators, which may be for-profit or nonprofit organizations, facilitate the selection of an arbitrator to decide the dispute, provide for basic rules of procedure and operations support, and generally administer the arbitration.[77] Parties usually have very limited rights to appeal from a decision in arbitration to a court.[78] Most arbitration also provides for limited or streamlined discovery procedures as compared to those in many court proceedings.[79]

History of Arbitration

The use of arbitration to resolve disputes between parties is not new.[80] In England, the historical roots of arbitration date to the medieval period, when merchants adopted specialized rules to resolve disputes between them.[81] English merchants began utilizing arbitration in large numbers during the nineteenth century.[82] However, English courts were hostile towards arbitration, limiting its use through doctrines that rendered certain types of arbitration agreements unenforceable.[83] Arbitration in the United States in the eighteenth and nineteenth centuries reflected both traditions: It was used primarily by merchants, and courts were hostile toward it.[84] Through the early 1920s, United States courts often refused to enforce arbitration agreements and awards.[85]

In 1920, New York enacted the first modern arbitration statute in the United States, which strictly limited courts' power to undermine arbitration decisions and arbitration agreements.[86] Under that law, if one party to an arbitration agreement refused to proceed to arbitration, the statute permitted the other party to seek a remedy in State court to enforce the arbitration agreement.[87] In 1925, Congress passed the United States Arbitration Act, which was based on the New York arbitration law and later became known as the Federal Arbitration Act (FAA).[88] The FAA remains in force today. Among other things, the FAA makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” [89]

Expansion of Consumer Arbitration and Arbitration Agreements

From the passage of the FAA through the 1970s, arbitration continued to be used in commercial disputes between companies.[90] Beginning in the 1980s, however, companies began to use arbitration agreements in form contracts with consumers, investors, employees, and franchisees that were not the result of individually negotiated terms.[91] By the 1990s, this trend began to spread more broadly within the consumer financial services industry.[92]

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One notable feature of these agreements is that they could be used to block class action litigation and often class arbitration as well.[93] The agreements could block class actions filed in court because when sued in a class action, companies could use the arbitration agreement to dismiss or stay the class action in favor of arbitration. Yet the agreements often prohibited class arbitration as well, rendering plaintiffs unable to pursue class claims in either litigation or arbitration.[94] More recently, some consumer financial providers themselves have disclosed in their filings with the SEC that they rely on arbitration agreements for the express purpose of shielding themselves from class action liability.[95]

Since the early 1990s, the use of arbitration agreements in consumer financial contracts has become widespread, as shown by Section 2 of the Study (which is discussed in detail in Part III.D below). By the early 2000s, a few consumer financial companies had become heavy users of arbitration proceedings to obtain debt collection judgments against consumers. For example, in 2006 alone, the National Arbitration Forum (NAF) administered 214,000 arbitrations, most of which were consumer debt collection proceedings brought by companies.[96]

Legal Challenges to Arbitration Agreements

The increase in the prevalence of arbitration agreements coincided with various legal challenges to their use in consumer contracts. One set of challenges focused on the use of arbitration agreements in connection with debt collection disputes. In the late 2000s, consumer groups began to criticize the fairness of debt collection arbitration proceedings administered by NAF, which was the most widely used arbitration administrator for debt collection.[97] In 2008, the San Francisco City Attorney's office filed a civil action against NAF alleging that NAF was biased in favor of debt collectors.[98] In 2009, the Minnesota Attorney General sued NAF, alleging an institutional conflict of interest because a group of investors with a 40 percent ownership stake in an affiliate of NAF also had a majority ownership stake in a debt collection firm that brought a number of cases before NAF.[99] A few days after the filing of the lawsuit, NAF reached a settlement with the Minnesota Attorney General pursuant to which it agreed to stop administering consumer arbitrations completely, although NAF did not admit liability.[100] Further, a series of class actions filed against NAF were consolidated in a multidistrict litigation, and NAF settled those in 2011 by agreeing to suspend $1 billion in pending debt collection arbitrations.[101]

The American Arbitration Association (AAA) likewise announced a moratorium on administering company-filed debt collection arbitrations, articulating significant concerns about due process and fairness to consumers subject to such arbitrations.[102] Specifically, shortly after the NAF settlement, the AAA offered testimony to Congress that—independent of the NAF settlement—AAA “had independently reviewed areas of the process and concluded that it had some weaknesses” in its own debt collection arbitration program, and noted that generally that “areas needing attention . . . include[d] consumer notification, arbitrator neutrality, pleading and evidentiary standards, respondents' defenses and counterclaims, and arbitrator training and recruitment.” [103]

A second group of challenges asserted that the invocation of arbitration agreements to block class actions was unlawful. Because the FAA permits challenges to the validity of arbitration agreements on grounds that exist at law or in equity for the revocation of any contract,[104] challengers argued that Start Printed Page 33217provisions prohibiting arbitration from proceeding on a class basis—as well as other features of particular arbitration agreements—were unconscionable under State law or otherwise unenforceable.[105] Initially, these challenges yielded conflicting results. Some courts held that class arbitration waivers were not unconscionable.[106] Other courts held that such waivers were unenforceable on unconscionability grounds.[107] Some of these decisions also held that the FAA did not preempt application of a State's unconscionability doctrine.[108]

Before 2011, courts were divided on whether arbitration agreements that bar class proceedings were unenforceable because they violated a particular State's laws. Then, in 2011, the Supreme Court held in AT&T Mobility v. Concepcion that the FAA preempted application of California's unconscionability doctrine to the extent it would have precluded enforcement of a consumer arbitration agreement with a provision prohibiting the filing of arbitration on a class basis. The Court concluded that any State law—even one that serves as a general contract law defense—that “[r]equir[es] the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” [109] The Court reasoned that class arbitration eliminates the principal advantage of arbitration—its informality—and increases risks to defendants (due to the high stakes of mass resolution combined with the absence of multilayered review).[110] As a result of the Court's holding, parties to litigation could no longer prevent the use of an arbitration agreement to block a class action in court on the ground that a prohibition on class arbitration in the agreement was unconscionable under the relevant State law.[111] The Court further held, in a 2013 decision, that a court may not use the “effective vindication” doctrine—under which a court may invalidate an arbitration agreement that operates to waive a party's right to pursue statutory remedies—to invalidate a class arbitration waiver on the grounds that the plaintiff's cost of individually arbitrating the claim exceeds the potential recovery.[112]

Regulatory and Legislative Activity

As arbitration agreements in consumer contracts became more common, Federal regulators, Congress, and State legislatures began to take notice of their impact on the ability of consumers to resolve disputes. One of the first entities to regulate arbitration agreements was the National Association of Securities Dealers—now known as the Financial Industry Regulatory Authority (FINRA)—the self-regulating body for the securities industry that also administers arbitrations between member companies and their customers.[113] Under FINRA's Code of Arbitration for customer disputes, FINRA members have been prohibited since 1992 from enforcing an arbitration agreement against any member of a certified or putative class unless and until the class treatment is denied (or a certified class is decertified) or the class member has opted out of the class or class relief.[114] FINRA's code also requires this limitation to be set out in any member company's arbitration agreement. The SEC approved this rule in 1992.[115] In addition, since 1976, the regulations of the Commodity Futures Trading Commission (CFTC) implementing the Commodity Exchange Act (CEA) have required that arbitration agreements in commodities contracts be voluntary.[116] In 2004, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—government-sponsored enterprises that purchase a large share of mortgages—ceased purchasing mortgages that contained arbitration agreements.[117]

Since 1975, FTC regulations implementing the Magnuson-Moss Warranty Act (MMWA) have barred the use, in consumer warranty agreements, of arbitration agreements that would result in binding decisions.[118] Some courts in the late 1990s disagreed with Start Printed Page 33218the FTC's interpretation, but the FTC promulgated a final rule in 2015 that “reaffirm[ed] its long-held view” that the MMWA “disfavors, and authorizes the Commission to prohibit, mandatory binding arbitration in warranties.”[119] In doing so, the FTC noted that the language of the MMWA presupposed that the kinds of informal dispute settlement mechanisms the FTC would permit would not foreclose the filing of a civil action in court.[120]

More recently, the Department of Labor finalized a rule addressing conflicts of interest in retirement advice.[121] To be eligible for an exemption from part of that rule, a covered entity cannot employ an arbitration agreement that can be used to block a class action, although agreements mandating arbitration of individual disputes will continue to be permitted.[122] Other agencies are reevaluating their arbitration initiatives. The Department of Education recently sought to postpone implementation of a rule that was intended to limit the impact of arbitration agreements in certain college enrollment agreements by addressing the use of arbitration agreements to bar students from bringing group claims.[123] The Centers for Medicare and Medicaid Services (CMS) have proposed revisions to a rule finalized in late 2016 regarding the requirements that long-term health care facilities must meet to participate in the Medicare and Medicaid programs.[124]

Congress has also taken several steps to address the use of arbitration agreements in different contexts. In 2002, Congress amended Federal law to require that, whenever a motor vehicle franchise contract contains an arbitration agreement, arbitration may be used to resolve the dispute only if, after a dispute arises, all parties to the dispute consent in writing to the use of arbitration.[125] In 2006, Congress passed the Military Lending Act (MLA), which, among other things, prohibited the use of arbitration provisions in extensions of credit to active servicemembers, their spouses, and certain dependents.[126] As first implemented by Department of Defense (DoD) regulations in 2007, the MLA applied to “[c]losed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000.” [127] In July 2015, DoD promulgated a final rule that significantly expanded that definition of “consumer credit” to cover closed-end loans that exceeded $2,000 or had terms longer than 91 days as well as various forms of open-end credit, including credit cards.[128] In 2008, Congress amended Federal agriculture law to require, among other things, that livestock or poultry contracts containing arbitration agreements disclose the right of the producer or grower to decline the arbitration agreement; the Department of Agriculture issued a final rule implementing the statute in 2011.[129]

As previously noted, Congress again addressed arbitration agreements in the 2010 Dodd-Frank Act. Dodd-Frank section 1414(a) prohibited the use of arbitration agreements in mortgage contracts, which the Bureau implemented in its Regulation Z.[130] Section 921 of the Act authorized the SEC to issue rules to prohibit or impose conditions or limitations on the use of arbitration agreements by investment advisers.[131] Section 922 of the Act invalidated the use of arbitration agreements in connection with certain whistleblower proceedings.[132] Finally, and as discussed in greater detail below, section 1028 of the Act required the Bureau to study the use of arbitration agreements in contracts for consumer financial products and services and authorized this rulemaking.[133] The authority of the Bureau and the SEC are similar under the Dodd-Frank Act except that the SEC does not have to complete a study before promulgating a rule.

State legislatures have also taken steps to regulate the arbitration process. Several States, most notably California, require arbitration administrators to disclose basic data about consumer arbitrations that take place in the State.[134] However, States are constrained in their ability to regulate arbitration because the FAA preempts conflicting State law.[135]

Arbitration Today

Today, the AAA is the primary administrator of consumer financial arbitrations.[136] The AAA's consumer financial arbitrations are governed by the AAA Consumer Arbitration Rules, which includes provisions that, among other things, limit filing and administrative costs for consumers.[137] The AAA also has adopted the AAA Consumer Due Process Protocol, which creates a floor of procedural and substantive protections and affirms that “[a]ll parties are entitled to a fundamentally-fair arbitration Start Printed Page 33219process.” [138] A second entity, JAMS, administers consumer financial arbitrations pursuant to the JAMS Streamlined Arbitration Rules & Procedures [139] and the JAMS Consumer Minimum Standards.[140] These administrators' procedures for arbitration both differ in several respects from the procedures found in court, as discussed in Section 4 of the Study and summarized below at Part III.D.

Further, although virtually all arbitration agreements in the consumer financial context expressly preclude arbitration from proceeding on a class basis, the major arbitration administrators do provide procedures for administering class arbitrations and have occasionally administered them in class arbitrations involving providers of consumer financial products and services.[141] These procedures, which are derived from class action litigation procedures used in court, are described in Section 4.8 of the Study. These class arbitration procedures will only be used by the AAA or JAMS if the arbitration administrator first determines that the arbitration agreement can be construed as permitting class arbitration. These class arbitration procedures are not widely used in consumer financial services disputes: Reviewing consumer financial arbitrations pertaining to six product types filed over a period of three years, the Study found only three.[142] Industry has criticized class arbitration on the ground that it lacks procedural safeguards. For example, class arbitration generally has limited judicial review of arbitrator decisions, for example, on a decision to certify a class or an award of substantial damages.[143]

III. The Arbitration Study

Section 1028(a) of the Dodd-Frank Act directed the Bureau to study and provide a report to Congress on “the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.” Pursuant to section 1028(a), the Bureau conducted a study of the use of pre-dispute arbitration agreements in contracts for consumer financial products and services and, in March 2015, delivered to Congress its Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a).[144]

This Part describes the process the Bureau used to carry out the Study and summarizes the Study's results. Where relevant, this Part then sets forth comments received in response to the proposal that were specific to the Study and its results. The Bureau generally addresses the outcome of its Study, including analyses of the results of the Study, in Part VI, Findings, below. In some instances, the Bureau has elected to address issues related to both the Study and the Findings in Part VI.

A. April 2012 Request for Information

At the outset of its work, on April 27, 2012, the Bureau published a Request for Information (RFI) in the Federal Register concerning the Study.[145] The RFI sought public comment on the appropriate scope, methods, and data sources for the Study. Specifically, the Bureau asked for input on how it should address three topics: (1) The prevalence of arbitration agreements in contracts for consumer financial products and services; (2) arbitration claims involving consumers and companies; and (3) other impacts of arbitration agreements on consumers and companies, such as impacts on the incidence of consumer claims against companies, prices of consumer financial products and services, and the development of legal precedent. The Bureau also requested comment on whether and how the Study should address additional topics. In response to the RFI, the Bureau received and reviewed 60 comment letters. The Bureau also met with numerous commenters and other stakeholders to obtain additional feedback on the RFI.

The feedback received through this process substantially affected the scope of the Study the Bureau undertook. For example, several industry trade association commenters suggested that the Bureau study not only consumer financial arbitration but also consumer financial litigation in court. The Study incorporated an extensive analysis of consumer financial litigation—both individual litigation and class actions.[146] Commenters also advised the Bureau to compare the relationship between public enforcement actions and private class actions. The Study included extensive research into this subject, including an analysis of public enforcement actions filed over a period of five years by State and Federal regulators and the relationship, or lack of relationship of these cases to private class litigation.[147] Commenters also recommended that the Bureau study whether arbitration reduces companies' dispute resolution costs and the relationship between any such cost savings and the cost and availability of consumer financial products and services. To investigate this, the Study included a “difference-in-differences” regression analysis using a representative random sample of the Bureau's Credit Card Database, to look for price impacts associated with changes relating to arbitration agreements for credit cards, an analysis that had never before been conducted.[148]

In some cases, commenters to the RFI encouraged the Bureau to study a topic, but the Bureau did not do so because certain effects did not appear Start Printed Page 33220measurable. For example, some commenters suggested that the Bureau study the effect of arbitration agreements on the development, interpretation, and application of the rule of law. The Bureau did not identify a robust data set that would allow empirical analysis of this phenomenon. Nonetheless, legal scholars have subsequently attempted to quantify this effect in relation to consumer law.[149]

B. December 2013 Preliminary Results

In December 2013, the Bureau issued a 168-page report summarizing its preliminary results on a number of topics (Preliminary Results).[150] One purpose of releasing the Preliminary Results was to solicit additional input from the public about the Bureau's work on the Study to date. In the Preliminary Results, the Bureau also included a section that set out a detailed roadmap of the Bureau's plans for future work, including the Bureau's plans to address topics that had been suggested in response to the RFI.[151]

In February 2014, the Bureau invited stakeholders for in-person discussions with staff regarding the Preliminary Results, as well as the Bureau's future work plan. Several external stakeholders, including industry associations and consumer advocates, took that opportunity and provided additional input regarding the Study.

C. Comments on Survey Design Pursuant to the Paperwork Reduction Act

In the Preliminary Results, the Bureau indicated that it planned to conduct a survey of consumers. The purpose of the survey was to assess consumer awareness of arbitration agreements, as well as consumer perceptions of, and expectations about, dispute resolution with respect to disputes between consumers and financial services providers.[152] Pursuant to the Paperwork Reduction Act (PRA), the Bureau also undertook an extensive public outreach and engagement process in connection with its consumer survey (the results of which are published in Section 3 of the Study). The Bureau obtained approval for the consumer survey from the Office of Management and Budget (OMB), and each version of the materials submitted to OMB during this process included draft versions of the survey instrument.[153] In June 2013, the Bureau published a Federal Register notice that solicited public comment on its proposed approach to the survey and received 17 comments in response. In July 2013, the Bureau hosted two roundtable meetings to consult with various stakeholders including industry groups, banking trade associations, and consumer advocates. After considering the comments and conducting two focus groups to help refine the survey, but before undertaking the survey, the Bureau published a second Federal Register notice in May 2014, which generated an additional seven comments.

D. The March 2015 Arbitration Study

The Bureau ultimately focused on nine empirical topics in the Study:

1. The prevalence of arbitration agreements in contracts for consumer financial products and services and their main features (Section 2 of the Study);

2. Consumers' understanding of dispute resolution systems, including arbitration and the extent to which dispute resolution clauses affect consumer's purchasing decisions (Section 3 of the Study);

3. How arbitration procedures differ from procedures in court (Section 4 of the Study);

4. The volume of individual consumer financial arbitrations, the types of claims, and how they are resolved (Section 5 of the Study);

5. The volume of individual and class consumer financial litigation, the types of claims, and how they are resolved (Section 6 of the Study);

6. The extent to which consumers sue companies in small claims court with respect to disputes involving consumer financial services (Section 7 of the Study);

7. The size, terms, and beneficiaries of consumer financial class action settlements (Section 8 of the Study);

8. The relationship between public enforcement and consumer financial class actions (Section 9 of the Study); and

9. The extent to which arbitration agreements lead to lower prices for consumers (Section 10 of the Study).

As described further in each subsection below, the Bureau's research on several of these topics drew in part upon data sources previously unavailable to researchers. For example, the AAA voluntarily provided the Bureau with case files for consumer arbitrations filed from the beginning of 2010, approximately when the AAA began maintaining electronic records, to the end of 2012. Compared to data sets previously available to researchers, the AAA case files covered a much longer period and were not limited to case files for cases resulting in an award. Using this data set, the Bureau conducted the first analysis of arbitration frequency and outcomes specific to consumer financial products and services.[154] Similarly, the Bureau submitted orders to financial service providers in the checking account and payday loan markets, pursuant to its market monitoring authority under Dodd-Frank section 1022(c)(4), to obtain a sample set of agreements of those institutions. Using these agreements, among others gathered from other sources, the Bureau conducted the most comprehensive analysis to date of the arbitration content of contracts for consumer financial products and services.[155]

The results of the Study also broke new ground because the Study, compared to prior research, generally considered larger data sets than had been reviewed by other researchers while also narrowing its analysis to consumer financial products and services. In total, the Study included the review of over 850 agreements for certain consumer financial products and services; 1,800 consumer financial services arbitrations filed over a three-year period; a random sample of the nearly 3,500 individual consumer finance cases identified as having been filed over a period of three years in Federal and selected State courts; and all of the 562 consumer finance class actions identified in Federal and selected State courts of the same time period. The Study also included over 40,000 filings in State small claims courts over the course of a single year. The Bureau supplemented this research by assembling and analyzing all of the more than 400 consumer financial class action settlements in Federal courts over a five-year period and more than 1,100 State and Federal public enforcement actions in the consumer finance area.[156] Start Printed Page 33221The Study also included the findings of the Bureau's survey of over 1,000 credit card consumers, focused on exploring their knowledge and understanding of arbitration and other dispute resolution mechanisms. The sections below describe in detail the process the Bureau followed in undertaking each section of the Study, summarize the main results of each section, and then summarizes and addresses criticisms of the Study results.[157]

Before doing so, one preliminary observation is in order. With rare exception, the commenters did not criticize the methodologies the Bureau used to assemble the various data sets used in the Study or the analyses the Bureau conducted of these data. Rather, to the extent commenters addressed the Study itself—as distinguished from the interpretation or significance of the Study's findings—in the main the commenters suggested that the Bureau should have engaged in additional analyses.

As explained in more detail below, in many instances the analyses that commenters suggested were not feasible given the limitations on the data available to the Bureau. For example, as discussed below, the Bureau did not have a feasible way of studying the actual costs that financial service providers incur in defending class actions or studying the outcomes of arbitration or individual litigation cases that were settled (or resolved in a manner consistent with a settlement) unless the case records reflected the settlement terms. In other instances, the analyses the commenters suggested—such as studying the satisfaction of the small number of consumers who file arbitration cases—were not, in the Bureau's judgment, relevant to determining whether limitations on arbitration agreements are in the public interest and for the protection of consumers. And, in other instances, resource limitations required the Bureau to deploy random sampling techniques or to limit the number of years under study while still obtaining representative data.

Beyond that, it is worth noting that it is the case with any research—even research as extensive and painstaking as the Study—that it is always possible, ex post, to think of additional questions that could have been asked, additional data that could have been procured, or additional analyses that could have been performed. The Bureau does not interpret section 1028's direction to study the use of arbitration agreements in consumer finance to require the Bureau to research every conceivably relevant question or to exhaust every conceivable data source as a precondition to exercising the regulatory authority contained in that section. As discussed in substantial detail below in Part VI, the Bureau believes that its extensive research provides ample evidence that the restrictions on the use of arbitration agreements contained in this Rule are in the public interest and for the protection of consumers.

1. Prevalence and Features of Arbitration Agreements (Section 2 of Study)

Section 2 of the Study addressed two central issues relating to the use of arbitration agreements: How frequently such agreements appear in contracts for consumer financial products and services and what features such agreements contain. Among other findings, the Study determined that arbitration agreements are commonly used in contracts for consumer financial products and services and that the AAA is the primary administrator of consumer financial arbitrations.

To conduct this analysis, the Bureau reviewed contracts for six product markets: Credit cards, checking accounts, general purpose reloadable (GPR) prepaid cards, payday loans, private student loans, and mobile wireless contracts governing third-party billing services.[158] Previous studies that analyzed the prevalence and features of arbitration agreements in contracts for consumer financial products and services either relied on small samples or limited their study to one market.[159] As a result, the Bureau's inquiry in Section 2 of the Study represents the most comprehensive analysis to date of the arbitration content of contracts for consumer financial products and services.

The Bureau's sample of credit card contracts consisted of contracts filed by 423 issuers with the Bureau as required by the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) as implemented by Regulation Z.[160] Taken together, these contracts covered nearly all consumers in the credit card market. For deposit accounts, the Bureau identified the 100 largest banks and the 50 largest credit unions, and constructed a random sample of 150 small and mid-sized banks. The Bureau obtained the deposit account agreements for these institutions by downloading them from the institutions' Web sites and through orders sent to institutions using the Bureau's market monitoring authority.

For GPR prepaid cards, the Bureau's sample included agreements from two sources. The Bureau gathered agreements for 52 GPR prepaid cards that were listed on the Web sites of two major card networks and a Web site that provided consolidated card information as of August 2013. The Bureau also obtained agreements from GPR prepaid card providers that had been included in several recent studies of the terms of GPR prepaid cards and that continued to be available as of August 2014.[161] For the storefront payday loan market, the Bureau again used its market monitoring authority to obtain a sample of 80 payday loan contracts from storefront payday lenders in California, Texas, and Florida.[162] For the private student loan market, the Bureau sampled seven private student loan contracts plus the form contract used by 250 credit unions that use a leading credit union service organization.[163] For the mobile wireless market, the Bureau reviewed the wireless contracts of the eight largest facilities-based providers of mobile wireless services [164] which also govern third-party billing services.[165]

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The analysis of the agreements that the Bureau collected found that tens of millions of consumers use consumer financial products or services that are subject to arbitration agreements, and that, in some markets such as checking accounts and credit cards, large providers are more likely to have the agreements than small providers.[166] In the credit card market, the Study found that small bank issuers were less likely to include arbitration agreements than large bank issuers.[167] Likewise, only 3.3 percent of credit unions in the credit card sample used arbitration agreements.[168] As a result, while 15.8 percent of credit card issuers included such agreements in their contracts, 53 percent of credit card loans outstanding were subject to such agreements.[169] In the checking account market, the Study again found that larger banks tended to include arbitration agreements in their consumer checking contracts (45.6 percent of the largest 103 banks, representing 58.8 percent of insured deposits).[170] In contrast, only 7.1 percent of small-and mid-sized banks and 8.2 percent of credit unions used arbitration agreements.[171] In the GPR prepaid card and payday loan markets, the Study found that the substantial majority of contracts—92.3 percent of GPR prepaid card contracts and 83.7 percent of the storefront payday loan contracts—included such agreements.[172] In the private student loan and mobile wireless markets, the Study found that most of the large companies—85.7 percent of the private student loan contracts and 87.5 percent of the mobile wireless contracts—used arbitration agreements.[173]

In addition to examining the prevalence of arbitration agreements, Section 2 of the Study reviewed 13 features sometimes included in such agreements.[174] One feature the Bureau studied was which entity or entities were designated by the contract to administer the arbitration. The Study found that the AAA was the predominant arbitration administrator for all the consumer financial products the Bureau examined in the Study. The contracts studied specified the AAA as at least one of the possible arbitration administrators in 98.5 percent of the credit card contracts with arbitration agreements; 98.9 percent of the checking account contracts with arbitration agreements; 100 percent of the GPR prepaid card contracts with arbitration agreements; 85.5 percent of the storefront payday loan contracts with arbitration agreements; and 66.7 percent of private student loan contracts with arbitration agreements.[175] The contracts specified the AAA as the sole option in 17.9 percent of the credit card contracts with arbitration agreements; 44.6 percent of the checking account contracts with arbitration agreements; 63.0 percent to 72.7 percent of the GPR prepaid card contracts with arbitration agreements; 27.4 percent of the payday loan contracts with arbitration agreements; and one of the private student loan contracts the Bureau reviewed.[176]

In contrast, JAMS is specified in relatively fewer arbitration agreements. The Study found that the contracts specified JAMS as at least one of the possible arbitration administrators in 40.9 percent of the credit card contracts with arbitration agreements; 34.4 percent of the checking account contracts with arbitration agreements; 52.9 percent of the GPR prepaid card contracts with arbitration agreements; 59.2 percent of the storefront payday loan contracts with arbitration agreements; and 66.7 percent of private student loan contracts with arbitration agreements. JAMS was specified as the sole option in 1.5 percent of the credit card contracts with arbitration agreements (one contract); 1.6 percent of the checking account contracts with arbitration agreements (one contract); 63.0 percent to 72.7 percent of the GPR prepaid card contracts with arbitration agreements; and none of the payday loan or private student loan contracts the Bureau reviewed.[177]

The Bureau's analysis also found, among other things, that nearly all the arbitration agreements studied included provisions stating that arbitration may not proceed on a class basis. Across each product market, 85 percent to 100 percent of the contracts with arbitration agreements—covering over 99 percent of market share subject to arbitration in the six product markets studied—included such no-class-arbitration provisions.[178] Most of the arbitration agreements that included such provisions also contained an “anti-severability” provision stating that, if the no-class-arbitration provision were to be held unenforceable, the entire arbitration agreement would become unenforceable as a result.[179]

The Study found that most of the arbitration agreements contained a small claims court “carve-out,” permitting either the consumer or both parties to file suit in small claims court.[180] The Study similarly explored the number of arbitration provisions that allowed consumers to “opt out” or otherwise reject an arbitration agreement. To exercise the opt-out right, consumers must follow stated procedures, which usually requires all authorized users on an account to physically mail a signed written document to the issuer (electronic submission is permitted only rarely), within a stated time limit. With the exception of storefront payday loans and private student loans, the substantial majority of arbitration agreements in each market studied generally did not include opt-out provisions.[181]

The Study analyzed three different types of cost provisions: Provisions addressing the initial payment of arbitration fees; provisions that addressed the reallocation of arbitration fees in an award; and provisions addressing the award of attorney's fees.[182] Most arbitration agreements reviewed in the Study contained provisions that had the effect of capping consumers' upfront arbitration costs at or below the AAA's maximum consumer fee thresholds. These same arbitration agreements took noticeably different approaches to the reallocation Start Printed Page 33223of arbitration fees in the arbitrator's award, with approximately one-fifth of the arbitration agreements in credit card, checking account, and storefront payday loan markets permitting shifting company fees to consumers.[183] The Study also found that only a small number of agreements representing negligible shares of the relevant markets directed or permitted arbitrators to award attorney's fees to prevailing companies.[184] A significant share of arbitration agreements across almost all markets did not address attorney's fees.[185]

Aside from costs more generally, the Study found that many arbitration agreements permit the arbitrator to reallocate arbitration fees from one party to the other. About one-third of credit card arbitration agreements, one-fourth of checking account arbitration agreements, and half of payday loan arbitration agreements expressly permitted the arbitrator to shift attorney's fees to the consumer.[186] However, as the Study pointed out, the AAA's consumer arbitration fee schedule, which became effective March 1, 2013, restricts such reallocation.[187] With respect to another type of provision that affects consumers' costs in arbitration—where the arbitration must take place—the Study noted that most, although not all, arbitration agreements contained provisions requiring or permitting hearings to take place in locations close to the consumer's place of residence.[188]

Further, most of the arbitration agreements the Bureau studied contained disclosures describing the differences between arbitration and litigation in court. Most agreements disclosed expressly that the consumer would not have a right to a jury trial, and most disclosed expressly that the consumer could not be a party to a class action in court.[189] Depending on the product market, between one-quarter and two-thirds of the agreements disclosed four key differences between arbitration and litigation in court: No jury trial is available in arbitration; parties cannot participate in class actions in court; discovery is typically more limited in arbitration; and appeal rights are more limited in arbitration.[190] The Study found that this language was often capitalized or in boldfaced type.[191]

The Study also examined whether arbitration agreements limited recovery of damages—including punitive or consequential damages—or specified the time period in which a claim had to be brought. The Study determined that most agreements in the credit card, payday loan, and private student loan markets did not include damages limitations. However, the opposite was true of agreements in checking account contracts, where more than three-fourths of the market included damages limitations; GPR prepaid card contracts, almost all of which included such limitations; and mobile wireless contracts, all of which included such limitations. A review of consumer agreements without arbitration agreements revealed a similar pattern, albeit with damages limitations being somewhat less common.[192]

The Study also found that a minority of arbitration agreements in two markets set time limits other than the statute of limitations that would apply in a court proceeding for consumers to file claims in arbitration. Specifically, these types of provisions appeared in 28.4 percent and 15.8 percent of the checking account and mobile wireless agreements by market share, respectively.[193] Again, a review of consumer agreements without arbitration agreements showed that 10.7 percent of checking account agreements imposed a one-year time limit for consumer claims.[194] No storefront payday loan, private student loan, or mobile wireless contracts in the sample without arbitration agreements had such time limits.[195]

The Study assessed the extent to which arbitration agreements included contingent minimum recovery provisions, which provide that consumers would receive a specified minimum recovery if an arbitrator awards the consumer more than the amount of the company's last settlement offer. The Study found that such provisions were uncommon; they appeared in three out of the six private student loan agreements the Bureau reviewed, but, in markets other than student loans, they appeared in 28.6 percent or less of the agreements the Bureau studied.[196]

Comments received regarding the scope of Section 2 are addressed in Part III.E below.

2. Consumer Understanding of Dispute Resolution Systems, Including Arbitration (Section 3 of Study)

Section 3 of the Study presented the results of the Bureau's telephone survey of a nationally representative sample of credit card holders.[197] The survey examined two main topics: (1) The extent to which dispute resolution clauses affected consumer's decisions to acquire credit cards; and (2) consumers' awareness, understanding, and knowledge of their rights in disputes against their credit card issuers. In late 2014, the Bureau's contractor completed telephone surveys with 1,007 respondents who had credit cards.[198]

The consumer survey found that when presented with a hypothetical situation in which the respondents' credit card issuer charged them a fee they knew to be wrongly assessed and in which they exhausted efforts to obtain relief from the company through customer service, only 2.1 percent of respondents stated that they would seek legal advice or consider legal proceedings.[199] Almost the same proportion of respondents stated that they would simply pay for the improperly assessed fee (1.7 percent).[200] A majority of respondents (57.2 percent) said that they would cancel their cards.[201]

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Respondents also reported that factors relating to dispute resolution—such as the presence of an arbitration agreement—played little to no role when they were choosing a credit card. When asked an open-ended question about all the factors that affected their decision to obtain the credit card that they use most often for personal use, no respondents volunteered an answer that referenced dispute resolution procedures.[202] When presented with a list of nine features of credit cards—features such as interest rates, customer service, rewards, and dispute resolution procedures—and asked to identify those features that factored into their decision, respondents identified dispute resolution procedures as being relevant less often than any other option.[203]

As for consumers' knowledge and default assumptions as to the means by which disputes between consumers and financial service providers can be resolved, the survey found that consumers generally lacked awareness regarding the effects of arbitration agreements. Of the survey's 1,007 respondents, 570 respondents were able to identify their credit card issuer with sufficient specificity to enable the Bureau to find the issuer's standard credit card agreement and thus to compare the respondents' beliefs with respect to the terms of their agreements with the agreements' actual terms.[204] Among the respondents whose credit card contracts did not contain an arbitration agreement, when asked if they could sue their credit card issuer in court, 43.7 percent answered “Yes,” 7.7 percent answered “No,” and 47.8 percent answered “Don't Know.” [205] At the same time, among the respondents whose credit card agreements did contain arbitration requirements, 38.6 percent of respondents answered “Yes,” while 6.8 percent answered “No,” and 54.4 percent answered “Don't Know.” [206] Even the 6.8 percent of respondents who stated that they could not sue their credit card issuers in court may not have had knowledge of the arbitration agreement: As noted above, a similar proportion of respondents without an arbitration agreement in their contract—7.7 percent compared to 6.8 percent—reported that they could not sue their issuers in court.[207] When asked if they could participate in class action lawsuits against their credit card issuer, more than half of the respondents whose contracts had pre-dispute arbitration agreements thought they could participate (56.7 percent).[208]

Respondents were also generally unaware of any opt-out opportunities afforded by their issuer. Only one respondent whose current credit card contract permitted opting out of the arbitration agreement recalled being offered such an opportunity.[209]

Comments Received on Section 3 of the Study

An industry commenter suggested that the Bureau should conduct further analyses to gain a better understanding of consumer comprehension with respect to arbitration agreements. The commenter asserted that this was appropriate given statements from the Bureau that many consumers do not even know that they are bound by an arbitration agreement. A different industry commenter thought the Bureau should have asked consumers if they would decline to file a class action against their credit card issuer because the presence of an arbitration agreement would substantially lower their likelihood of classwide relief. This commenter also said that, rather than asking consumers hypothetical questions about what they would do if an improper charge appeared on their account in the future, the Bureau should have asked whether such a charge had appeared on a consumer's account in the past and, if so, what the consumer did about it. Relatedly, an industry commenter suggested that the Bureau should have surveyed consumers about their baseline level of understanding of other key provisions of their card agreements. With such a baseline, the commenter said that the Bureau could have evaluated whether consumers pay greater, less, or the same attention to dispute resolution clauses as to other clauses important to them—and why that might be so. Absent such data, the commenter said that the survey is meaningless.

A law firm commenter writing on behalf of an industry participant suggested that the Study's consumer survey was flawed because the Bureau only surveyed credit card consumers and that the Bureau should not draw general conclusions about consumers' understanding of dispute resolution systems from survey results in a single market in part because credit card agreements are often provided simultaneously with an access device rather than when a consumer applies for a card. This is because, the commenter suggested, that credit card contracts are unique, because consumers do not receive the complete loan agreement until they receive the card itself.

Response to Comments Received on Section 3

The Bureau disagrees with the commenter that suggested that the Bureau should have conducted further analyses of consumer comprehension. The Bureau, in Section 3 of the Study, explored in detail consumer comprehension issues with respect to arbitration agreements using a nationally representative telephone survey. As is discussed in the Study, among other findings, the Bureau determined that a majority of respondents whose credit cards include pre-dispute arbitration agreements did not know if they could sue their issuers in court. Nor does the Bureau agree that asking consumers about their likelihood to file a class action given an arbitration agreement would result in useful information. As the Study showed, the proposal and this final rule discuss, and several industry commenters acknowledged, regardless of the level of individual consumer awareness, arbitration agreements do in fact have the effect of blocking class actions that are filed and suppressing the filing of many more cases, consumers' awareness of this fact does not seem relevant. Insofar as cases are blocked, further focus on consumers' comprehension of this fact is unnecessary.

The Bureau acknowledges it did not develop a baseline of understanding of other key credit card agreement terms. However, the Bureau disagrees that the failure to do so renders the survey “meaningless.” The survey found that consumers do not shop for credit cards based on the type of dispute resolution process provided in the credit card agreement and that consumers do not understand the consequences of choosing a card with an arbitration provision. Whether consumers have greater or lesser understanding of other Start Printed Page 33225provisions of credit card agreements does not seem to the Bureau to be relevant in assessing whether limitations on the use of arbitration agreements is for the protection of consumers and in the public interest.[210]

Regarding the commenter that suggested that the survey of credit card customers cannot be extrapolated to other markets because credit card agreements are often provided simultaneously with an access device (and not at the time of application), the Bureau disagrees that this is a relevant reason not to extrapolate the results of the survey. Even if consumers do not receive the terms at the time of application, they do receive them before they activate a credit card. At that point, they are free to reject the credit card and its terms. The survey showed that few make that choice; the Bureau has no reason to believe that such a decision is different in other markets. Nor has this or any other commenter provided evidence to the contrary.

3. Comparison of Procedures in Arbitration and in Court (Section 4 of Study)

While the Study generally focused on empirical analysis of dispute resolution, Section 4 of the Study provided a brief qualitative comparison between the procedural rules that apply in court and in arbitration. Particularly given changes to the AAA consumer fee schedule that took effect March 1, 2013, the procedural rules are relevant to understanding the context from which the Study's empirical findings arise.

The Study's procedural overview described court litigation as reflected in the Federal Rules and, as an example of a small claims court process, the Philadelphia Municipal Court Rules of Civil Practice. It compared those procedures to arbitration procedures as set out in the rules governing consumer arbitrations administered by the two leading arbitration administrators in the United States, the AAA and JAMS. The Study compared arbitration and court procedures according to eleven factors: The process for filing a claim, fees, legal representation, the process for selecting the decision maker, discovery, dispositive motions, class proceedings, privacy and confidentiality, hearings, judgments and awards, and appeals.

Filing a Claim and Fees. The Study described the processes for filing a claim in court and in arbitration. With respect to fees, the Study noted that the fee for filing a case in Federal court is $350 plus a $50 administrative fee—paid by the party filing suit, regardless of the amount being sought—and the fee for a small claims filing in Philadelphia Municipal Court ranges from $63 to $112.38.[211] In arbitration, under the AAA consumer fee schedule that took effect March 1, 2013, the consumer pays a $200 administrative fee, regardless of the amount of the claim and regardless of the party that filed the claim; in JAMS arbitrations, when a consumer initiates arbitration against the company, the consumer is required to pay a $250 fee.[212] Prior to March 1, 2013, arbitrators in AAA consumer arbitrations had discretion to reallocate fees in the final award. After March 1, 2013, arbitrators can only reallocate arbitration fees in the award if required by applicable law or if the claim “was filed for purposes of harassment or is patently frivolous.” [213]

Parties in court generally bear their own attorney's fees, unless a statute or contract provision provides otherwise or a party is shown to have acted in bad faith. However, under several consumer protection statutes, providers may be liable for attorney's fees.[214] For example, under the AAA's Consumer Rules, “[t]he arbitrator may grant any remedy, relief, or outcome that the parties could have received in court, including awards of attorney's fees and costs, in accordance with the law(s) that applies to the case.” [215]

Representation. The Study noted that in most courts, individuals can either represent themselves or hire an attorney as their representative.[216] In arbitration, the rules are more flexible than in many courts about the identity of party representatives. For example, the AAA Consumer Rules permit a party to be represented “by counsel or other authorized representative, unless such choice is prohibited by applicable law.” [217] Some States, however, prohibit non-attorneys to represent parties in arbitration.[218]

Selecting the Decisionmaker. The Study noted that court rules generally do not permit parties to reject the judge assigned to hear their case.[219] In arbitration, if the parties agree on the individual they want to serve as arbitrator, they can choose that person to decide their dispute; if the parties cannot agree on the arbitrator, the arbitrator is selected following the procedure specified in their contract or in the governing arbitration rules.[220]

Discovery. The Study stated that the Federal Rules provide a variety of means by which a party can discover evidence in the possession of the opposing party or a third party, while the right to discovery in arbitration is more limited.[221]

Dispositive Motions. The Study noted that the Federal Rules provide for a variety of motions by which a party can seek to dispose of the case, either in whole or in part, while arbitration rules typically do not expressly authorize dispositive motions.[222]

Class Proceedings. The Study described the procedural rules for class actions under Federal Rule 23 and noted that the Bureau was unaware of a class action procedure for small claims court.[223] The Study further noted that the AAA and JAMS have adopted rules, derived from Federal Rule 23, for administering arbitrations on a class basis.[224]

Privacy and Confidentiality. The Study stated that court litigation (including small claims court) is a public process, with proceedings conducted in public courtrooms and the record generally available for public review; by comparison, arbitration is a private process in that there is no particular mechanism for public transparency. Absent an agreement by the parties, however, it is not by law required to be confidential.[225]

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Hearings. The Study stated that if a case in court does not settle before trial or get resolved on a dispositive motion, it will proceed to trial in the court in which the case was filed. A jury may be available for these claims. On the other hand, if an arbitration filing does not settle, the arbitrator can resolve the parties' dispute based on the parties' submission of documents alone, by a telephone hearing, or by an in-person hearing.[226]

Judgments/Awards. The Study further noted that the outcome of a case in court is reflected in a judgment, which the prevailing party can enforce through various means of post-judgment relief, and that the outcome of a case in arbitration is reflected in an award, which, once turned into a court judgment, can be enforced the same as any other court judgment.[227]

Appeals. The Study stated that parties in court can appeal a judgment against them to an appellate court; by comparison, parties can challenge arbitration awards in court only on the more limited grounds set out in the FAA.[228]

Comments Received on Section 4 of the Study

A nonprofit commenter criticized the Bureau's analysis of arbitration procedures by noting that it is the shortest section of the Study and that the Bureau did not attempt to estimate the actual transaction cost for consumers in pursuing claims in court as compared to arbitration. A research center commenter suggested that the Bureau should have performed a more detailed analysis of how judges supervise arbitration and how many businesses have adopted provisions similar to that at issue in the Concepcion case [229] because this information would aid the Bureau's analysis of the effectiveness of arbitration clauses for consumers.

Response to Comments Received on Section 4

While the review of arbitration procedures was shorter than other chapters that report on the results of empirical analyses undertaken for the Study, the Bureau believes its analysis to be fulsome; the commenter—other than offering the transaction cost criticism as discussed in the rest of this paragraph—did not explain what more the Bureau's analysis could have done nor did it identify other specific topics for analysis. With regard to the comparison of costs, the Bureau notes that the Study provided a detailed discussion of the fees a consumer would need to pay in (a) Federal court; (b) small claims court, using Philadelphia Municipal Court as an example; and (c) arbitration, using the AAA and JAMS as examples.[230] The Bureau notes that the Study included a discussion regarding available fee waivers for indigent plaintiffs, as well as the ability of the arbitrator to reallocate the initial fee distribution.[231] The Study also assessed the frequency with which consumers proceeded without counsel in arbitration proceedings and in court proceedings.

As for the commenter that suggested that the Bureau should have looked at how judges supervise arbitration, the commenter did not explain what additional insights could be gained from such an analysis. As for the commenter's contentions regarding Concepcion-like clauses, the Bureau notes that Section 2 found such clauses to be rare in consumer finance.[232]

4. Consumer Financial Arbitrations: Frequency and Outcomes (Section 5 of Study)

Section 5 of the Study analyzed arbitrations of consumer finance disputes between consumers and consumer financial services providers. This section tallied the frequency of such arbitrations, including the number of claims brought and a classification of which claims were brought. It also examined outcomes, including how cases were resolved and how consumers and companies fared in the relatively small share of cases that an arbitrator resolved on the merits. The Study performed this analysis for arbitrations concerning credit cards, checking accounts, payday loans, GPR prepaid cards, private student loans, and automobile purchase loans. To conduct this analysis, the Bureau used electronic case files from the AAA.[233] Pursuant to a non-disclosure agreement, the AAA voluntarily provided the Bureau its electronic case records for consumer disputes filed during the years 2010, 2011, and 2012.[234] Because the AAA provided the Bureau with case records for all disputes filed in arbitration during this period, Section 5 of the Study provided a reasonably complete picture of the frequency and typology of claims that consumers and companies file in arbitration.[235]

The Study identified about 1,847 filings in total—about 616 per year—with the AAA for the six product markets combined.[236] According to the standard AAA claim forms, about 411 arbitrations per year were designated as having been filed by consumers alone; the remaining filings were designated as having been filed by companies or filed as mutual submissions by both the consumer and the company.[237] Forty percent of the arbitration filings involved a dispute over the amount of debt a consumer allegedly owed to a Start Printed Page 33227company, with no additional affirmative claim by either party; in 31 percent of the filings, parties brought affirmative claims with no formal dispute about the amount of debt owed; in another 29 percent of the filings, consumers disputed alleged debts but also brought affirmative claims against companies.[238]

Although claim amounts varied by product, in disputes involving affirmative claims by consumers, the average amount of such claims was approximately $27,000 and the median amount of such claims was $11,500.[239] In debt disputes, the average disputed debt amount was approximately $15,700; the median was approximately $11,000.[240] Across all six product markets, about 25 cases per year involved affirmative claims of $1,000 or less.[241]

Overall, consumers were represented by counsel in 63.2 percent of arbitration cases.[242] The rate of representation, however, varied widely based on the product at issue; in payday and student loan disputes, for example, consumers had counsel in about 95 percent of all cases filed.[243]

To analyze the outcomes in arbitration, the Bureau confined its analysis to claims filed in 2010 and 2011 in order to limit the number of cases that were pending at the close of the period for which the Bureau had data. The Bureau's analysis of arbitration outcomes was limited by a number of factors that are unavoidable in any review of dispute resolution.[244] Among other issues, settlement terms were rarely known in cases in which the parties settled their disputes. Indeed, in many cases, even the fact that a settlement occurred was difficult to discern because the parties were not required to notify the AAA of a settlement.[245] Accordingly, on the one hand, an incomplete file could indicate a settlement, or, on the other hand, that the proceeding was still in progress but relatively dormant. Because parties settled claims strategically, disputes that did reach an arbitrator's decision on the merits were not a representative sample of the disputes that were filed.[246] For example, if parties settled all strong consumer (or company) claims, then consumers (or companies) may appear to do poorly before arbitrators because only weak claims are heard at hearings. As the Study explained, these limitations are inherent in a review of this nature and unavoidable.

With those significant caveats noted, the Study determined that in 32.2 percent of the 1,060 disputes filed during the first two years of the Study period (341 disputes) arbitrators resolved the dispute on the merits. In 23.2 percent of the disputes (246 disputes), the record showed that the parties settled. In 34.2 percent of disputes (362 disputes), the available AAA case record ended in a manner that was consistent with settlement—for example, a voluntary dismissal of the action—but the Bureau could not definitively determine that settlement occurred. In the remaining 10.5 percent of disputes (111 disputes), the available AAA case record ended in a manner that suggested the dispute is unlikely to have settled; for example, the AAA may have refused to administer the dispute because it determined that the arbitration agreement at issue was inconsistent with the AAA's Consumer Due Process Protocol.[247]

As noted above, only a small portion of filed arbitrations reached a decision. The Study identified 341 cases filed in 2010 and 2011 that were resolved by an arbitrator and for which the outcome was ascertainable.[248] Of these 341 cases, 161 disputes involved an arbitrator decision on a consumer's affirmative claim. Of the cases in which the Bureau determined the results, consumers obtained relief on their affirmative claims in 32 disputes (20.3 percent).[249] Consumers obtained debt forbearance in 19.2 percent of the cases in which an arbitrator could have provided some form of debt forbearance (46 cases).[250] The total amount of affirmative relief awarded in all cases was $172,433 and total debt forbearance was $189,107.[251] Of the 52 cases filed in 2010 and 2011 that involved consumer affirmative claims of $1,000 or less, arbitrators resolved 19, granting affirmative relief to consumers in four such cases.[252] With respect to disputes that involved company claims in 2010 and 2011, the Bureau determined the terms of arbitrator awards relating to company claims in 244 of the 421 disputes.[253] Arbitrators provided companies some type of relief in 227, or 93.0 percent, of those disputes. In those 227 disputes, companies won a total of $2,806,662.[254]

The Study found that consumers appealed very few arbitration decisions and companies appealed none. Specifically, it found four arbitral appeals filed between 2010 and 2012. Consumers without counsel filed all four. Three of the four were closed after the parties failed to pay the required administrator fees and arbitrator deposits. In the fourth, a three-arbitrator panel upheld an arbitration award in favor of the company after a 15-month appeal process.[255]

The Study also found that very few class arbitrations were filed. The Study identified only two filed with AAA between 2010 and 2012. One was still pending on a motion to dismiss as of September 2014. The other file contained no information other than the arbitration demand that followed a State court decision granting the company's motion seeking arbitration.[256]

The Study also found that, when there was a decision on the merits by an arbitrator, the average time to resolution was 179 days, and the median time to resolution was 150 days. When the record definitively indicated that a case had settled, the median time to settlement was 155 days from the filing of the initial claim.[257] Further, the Study found that more than half of the filings that reached a decision were resolved by “desk arbitrations,” meaning that the proceedings were resolved solely on the basis of documents submitted by the parties (57.8 percent). Approximately one-third (34.0 percent) of proceedings were resolved by an in-person hearing, 8.2 percent by telephonic hearings, and 2.4 Start Printed Page 33228percent through a dispositive motion with no hearing.[258] When there was an in-person hearing, the Study estimated that consumers travelled an average of 30 miles and a median of 15 miles to attend the hearing.[259]

Comments Received on Section 5 of the Study

An industry commenter criticized the Study's review of arbitration processes for its failure to assess whether the AAA due process protocol was effective in ensuring arbitrator neutrality. The commenter suggested that the Bureau could have reviewed decisions of individual arbitrators to see if they had a pattern of favoring the companies over consumers. This commenter further criticized the Bureau for making no effort to evaluate whether arbitrators' decisions were properly decided.

Similarly, a Congressional commenter expressed concern that the Study failed to thoroughly analyze and compare arbitration programs and program features. The commenter suggested that the Bureau should have reviewed whether certain features of arbitration programs produce better consumer outcomes and enhance the consumer experience as compared to others, but did not identify specifically which features warranted additional analysis.

An industry commenter took issue with the Bureau's assertion that the disputes it reviewed involving AAA represent substantially all consumer finance arbitration disputes that were filed during the Study period, noting that JAMS was named as the administrator at least 50 percent as often as AAA in the agreements reviewed by the Bureau.

Another industry commenter suggested that the Study's data regarding disputes reached on the merits were not representative of the sample because only 32 percent of cases had a judgment on the merits, while the rest remained dormant or settled on unknown terms.

Response to Comments on Section 5 of the Study

With respect to the commenter that criticized the Bureau for not evaluating whether certain arbitration programs (such as those that limit consumer costs, allow for “bonus” awards,[260] or other benefits) provide better consumer outcomes, the Bureau notes that the case records available for the Study did not necessarily include the terms of the arbitration agreement and that, except for the cases that were decided by an arbitrator, the case records also did not include the terms of the outcomes. Thus, the analysis of arbitration programs (as expressed in arbitration agreements) suggested by this commenter was not feasible and, in any event, would not have impacted the central finding, discussed below, that an extremely small number of consumers avail themselves of any arbitration process under any scheme.

As to the commenter that criticized the Bureau for not evaluating whether arbitrators deciding AAA consumer cases were biased, the Bureau notes that, for those cases that were resolved with a written opinion, the Study reported whether the decision favored the consumer or the financial institution and the amount of the award, if any. The Study also explored whether arbitrators favored parties that were repeat players before them.[261] As the Study noted, commentators have long raised concerns that such a repeat player bias may occur given incentives some arbitrators may have to curry favor while seeking future appointments.[262] The Bureau could not evaluate outcomes in cases that settled or cases that were resolved in a manner consistent with a settlement. The Bureau also did not evaluate whether arbitrators' decisions were “properly decided” as the Bureau does not believe it would have a basis for making such a determination. As discussed in Part VI below, this rulemaking does not rely on a finding that arbitration proceedings are fair (or not) but rather that consumers do not use arbitration to resolve disputes in any meaningful volume.

With respect to the industry commenter that suggested the Study undercounted individual arbitration because it studied only those filed with the AAA and not JAMS, the Bureau noted in the Study and the proposal that JAMS appears to handle a relatively small number of consumer finance arbitrations per year. For example, it reported to the Bureau that it handled 115 consumer finance arbitrations in 2015 (an unknown number of which were filed by consumers as opposed to providers),[263] significantly fewer than the approximately 600 per year the Bureau found filed with the AAA in the Study. Thus, the Bureau believes that the relevant data supports a conclusion that the AAA cases represent a substantial majority of consumer finance arbitrations that occur. Further, even if the Bureau were to assume that JAMS handled a consumer finance caseload equal to half of the AAA caseload (based on the fact that JAMS was named as an administrator about 50 percent as often as AAA), that would still suggest that there are fewer than 900 consumer financial services cases per year as between the two largest administrators.

As for the commenter that contended that the decisions reached on the merits are not representative of the whole, the Bureau notes that it does not contend otherwise. It noted in the Study that a merits-decision occurred less frequently than other forms of resolution, such as settlement.[264]

5. Consumer Financial Litigation: Frequency and Outcomes (Section 6 of Study)

The Study's review of consumer financial litigation in court represented, the Bureau believes, the only analysis of the frequency and outcomes of consumer finance cases to date. While there is a large body of research regarding cases filed in court generally, preexisting studies of consumer finance cases either assessed only the number of filings—not typologies and outcomes, as the Study did—or focused on the frequency of cases filed under individual statutes.[265] The Study performed this analysis for individual court litigation concerning five of the same six product markets as those covered by its analysis of consumer financial arbitration: Credit cards, checking accounts and debit cards; payday loans; GPR prepaid cards; and private student loans.[266] In addition, the Study analyzed class cases filed in these five markets and also with respect to automobile loans. This analysis focused on cases filed from 2010 to 2012, as an analogue to the years for which electronic AAA records were available, Start Printed Page 33229and captured outcomes reflected on dockets through February 28, 2014.

The Bureau's class action litigation analysis extended to all Federal district courts. To conduct this analysis, the Bureau collected complaints concerning these six products using an electronic database of pleadings in Federal district courts.[267] The Bureau also reviewed Federal multi-district litigation (MDL) proceedings to identify additional consumer financial complaints filed in Federal court. After the Bureau identified its set of Federal class complaints concerning the six products and individual complaints concerning the five products, it collected the docket sheet from the Federal district court in which the complaint was filed in order to analyze relevant case events. The Bureau also collected State court class action complaints from three States (Utah, Oklahoma, and New York) and seven large counties that had a public electronic database in which complaints were regularly available.[268] The Bureau determined that it was feasible to collect class action complaints from the State and county databases, but not complaints in individual cases from those databases.[269] Collectively, this State court sample accounted for 18.1 percent of the U.S. population as of 2010.[270]

The Study's analysis of putative class action filings identified 562 cases filed by consumers from 2010 through 2012 in Federal courts and selected State courts concerning the six products, or about 187 per year.[271] Of these 562 putative class cases, 470 were filed in Federal court, and the remaining 92 were filed in the State courts in the Bureau's State court sample set.[272] In Federal court class cases, the most common claims were under the FDCPA and State statutes prohibiting unfair and deceptive acts and practices.[273] In State court class cases, State law claims predominated.[274] All Federal and State class cases sought monetary relief. Unlike the AAA arbitration rules, court rules of procedure generally do not require plaintiffs to identify specific claim amounts in their pleadings. Accordingly, the Bureau had limited ability to ascertain the number of “small” claims asserted in class action litigation for purposes of comparison to the 25 arbitration disputes each year in the markets analyzed in the AAA case set that included consumer affirmative claims of $1,000 or less.[275] The Bureau was able to determine, however, that more than one-third of the 562 class cases sought statutory damages only under Federal statutes that cap damages available in class proceedings (sometimes accompanied by claims for actual damages). Only about 10 percent of the 562 class cases sought statutory damages under Federal statutes that do not cap damages available in class proceedings.[276]

As with the Study's analysis of the arbitration proceedings noted above, the Study set out a number of explicit and inherent limitations to its analysis of litigation outcomes.[277] While the available data indicated that most court cases were resolved by settlement or in a manner consistent with a settlement, the terms of any settlement were typically unavailable from the court record unless the settlement was on a class basis. The bulk of cases, therefore, including individual cases and cases filed as a class action but that settled on an individual basis only, resulted in unknown substantive outcomes.[278] Other limitations, however, were unique to the review of litigation filings. For instance, the lack of specific information about claim amounts in court filings meant that the Study was unable to offer a meaningful analysis of recovery rates.[279] Further, some cases in court often could not be reduced to a single result because plaintiffs in those cases may have alleged multiple claims against multiple defendants, and one case can have multiple outcomes across the different claims and parties. For this reason, the Study reported on several types of outcomes, more than one of which may have occurred in any single case.[280] In addition, while the Bureau believed that its data set of State court complaints is the most robust available, the Bureau noted the dataset's limitations. For example, the three States and seven additional counties from which the Bureau collected complaints filed in State court may not be representative of the consumer financial litigation filed in State courts nationwide.[281]

In addition to the limitations on comparing case outcomes, the Study also noted that even comparing frequency or process across litigation and arbitration proceedings was of limited utility.[282] The Study noted that differences in data may result from decisions consumers and companies make pertaining to arbitration and litigation, including but not limited to whether a relationship would be governed by a pre-dispute arbitration agreement; whether a case is filed and if so on a class or individual basis; and whether to seek arbitration of cases filed in court.[283] With those caveats noted, the Study indicated that class filings result in myriad outcomes. Of the 562 class cases the Study identified, 12.3 percent (69 cases) had final class settlements approved by February 28, 2014.[284] As of April 2016, 18.1 percent of the filings (102 cases) featured final class settlements or class settlement agreements pending approval.

An additional 24.4 percent of the class cases (137 cases) involved a non-class settlement and 36.7 percent (206 cases) involved a potential non-class settlement.[285] In 10 percent of the class cases (56 cases), the action against at least one company defendant was dismissed as the result of a dispositive Start Printed Page 33230motion unrelated to arbitration.[286] In 8 percent of the 562 class cases (45 cases), all claims against a company were stayed or dismissed based on a company filing an arbitration motion.[287]

The Study also identified 3,462 individual cases filed in Federal court concerning the five product markets studied during the period, or 1,154 per year.[288] As with putative class filings, individual pleadings provide minimal information about the overall claim amounts sought by plaintiffs. Less than 6 percent of the overall individual litigation disputes were filed without counsel.[289]

The Bureau reviewed outcomes in all of the individual cases from four of the five markets studied and a random sample of the cases filed in the fifth market, resulting in an analysis of 1,205 cases.[290] In 48.2 percent of those 1,205 cases (581 cases), the record reflected that a settlement had occurred, though the record only rarely (in around 5 percent of those 581 cases) reflected the monetary or other relief afforded by the settlement. In 41.8 percent of the 1,205 cases (504 cases), the record reflected a withdrawal by at least one consumer or another outcome potentially consistent with settlement, such as a dismissal for failure to prosecute or failure to serve (but where the plaintiff also might have withdrawn with no relief). In 6.8 percent of the cases (82 cases), a consumer obtained a judgment against a company party through a summary judgment motion, a default judgment (most common), or, in two cases, a trial. In 3.7 percent of cases (44 cases), the action against at least one company was dismissed via a dispositive motion unrelated to arbitration.[291]

Individual cases generally resolved more quickly than class cases. Aside from cases that were transferred to MDLs, Federal class cases closed in a median of approximately 218 days for cases filed in 2010 and 211 days for cases filed in 2011. Class cases in MDLs were markedly slower, closing in a median of approximately 758 days for cases filed in 2010 and 538 days for cases filed in 2011. State class cases closed in a median of approximately 407 days for cases filed in 2010 and 255 days for cases filed in 2011.[292] Aside from a handful of individual cases transferred to MDL proceedings, individual Federal cases closed in a median of approximately 127 days.[293]

Notwithstanding the inherent limitations noted above, the Bureau's large set of individual and class action litigations allowed the Study to explore whether motions seeking to compel arbitration were more likely to be asserted in individual filings or in putative class action filings. Across its entire set of court filings, the Study found that motions seeking to compel arbitration were much more likely to be asserted in cases filed as class actions. For most of the cases analyzed in the Study, it was not apparent whether the defendants in the proceedings had the option of moving to seek arbitration proceedings (i.e., the Bureau was unable to determine definitively whether the contracts between the consumers and defendants contained arbitration agreements). The Bureau, however, was able to limit its focus to complaints against companies that it knew to use arbitration agreements in their consumer contracts in the year in which the cases were filed by limiting its sample set to disputes regarding credit cards. In the 40 class cases where the Study was able to ascertain that the case was subject to an arbitration agreement, motions seeking arbitration were filed 65 percent of the time.[294] In a comparable set of 140 individual disputes, motions seeking arbitration were filed one-tenth as often, in only 5.7 percent of proceedings.[295] Overall, the Study identified nearly 100 Federal and State class action filings that were dismissed or stayed because companies invoked arbitration agreements by filing a motion to compel and citing an arbitration agreement in support.[296]

Comments Received on Section 6 of the Study

One industry lawyer commenter criticized the Bureau's review of class action filings for failing to evaluate the underlying merits of the class actions and whether they asserted substantive claims or instead alleged what the commenter considered technical violations, such as improperly worded disclosures. This commenter similarly suggested that the Bureau should have evaluated whether class action claims were meritorious or whether plaintiffs made frivolous claims to attract nuisance value settlements.

An industry commenter took issue with the fact that the Bureau studied 1,800 arbitrations but only a sample of the individual litigation cases and asserted that extrapolating from the latter but not the former provided an inaccurate picture of the individual litigation landscape. The commenter similarly opined that the State court class actions studied by the Bureau cannot be relied upon to be representative of such litigation nationwide because the Bureau, in the Study, acknowledged that they may not be representative of the entire country.

An industry commenter took issue with the small number of instances documented in the Study (12) where a dismissed class claim was re-filed in arbitration, contending that the Bureau did not research whether claims were filed in any arbitration forum other than the AAA.

Relatedly, an industry commenter expressed concern that the number of individual Federal court lawsuits reported in the Study was too low. Specifically, the commenter cited records of the Transactional Records Access Clearinghouse (TRAC), which is a data gathering and research organization at Syracuse University. The commenter asserted, based on the TRAC data, that there were 890 consumer credit lawsuits filed in Federal district court in May 2012 and 723 such suits filed in September 2012.[297] The commenter also referenced data from a commercial litigation monitoring Web site called WebRecon that similarly stated that more than 1,000 consumers per month filed suits in Federal courts in the years 2010, 2011, and 2012 for violations of the TCPA, FCRA, or the FDCPA.[298] Taken together, the commenter asserted these figures as a Start Printed Page 33231basis to question the accuracy of the Bureau's data.

Response to Comments Received on Section 6

Regarding the industry lawyer commenter that criticized the Study's failure to explore whether class actions assert substantive or technical claims, the Bureau notes that the Study did report on the types of claims asserted in Federal class actions by statute.[299] The Bureau does not believe that it would be appropriate for it to classify claims alleging violations of Federal or State law as “technical” or not “substantive.” Nor does the Bureau believe that it would be feasible, given notice pleading requirements, or appropriate for the Bureau to assess the merits of the claims asserted in these complaints. The Bureau notes that the Federal Rules of Civil Procedure provide means of securing dismissal of complaints which, on their face, fail to state a valid cause of action and of obtaining summary judgments for cases in which there are no genuine issues of material fact and the defendant is entitled to judgment as a matter of law. As discussed below in connection with Section 8 of the Study, the Bureau reported statistics on such dispositive motions in the context of Federal class action settlements. The Bureau discusses further judicial safeguards on such cases in Part VI Findings below, including by noting legislative and judicial safeguards that limit frivolous litigation. The Bureau also disagrees with the commenter that said the Study only looked for claims re-filed in arbitration in its AAA data. As is explained in Section 6 of the Study, the Bureau located nine of the 12 re-filings in its review of court filings.[300] Four of these cases were filed with JAMS and five with AAA. The remaining three cases that the Bureau identified came from its review of AAA data.[301]

As for the assertions that the Bureau's analysis undercounted the number of individual cases filed in Federal court, the Bureau does not believe that the figures cited by the commenters provide a basis on which to question the accuracy of the Bureau's data. As is explained in detail in Appendix L of the Study, the Bureau completed its analysis by first crafting a deliberately overbroad text search in the Courtlink database and then manually sorting through that data for cases that fit the relevant parameters. The Bureau filtered this data so that it could analyze individual claims filed in Federal court with respect to five consumer financial products (credit cards, GPR prepaid cards, checking accounts/debit cards, payday loans, and private student loans) and found approximately 1,200 per year. The TRAC and WebRecon sources referenced by the commenter did not, as the Bureau did, analyze each case to see whether it fell into one of the five product categories analyzed in that part of Section 6. Both databases appear to be based on initial case designations made upon filing by a plaintiff. Thus, many cases designated as “consumer credit” fall outside both the parameters of Section 6 and the Bureau's proposed rulemaking. For example, not every case filed under the FCRA or the FDCPA and reported by TRAC as a consumer credit case concerns a consumer financial product or service, and thus TRAC overstates the number of Federal individual claims concerning such products. Similarly and as the Bureau noted in the proposal, an unknown number of the cases reported by WebRecon also would not be covered by the Study or by the proposal rule because that database similarly includes all claims under FDCPA, FCRA and TCPA and have not been analyzed further. As evidence of the overbroad nature of these results, a separate study explained that more than 3,000 TCPA claims were filed in 2015 but many of these concerned marketing communications unrelated to consumer finance, such as those against a merchant or a company with whom the consumer has no relationship (contractual or otherwise).

As for the commenter concerned about the Bureau having extrapolating data on individual litigation, the Bureau notes that the Study did not purport to analyze all claims about consumer financial products filed in Federal court. Thus it agrees that the number of individual Federal lawsuits about all of the consumer financial products that would be covered by this rule is necessarily higher than 1,200. The Bureau knows of no reason to view the studied markets as materially different than other financial services markets, however, with regard to the level of Federal litigation overall, nor does the commenter suggest otherwise. As for extrapolating from Federal individual lawsuits, the Bureau disagrees that extrapolating data is inappropriate. Extrapolation is standard technique used in studies like the Bureau's and is typically only inappropriate if there is a reason that the data collected is unique. The Bureau does not believe such a reason exists regarding its Federal individual court records, nor did the commenter identify one.[302] As for the State court class action data, which was drawn from courts representing 18.1 percent of the population, the Bureau stated in the Study that the data from the State courts analyzed may not be representative of the consumer financial litigation filed in State courts nationwide.[303] Despite the cautious language in the Study, the Bureau is not aware of any reason why this data are not representative of parts of the country not studied. Below, in Part VI, the Bureau discusses the extent to which it relies on this data.

6. Small Claims Court (Section 7 of Study)

As described above, Section 2 of the Study found that most arbitration agreements in the six markets the Bureau studied contained a small claims court “carve-out” that typically afforded either the consumer or both parties the right to file suit in small claims court as an alternative to arbitration. Commenters on the RFI urged the Bureau to study the use of small claims courts with respect to consumer financial disputes. The Bureau undertook this analysis, published the results of this inquiry in the Preliminary Results, and also included these results in Section 7 of the Study.

The Bureau believes that the Study's review of small claims court filings is the only study of the incidence and typology of consumer financial disputes in small claims court to date. Prior research suggests that companies make greater use of small claims court than consumers and that most company-filed suits in small claims court are debt collection cases.[304] The Study, however, Start Printed Page 33232was the first that the Bureau has been able to identify to assess the frequency of small claims court filings concerning consumer financial disputes across multiple jurisdictions.

The Bureau obtained the data for this analysis from online small claims court databases operated by States and counties. No centralized repository of small claims court filings exists.[305] The Bureau identified 12 State databases that purport to provide Statewide data and that can be searched by year and party name, plus a comparable database for the District of Columbia and a database for New York State that did not include New York City. This “State-level sample” covered approximately 52 million people. The Bureau also identified 17 counties with small claims court databases that met the same criteria (purporting to provide countywide data and being searchable by year and party name), including small claims courts for three of five counties in New York City. This “county-level sample” covered approximately 35 million people and largely avoided overlap with the State-level sample.[306] The Bureau searched each of these 31 jurisdictions' databases for cases involving a set of 10 large credit card issuers that the Bureau estimated to cover approximately 80 percent of credit card balances outstanding nationwide.[307] The Bureau cross-referenced the issuers' advertising patterns to confirm that the issuers offered credit on a widespread basis to consumers in the jurisdictions the Bureau studied.[308]

The Study estimated that, in the jurisdictions the Bureau studied—with a combined population of approximately 87 million people—consumers filed no more than 870 disputes in 2012 against these 10 institutions [309] (including the three largest retail banks in the United States).[310] This figure included all cases in which an individual sued an issuer or a party with a name that a consumer might use to mean the issuer, without regard to whether the claim was consumer financial in nature.

As the Study noted, the number of claims brought by consumers that were consumer financial in nature was likely much lower. Out of the 31 jurisdictions studied, the Bureau was able to obtain underlying case documents on a systematic basis for only two jurisdictions: Alameda County and Philadelphia County. The Bureau's analysis of all cases filed by consumers against the credit card issuers in its sample found 39 such cases in Alameda County and four such cases in Philadelphia County. When the Bureau reviewed the actual pleadings, however, only four of the 39 Alameda cases were clearly individuals filing credit card claims against one of the 10 issuers, and none of the four Philadelphia cases were situations where individuals were filing credit card claims against one of the 10 issuers. This additional analysis shows that the Bureau's broad methodology likely significantly overstated the actual number of small claims court cases filed by consumers against credit card issuers.[311]

The Study also found that in small claims court credit card issuers were more likely to sue consumers than consumers were to sue issuers. The Study estimated that, in these same jurisdictions, issuers in the Bureau's sample filed over 41,000 cases against individuals.[312] Based on the available data, it is likely that nearly all these cases were debt collection claims.[313]

Comments Received on Section 7 of the Study

One industry commenter asserted that the Bureau had only evaluated whether arbitration agreements contained small claims court carve-outs and requested that the Bureau re-conduct its Study to, among other things, critically analyze the use of small claims court as compared to arbitration or class action litigation. The commenter did not specifically address the Bureau's analysis in Section 7 of the Study or otherwise specify what further type of critical analysis would have been appropriate.

Another industry commenter asserted that the sample size used by the Bureau in its analysis of small claims court was too small and that this demonstrates a weakness of the Study that undermines the credibility of any assertion that consumers rarely proceed individually to obtain relief from legal violations. This commenter focused on the fact that the Bureau's review was limited to what it considered a small number of jurisdictions and only looked at claims against 10 large credit card issuers in 2012, asserting that the Bureau thus understated the total number of small claims cases. Relatedly, another industry commenter expressed concern about the Bureau's limited analysis of small claims court cases, emphasizing that the Bureau was able to review case documents in only two jurisdictions out of the thousands of counties in the United States. However, unlike the prior commenter, this commenter was concerned that the data reflected by the Bureau's methodology may overstate the number of small claims cases filed by consumers against credit card issuers.

Response to Comments on Section 7 of the Study

The Bureau disagrees that its Study of small claims court was limited to an analysis of whether arbitration agreements contain class action carve-outs. As is discussed in detail above, the Bureau conducted the most fulsome analysis it could practicably conduct of consumers' use of small claims court to resolve disputes with their providers.[314] As stated above, the Bureau believes that this is the only Study with such a broad scope of jurisdictional coverage that analyzes the incidence and typology of consumer financial disputes in small claims court to date. This was in addition to—and distinct from—Section 2's analysis of companies' use of small-claims court carve-outs in their arbitration agreements.

The Bureau disagrees with the commenter that asserted that the size of the sample and the nature of its review of small claims court data undermine the Bureau's conclusion that consumers rarely proceed in this venue. The commenter did not explain why, given that the Bureau analyzed small claims courts in jurisdictions with a combined population of approximately 87 million people and found only 870 suits in 2012 against these 10 largest credit card issuers, it should be expected to find a substantially higher incidence of suits in the other portions of the country or against other providers. As is explained in the Study's Appendix Q,[315] no one had previously conducted a sample as large as the Bureau's, and the 10 credit card issuers studied accounted for 84 percent of credit card outstandings in the Bureau's credit card contract Start Printed Page 33233sample.[316] Given the modest number of consumer-filed claims found, the Bureau does not believe that it is likely that a large number of cases were filed in regular State courts or small claims courts against providers of consumer financial products or services.[317]

With regard to the other commenter's concern that the Bureau has overstated the number of small claims court cases in the jurisdictions it studied, the Bureau pointed out that the 870 cases identified in Section 7 constituted a likely upper limit to the number of consumer-filed small claims court cases against the identified credit card issuers.[318] Indeed, as the Bureau notes in Part VI Findings below, the commenter expressed concern at the potential over-counting of consumer claims tends to support the Bureau's belief that the number of small claims court cases involving credit cards indicates that these claims may go unaddressed but for class actions.

7. Class Action Settlements (Section 8 of Study)

Section 8 of the Study contained the results of the Bureau's quantitative assessment of consumer financial class action settlements. As described above, Section 6 of the Study, which analyzed consumer financial litigation, included findings about the frequency with which consumer financial class actions are filed and the types of outcomes reached in such cases. The dataset used for that analysis consisted of cases filed between 2010 and 2012 and outcomes of those cases through February 28, 2014.

To better understand the results of consumer financial class actions that result in settlements, for Section 8, the Bureau conducted a search of class action settlements through an online database for Federal district court dockets. The Bureau searched this database using terms designed to identify final settlement orders finalized from 2008 to 2012 in consumer financial cases. The selection criteria for this data set differed from many other sections in the Study, in that it was not restricted to a discrete number of consumer financial products and services.[319] Rather, the Bureau reviewed these dockets and identified settlements where either: (1) The complaint alleged a violation of one of the enumerated consumer protection statutes under title X of the Dodd-Frank Act; or (2) the plaintiffs were primarily consumers and the defendants were institutions selling consumer financial products or engaged in providing consumer financial services (other than consumer investment products and services), regardless of the basis of the claim. To the extent that the case involved any such consumer financial product or service—not only the six main product areas identified in the AAA and litigation sets—it was included in the data set.[320]

The set of consumer financial class action settlements overlapped with the data set used for the analysis of the frequency and outcomes of consumer financial litigation (Section 6 of the Study) insofar as cases filed in 2010 through 2012 had settled by the end of 2012. The analysis of class action settlements was larger because it encompassed a wider time period (settlements finalized from 2008 through 2012), which, among other benefits, decreased the variance across years that could be created by unusually large settlements and allowed the Bureau to account for the impact of such events as the April 2011 Supreme Court decision in Concepcion, which is discussed above.[321] The Bureau used this data set to perform a more detailed analysis of class settlement outcomes, including issues such as the number of class members eligible for relief in these settlements; the amount and types of relief available to class members; the number of class members who had received relief and the amount of that relief; and the extent to which relief went to attorneys. While several previous studies of class action settlements have been published, the Study was the first to comprehensively catalogue and analyze class action settlements specific to consumer financial markets.[322]

As the Study noted, there were limitations to the Bureau's analysis. The Study understated the number of class action settlements finalized, and the amount of relief provided, during the period under study because the Bureau could not identify class settlements in State court class action litigation. (The Bureau determined it was not feasible to do so in a systematic way.[323] ) Further, the claims data on the settlements the Bureau identified is incomplete, as dockets are often closed when the final approved settlement order is issued even if claims numbers are not yet final.[324] In addition, not every settlement document contained information on every data point or metric that the Bureau sought to analyze; the Study accounted for this by referencing, for every metric reported on, the number of settlements that provided the relevant number or estimate.[325]

The Bureau identified 422 Federal consumer financial class settlements that were approved between 2008 and 2012, resulting in an average of approximately 85 approved settlements per year.[326] The bulk of these settlements (89 percent) concerned debt collection, credit cards, checking accounts, or credit reporting.[327] Of these 422 settlements, the Bureau was able to analyze 419.[328] The Bureau identified the class size or a class size estimate in 78.5 percent of these settlements (329 settlements). There were 350 million total class members in these settlements. Excluding one large settlement with 190 million class members (In re TransUnion Privacy Litigation),[329] these settlements included 160 million class members.[330]

These 419 settlements included cash relief, in-kind relief, and other expenses Start Printed Page 33234that companies paid. The total amount of gross relief in these 419 settlements—that is, aggregate amounts promised to be made available to or for the benefit of damages classes as a whole, calculated before any fees or other costs were deducted—was about $2.7 billion.[331] This estimate included cash relief of about $2.05 billion and in-kind relief of about $644 million.[332] These figures represent a floor, as the Bureau did not include the value, or cost to the defendant, of making agreed behavioral changes to business practices.[333] The Study showed that there were 53 settlements covering 106 million class members that mandated behavioral relief that required changes in the settling companies' business practices beyond simply to comply with the law.

Sixty percent of the 419 settlements (251 settlements) contained enough data for the Bureau to calculate the value of cash relief that, as of the last document in the case files, either had been or was scheduled to be paid to class members. Based on these cases alone, the value of cash payments to class members was $1.1 billion. Again, this excludes payment of in-kind relief and any valuation of behavioral relief.[334]

For 56 percent of the 419 settlements (236 settlements), the docket contained enough data for the Bureau to estimate, as of the date of the last filing in the case, the number of class members who were guaranteed cash payment because either they had submitted a claim or they were part of a class to which payments were to be made automatically. In these settlements, 34 million class members were guaranteed recovery as of the time of the last document available for review, having made claims or participated in an automatic distribution.[335] Of 382 settlements that offered cash relief, the Bureau determined that 36.6 percent included automatic cash distribution that did not require individual consumers to submit a claim form or claim request.[336]

The Study also sought to calculate the rate at which consumers claimed relief when such a process was required to obtain relief. The Bureau was able to calculate the claims rate in 25.1 percent of the 419 settlements that contained enough data for the Bureau to calculate the value of cash relief that had been or was scheduled to be paid to class members (105 cases). In these cases, the average claims rate was 21 percent and the median claims rate was 8 percent.[337] Rates for these cases should be viewed as a floor, given that the claims numbers used to calculate these rates may not have been final for many of these settlements as of the date of the last document in the docket and available for review by the Bureau. The weighted average claims rate, excluding the cases providing for automatic relief, was 4 percent including the large TransUnion settlement, and 11 percent excluding that settlement.[338]

The Study also examined attorney's fee awards. Across all settlements that reported both fees and gross cash and in-kind relief, fee rates were 21 percent of cash relief and 16 percent of cash and in-kind relief. Here, too, the Study did not include any valuation for behavioral relief, even when courts relied on such valuations to support fee awards. The Bureau was able to compare fees to cash payments in 251 cases (or 60 percent of the data set). In these cases, of the total amount paid out in cash by defendants (both to class members and in attorney's fees), 24 percent was paid in fees.[339]

In addition, the Study included a case study of In re Checking Account Overdraft Litigation, MDL No. 2036 (the Overdraft MDL)—a multi-district proceeding involving class actions against a number of banks—to shed further light on the impact of arbitration agreements on the resolution of individual and class claims. As of the Study's publication, 23 cases had been resolved in the Overdraft MDL. In 11 cases, the banks' deposit agreements did not include arbitration provisions; in those cases, 6.5 million consumers obtained $377 million in relief. In three cases, the defendants' deposit agreements had arbitration provisions, but the defendants did not seek arbitration; in those cases, 13.7 million consumers obtained $458 million in relief.[340] Another four defendants moved to seek arbitration, but ultimately settled; in those cases 8.8 million consumers obtained $180.5 million in relief.[341] Five companies, in contrast, successfully invoked arbitration agreements, resulting in the dismissal of the cases against them.[342]

The Overdraft MDL cases also provided useful insight into the extent to which consumers were able to obtain relief via informal dispute resolution—such as telephone calls to customer service representatives. As the Study noted, in 17 of the 18 Overdraft MDL settlements, the amount of the settlement relief was finalized, and the number of class members determined, after specific calculations by an expert witness who took into account the number and amount of fees that had already been reversed based on informal consumer complaints to customer service. The expert witness used data provided by the banks to calculate the amount of consumer harm on a per-consumer basis; the data showed, and the calculations reflected, informal reversals of overdraft charges. Even after controlling for these informal reversals, nearly $1 billion in relief was made available to more than 28 million class members in these MDL cases.[343]

Start Printed Page 33235

Comments Received on Section 8 of the Study

Several commenters, including industry commenters and a nonprofit commenter, criticized the Bureau's analysis of class action settlements. These commenters cited a working paper by one research center that critiqued use of what it called “aggregate averages” to evaluate the effectiveness of class action cases.[344] The result, according to the nonprofit commenter, was that the Study tended to overweight data from a handful of very large settlements in a way that overstates the importance of class actions. Relatedly, an industry commenter contended that the Study gave undue weight to a few large class action settlements. This commenter, several industry commenters, and a research center commenter also took issue with the Bureau's decision to exclude certain settlements from the Study because the settlements did not involve contractual relationships and thus could not be blocked by invoking an arbitration agreement (e.g., cases involving out-of-network ATM notices) while including debt collection class actions which, according to the commenters, also do not typically involve a contractual relationship between the debt collector and the consumer. Along similar lines, an industry trade association commenter took issue with the Bureau's use and analysis of the Overdraft MDL case study. According to the commenter, the overdraft cases were atypical because, among other things, they settled, they involved automatic payouts to class members rather than requiring the submission of claims, and they resulted in abnormally large settlements. The commenter stated that the Bureau should therefore have excluded the cases from its analysis. Furthermore, the commenter asserted that the Bureau failed to address critical questions about the overdraft cases, including the time spent in litigation before settlement, the net present value to consumers of the settlements, and the plaintiff's attorney fees. Finally, the research center commenter also contended that the Bureau's approach biased the Study by skewing data on attorney's fees.

A nonprofit commenter, a research center commenter and several industry commenters also criticized the Study for not attempting to assess the underlying merit of consumer class actions that result in settlements and one of these industry commenters criticized the Bureau for not also analyzing the merits of all class actions, not just those that settled. The nonprofit commenter noted that the Study did not present data regarding which companies were more likely to settle nor did the Bureau offer details on what the commenter identified as key measures of class action performance. Without this information, contended the commenter, readers are unable to know if allowing more class actions would actually resolve a societal problem or instead would be used to extort settlements from companies for minor violations that do not harm anyone. One industry commenter focused on the fact that the Bureau did not calculate any actual injury to consumers belonging to a class and instead assumed that settlements reflect redress for legal violations even though most settlements do not include a finding of wrongdoing and some may be settlements to resolve nuisance suits. This commenter further expressed concern for, in its view, the Bureau's failure to determine if class action claims were meritless or frivolous. Relatedly, one of the industry commenters said that the Bureau should have evaluated whether class actions were brought to address consumer harm as opposed to being motivated by attorneys' desire to earn fees (and thus benefits to consumers were secondary).

An industry commenter suggested that Section 8 exceeded the Bureau's authority, noting that section 1028(a) required the Bureau to study pre-dispute arbitration agreements and did not expressly require the Bureau to study class actions and the use of arbitration agreements to block class actions.

Another industry commenter noted that the data set considered in this section was for a five-year period and not three years as was used in some of the other sections and asserted that this distorted the relative importance of class actions. The commenter further noted that the data was not restricted to specific consumer financial products and services. The commenter also stated that it was difficult to analyze unequal or dissimilar data sets and come to an accurate portrait of how they compare.

A research center commenter and an industry trade association both expressed concern that the analysis in this section of the Study excluded the sums that companies paid attorneys to defend class action claims and class actions that did not report payments to class members; in other words, they asserted that the Bureau did not present the “net cost” of class actions in the Study. The commenters argued that the Study accordingly substantially underestimated costs incurred by companies in connection with class actions. The research center commenter further asserted that the Bureau either systematically excluded or overstated the benefit of many claims-made settlements.[345]

Finally, an industry commenter suggested that the Bureau's method for calculating attorney's fees artificially deflated the average amount of attorney's fees reported per case.

Response to Comments Received on Section 8

In response to the commenters that were concerned with the Bureau's use of aggregate averages, the Bureau notes that it did present Section 8's analyses of class action settlements in a number of different segments. This allows the public to avoid any confusion that could be caused by aggregating the entire set, and commenters to focus on whatever segments they believe to be most relevant. The Study also directly addressed potential confusion on aggregate averages by providing data on the number of settlements within various ranges of gross relief.[346] Further, the Study included tables that provided specific information for, among other variables: Year and type of relief (table 7) and 11 different product types (table 8). Regarding the comment that suggested that the Study overweights large settlements such as the Overdraft MDL, the Bureau believes that rather than indicating a problem with the Study, this simply reflects the fact that the distribution of class action settlement amounts is right-skewed. Commenters suggest no reason why this distribution is unusual. As is noted below in Part VI.B.3, there continue to be large class action settlements in consumer finance.

As for the related concern about the Bureau's inclusion of certain class actions that commenters thought should have been excluded, the Bureau Start Printed Page 33236similarly provided data in different forms to allow interested persons to tally the figures and omit cases as they see fit.[347] In other words, if an interested person was concerned about the Bureau's inclusion of a particular category, such as the overdraft or debt collection cases, the data were presented in a way that allowed that person to consider the data without those cases. Also, as suggested in Part VI.B.3, below, the Bureau believes that even if these categories of class action settlements were excluded from the data, the Bureau's conclusion as to the efficacy of class settlements generally would not change. In any event, the Bureau chose to include debt collection cases because a debt collector normally seeks to collect a debt based on a contract and may be able to invoke an arbitration clause if one is contained in the original credit agreement.[348] By contrast, the cases involving ATM disclosures involved no contract between the merchant and consumer, and thus no arbitration agreement could be used to block cases filed by customers.

In response to the commenter that took issue with the Bureau's use and analysis of the Overdraft MDL case study, the Bureau believes that overdraft cases were not atypical in offering automatic payouts to class members.[349] Nor were the overdraft settlements abnormally large—just two of the seven largest settlements identified in the Study were Overdraft MDL cases.[350] The Bureau also believes that the commenter did not explain why its litany of other questions on the overdraft cases warranted these cases' exclusion from the Study. In any event, the data the commenter sought for the overdraft cases are within the normal range of values set out in the Study.[351]

As for the commenters that asserted that the Bureau did not review the merits of all class actions or just those that resulted in settlements, as noted above in connection with Section 6 of the Study, the Bureau notes that the Study analyzed the closest proxies for merit possible—the filing and disposition of summary judgment motions and motions to dismiss preceding final class action settlements.[352] The commenters were correct to the extent that the Bureau did not attempt to evaluate the merits of claims resolved in class action settlements. The Bureau did not believe it possessed any greater ability to do so than the parties that had agreed to settlements or the courts that reviewed them. In any event, as with all litigation settlements, parties made their own judgments about the case in assessing and agreeing to a settlement. The relationship between merit and settlements is discussed further in Part VI, below.

With respect to the industry commenter concerned that the Bureau's Study was too expansive and exceeded its section 1028(a) authority—by studying class actions in addition to arbitration—the Bureau believes that its analysis is relevant to performance of its charge under section 1028(a) and notes that a number of responses by industry and consumer commenters alike to the Bureau's initial request for information strongly urged the Bureau to study class action litigation.[353] One of the commenters that responded to the original request for information, a coalition of industry trade associations, specifically requested that the Bureau study whether class actions provided meaningful benefit to individual consumers as compared with individual arbitration. The Bureau agreed with this commenter because, in its view, the only way to assess whether arbitration agreements adequately protect consumers is to evaluate others means of consumer protection. This includes class actions, the blocking of which is a motivator for and key result of companies' use of arbitration agreements.

Regarding the Bureau's selection of a five-year period review of class actions, the Bureau studied the longest time periods practicable for the various individual components of the Study consistent with electronic data availability and other Bureau resource limitations. As it explained in the Study and the proposal, the fact that it was practicable to study a broader time range for Section 8 of the Study had a number of advantages, including the ability to account for significant background shocks such as the financial crisis and the Supreme Court's decision in Concepcion in 2011, as well as for the fact that the results of settlements may not be reported to courts for some time.[354] Also, a longer time period decreased the variance across years that could be created by unusually large settlements. Further, the Study set forth data by year and by claim in numerous tables and figures, so that outside parties could analyze specific data sets, particularly if they wanted to focus on or exclude specific financial products and services.[355]

With regard to concerns raised by the research center commenter, as discussed further below in Part III.E, the Bureau notes that data about defense attorney costs is not publicly available. The Bureau further determined that it would be too difficult or impossible to gather additional information on any uniform basis about defense costs, given that at least some of this information may be considered subject to attorney-client privilege. The Bureau made clear that it was seeking to study “transaction costs in consumer class actions,” and firms that had been involved in defending class actions could have produced data on their transaction costs during the Bureau's Study process but did not. Nor has any such data been provided to the Bureau in response to the notice of proposed rulemaking.[356] As for not studying class actions for which data was unavailable, this limitation was noted in the Study; the Bureau was only able to study cases for which data could be located.[357] For cases the Bureau could find, the data gathered, at minimum, establishes a floor for the amount of money recovered by consumers in class actions.

Finally, with regard to the concern related to the method used to report attorney's fees, the Bureau notes that the Start Printed Page 33237Study reported data regarding attorney's fees in a number of different ways—including by comparing them to cash relief, to gross relief, and by product type. To the extent that the commenter suggested that the Bureau is drawing the wrong conclusion from this data, the Bureau addresses that argument below in Part VI.

8. Consumer Financial Class Actions and Public Enforcement (Section 9 of Study)

Section 9 of the Study explored the relationship between private consumer financial class actions and public (governmental) enforcement actions. As Section 9 noted, some industry trade association commenters (commenting on the RFI) urged the Bureau to study whether class actions are an efficient and cost-effective mechanism to ensure compliance with the law given the authority of public enforcement agencies. Specifically, these commenters suggested that the Bureau explore the percentage of class actions that are follow-on proceedings to government enforcement actions. Other stakeholders have argued that private class actions are needed to supplement public enforcement, given the limited resources of government agencies, and that private class actions may precede public enforcement and, in some cases, spur the government to action. To better understand the relationship between private class actions and public enforcement, Section 9 analyzed the extent to which private class actions overlapped with government enforcement activity and, when they did overlap, which types of actions came first.

The Bureau obtained data for this analysis in two steps. First, it assembled a sample of public enforcement actions and searched for “overlapping” private class actions, meaning that the cases sought relief against the same defendants for the same conduct, regardless of the legal theory employed in the complaint at issue.[358] The Bureau did this by reviewing Web sites for all Federal regulatory agencies with jurisdiction over consumer finance matters, for the State regulatory and enforcement agencies in the 10 largest and 10 smallest States, and for four county agencies in those States to identify reports on public enforcement activity over a period of five years from 2008 through 2012.[359] The Bureau used this sample because it wanted to capture enforcement activity by both large and small States and because it wanted to capture enforcement activity by city attorneys in light of the increasing work by city attorneys in this regard. The Bureau then searched an online database to identify overlapping private cases (including cases filed before 2008 and after 2012) and searched the pleadings in those cases.[360]

Second, the Bureau essentially performed a similar search over the same period, but in reverse: The Bureau assembled a sample of private class actions and then searched for overlapping public enforcement actions. This sample of private class actions was derived from a sample of the class settlements used for Section 8 and a review of the Web sites of leading plaintiff's class action law firms. To find overlapping public enforcement actions (typically posted on government agencies' Web sites), the Bureau searched online using keywords specific to the underlying private action.[361]

The Study found that, where the government brings an enforcement action, there is rarely an overlapping private class action. For 88 percent of the public enforcement actions the Bureau identified, the Bureau did not find an overlapping private class action.[362] The Study similarly found that, where private parties brought a class action, an overlapping government enforcement action existed in only a minority of cases, and rarely existed when the class action settlement is relatively small. For 68 percent of the private class actions the Bureau identified, the Bureau did not find an overlapping public enforcement action. For class action settlements of less than $10 million, the Bureau did not identify an overlapping public enforcement action 82 percent of the time.[363]

Finally, the Study found that, when public enforcement actions and class actions overlapped, private class actions tended to precede public enforcement actions instead of the reverse. When the Study began with government enforcement activity and identified overlapping private class actions, public enforcement activity was preceded by private activity 71 percent of the time. Likewise, when the Bureau began with private class actions and identified overlapping public enforcement activity, private class action complaints were preceded by public enforcement activity 36 percent of the time.[364]

Comments Received on Section 9 of the Study

Several industry commenters stated that, in their view, the Study was flawed because the Bureau did not properly consider the impacts its own enforcement activities have on providers. For example, one of these commenters stated that the Bureau only reviewed AAA arbitrations resolved during what it termed the Bureau's “formative stage” and asserted that the Study was therefore skewed because it did not take into account the Bureau's enforcement actions in later years. Another commenter criticized the Bureau for failing to account for the impact that other Bureau activities—interim final and other finalized rulemakings, amicus briefs, etc.—would have on providers, and asserted that further study of these impacts is warranted.

An industry commenter took issue with what it believed to be an overly narrow focus in this Section 9 of the Study that overlooked several key points. For example, this commenter said that the Bureau should have evaluated how many class actions are a result of other disclosures of wrongdoing (e.g., news reports) and thus the filing of a class action did not function as a disclosure mechanism informing the company of its potential wrongdoing. In addition, the commenter said the Bureau should have evaluated how many class actions followed government investigations or other disclosures of claimed wrongdoing, rather than focusing only on how many class actions overlapped with public enforcement actions. The commenter Start Printed Page 33238noted that in some instances government enforcement agencies declined to bring an action even where they identified wrongdoing.

Response to Comments on Section 9 of the Study

As to the comments that criticized the scope of the Bureau's analysis of its own enforcement actions, noting that the Bureau increased its enforcement activity after 2012, such comments assume that the purpose of the analysis was to assess the overall level of public enforcement and compare it to the volume of class action activity. To the extent that there has been, and will continue to be, an increase in Bureau enforcement actions relative to the Study period, the Bureau knows of no reason to believe that the relationship between public and private enforcement will change, nor did any commenter suggest a basis for so believing.[365] As is discussed in greater detail in Part VI below, Section 9 demonstrated that there was generally little overlap between these two spheres, and to the extent there is, private activity generally precedes public activity. As was discussed in that section, the Bureau believes that these data indicated—as supported by the comments from a group of State attorneys general and the Bureau's experience and expertise—that private class actions are a useful complement to public enforcement actions, especially given the resource limitations faced by regulators or that may be faced by regulators in the future. With respect to whether the Bureau considered other of its undertakings, the Bureau does not believe that there is an adequate means to do so and, more importantly, that such an undertaking would not be relevant to this rulemaking.[366]

9. Arbitration Agreements and Pricing (Section 10 of Study)

Section 10 of the Study contained the results of a quantitative analysis which explored whether arbitration agreements affected the price and availability of credit to consumers. Commenters on the Bureau's RFI suggested that the Bureau explore whether arbitration agreements lower the prices of financial services to consumers. In academic literature, some hypothesize that arbitration agreements reduce companies' dispute resolution costs and that companies “pass through” at least some cost savings to consumers in the form of lower prices, while others reject this notion.[367] However, as the Study noted, there is little empirical evidence to support either position.[368]

To address this gap in scholarship, the Study explored the effects of arbitration agreements on the price and availability of credit in the credit card marketplace following a series of settlements in Ross v. Bank of America, an antitrust case in which, among other things, several credit card issuers were alleged to have colluded to introduce arbitration agreements into their credit card contracts.[369] In these Ross settlements, which were negotiated separately from settlements in the case pertaining to the non-disclosure of currency conversion fees, certain credit card issuers agreed to remove arbitration agreements from their consumer credit card contracts for at least three and a half years.[370] Using data from the Bureau's Credit Card Database,[371] the Bureau examined whether it could find statistically significant evidence, at a standard confidence level (95 percent), that companies that removed their arbitration agreements raised their prices as measured by total cost of credit in a manner that was different from that of comparable companies that did not remove their agreements. The Bureau was unable to identify any such evidence from the data.[372]

The Bureau performed a similar inquiry into whether the affected companies altered the amount of credit they offered consumers, all else being equal, in a manner that was statistically different from that of comparable companies. The Study noted that this inquiry was subject to limitations not applicable to the price inquiry, such as the lack of a single metric to define credit availability.[373] Using two measures of credit offered, the Study did not find any statistically significant evidence that companies that eliminated arbitration provisions reduced the credit they offered.[374]

Comments Received on Section 10 of the Study

An industry commenter and a trade association dismissed the Bureau's findings in Section 10, asserting that the Ross case did not provide an appropriate case study because changes in bank pricing are slow to occur and because credit cards issuers would not be expected to shift their pricing in response to a temporary ban on arbitration agreements in any event. The trade association commenter contended that the Bureau understated the problems with its difference-in-difference analysis of pricing changes. For example, the commenter questioned the Bureau's selection of a control group due to its admission that it did not know if all members of the control group used arbitration agreements. Also, citing two academics, the commenter stated that the lack of evidence of a price change was unsurprising given the temporary nature of the moratorium and, as noted above, that large institutions like the Ross settlers typically change prices slowly. A research center commenter expressed a similar concern.

A nonprofit commenter, citing to an academic working paper, contended that the Study failed to indicate whether the Bureau checked to ensure the validity of the econometric technique it used in evaluating price changes. This commenter also criticized the Bureau's method as valid only if prices had been Start Printed Page 33239changing at the same rate prior to the settlement in Ross.

An individual commenter criticized the conclusions that the Bureau drew from its analysis, and asserted that footnote 34 in Section 10 of the Study demonstrated that the Ross settlement did in fact prompt differential pricing responses from the banks involved and that such a result comports with economic expectation. The commenter further asserted that the Bureau improperly dismissed this result as statistical noise that disappeared once costs were collapsed into a single total cost of credit (TCC) variable. In reality, the commenter asserted, the Bureau's analysis implied that the banks increased other costs charged to consumers as evidenced by the separate regression analyses with respect to APR and fees. This commenter also suggested that a number of other events that happened around the same time as the Ross settlement—e.g., the enactment of the CARD Act and the Dodd-Frank Act, Supreme Court litigation regarding the applicability of the FAA, and other ongoing class action lawsuits—may have also had varying effects on companies' use of arbitration agreements and pricing decisions. The commenter asserted that consumers who did not trigger the currency conversion fees that were specifically at issue in Ross suffered as a result of these differential changes, and that such consumers were more likely to be low-income, unmarried, and members of racial and ethnic minorities. Accordingly, the commenter asserted that the Bureau's analysis in fact suggested that dropping the arbitration agreements led to more expensive credit for certain groups of consumers.

An industry commenter noted that the Bureau's analysis in this section focused only on large banks and did not account for small institutions' practices, which the commenter suggested may be different. The commenter noted that the Study more generally found that larger institutions were more likely to use arbitration agreements and asserted that there may be a relationship between using arbitration and providing credit to many more consumers, especially those with poor credit (as large institutions may be more likely to do). The commenter concluded that this might mean that the class proposal could harm credit access for poorer consumers. A research center made a similar point, stating that empirical evidence shows that consumer finance companies do pass on changes in their costs but that banks are unlikely to adjust their deposit and loan rates quickly or fully to reflect only temporary changes in market interest rates. This commenter also suggested that firms in the consumer services sector adjust prices much more slowly in response to cost changes than do firms in the manufacturing sector, and large firms adjust prices more slowly than do small firms.

Another industry commenter stated that, in its view, there was not statistically significant empirical support to generalize the findings in this section beyond the specific Ross case. This commenter accused the Bureau of using what it labeled as a bizarre methodology and of inappropriately extrapolating results from the behavior of an arbitrary and small group of providers. The commenter concluded that the results in Section 10 were overly handicapped by caveats and other uncertainties that did not extend across all providers in all markets. Relatedly, an industry commenter suggested that the conclusions of this section ignored case study evidence that shows consumers would choose a lower priced product that includes an arbitration clause as opposed to a higher priced one that lacked an arbitration clause.

Response to Comments on Section 10 of the Study

The purpose of Section 10 was to explore the suggestion by some that companies' use of arbitration agreements lowers prices for consumers. The analysis then conducted found no evidence to support that claim. As the Bureau explained in the Study, analyzing whether pre-dispute arbitration agreements lower the price of consumer financial products or services is extremely difficult. The Bureau continues to believe that it made sense to analyze the Ross case as a potential natural experiment, although it could not provide a complete answer to the underlying question. The Bureau continues to believe that it used an appropriate methodology in analyzing those results and concluding that it did not demonstrate statistically significant evidence that the issuers increased prices or reduced access to credit. Nevertheless, the Bureau notes that Section 10 does not form the basis for any of the Bureau's significant findings, which are discussed in greater detail in Part VI below. Instead, the Bureau finds that there is some amount (although the specific amount is unknown) of costs from the class rule that will be passed on to consumers. See also Section 1022(b)(2) Analysis, below.

With regard to criticism of the methodology, the Bureau notes that its regression analysis was designed to control for effects that could have impacted pricing if the credit card companies had changed their prices for any number of external factors.[375] This is because the analysis did not just evaluate whether there was a change in pricing, but rather looked instead to see if the change in pricing of the Ross settlers sample differed from the change in pricing of the other banks that were subject to the same external background factors. The Bureau's analysis also looked at multiple time periods spanning 2008 through 2011, in part to account for the possibility that any price adjustments by the Ross settlers may have taken place over a relatively long period of time.[376] The Bureau acknowledged in both the Study and the proposal that the Ross settlement was time limited and that it is possible that the banks who were subjected to the settlement might have taken that fact into account in deciding their pricing strategy going forward.[377] This is an inherent limitation in the data.

As to the commenter that expressed concern that the Bureau had never ensured the validity of its econometric technique, the Bureau believes that the commenter misunderstood the nature of the difference-in-difference analysis used. In the analysis, the control group was neither companies with arbitration clauses nor was it companies that did not have arbitration clauses. Rather, the control group was companies that did not change their use of arbitration provisions, either because they used arbitration provisions through the entire period or they did not use arbitration provisions through the entire period. The treatment group was the Ross settlers who did change their use of arbitration provisions. The Bureau believes that this comparison was effective because it was not comparing the absolute pricing of the different issuers but instead was comparing the rate at which they changed their pricing during the time period. The Bureau further notes that nothing indicated that the treatment group—the issuers that changed their use of arbitration provisions—changed their pricing in a statistically significant way vis-a-vis the control group.[378] Consequently, the Study did not find evidence that the Start Printed Page 33240companies that had to stop using arbitration provisions changed their pricing in any meaningful way as compared to people that did not have to do so.

As to the nonprofit commenter's point that the Bureau's technique in this analysis was valid only if prices had been changing at the same rate prior to the settlement in Ross, the Bureau notes that the technique used does assume that the two groups of companies changed pricing at the same rate before the imposition of the moratorium (controlling for a number of variables).[379] Thus, the Bureau's analysis assumed that banks changed pricing at the same rate notwithstanding the items controlled for.

As to the individual commenter that expressed concern about other impacts on pricing and arbitration agreements beyond the Ross settlement, the Bureau's analysis attempted to control for a number of variables. Specifically, the benefit of conducting a difference-in-differences analysis is that it should account for background effects like the CARD Act, the Dodd-Frank Act, the development of law over time, and pending litigation. The Bureau notes that it did not state that the analysis was “problematic,” but simply set out limitations of the analysis, as it did with regard to each section of the Study.[380]

In response to this commenter's assertion that the Bureau did find a difference and buried it in footnote 34, the Bureau believes that the commenter was really disagreeing with the use of TCC as the appropriate metric.[381] As the Bureau explained, pricing involves numerous components that work together to represent total cost. For example, a provider can raise interest rates but lower fees and still have the same TCC. All that footnote 34 stated was that given the number of regressions run, it was likely that at least one of the trials would produce statistically significant coefficients on the various dependent variables simply by chance. Nevertheless, the Bureau continues to believe that TCC was the appropriate metric because it represents everything that consumers pay to keep and use their credit cards.[382] Finally, as to the individual commenter concerned that the Study did not account for higher interest rates that disproportionately impact, among others, low-income households, the Bureau notes that its analysis in Section 10 controlled for credit score and refreshed credit score (both square and log terms for each) as well as for borrower income but did not find statistically significant results for TCC overall.[383] Similarly, when the Bureau studied whether there were limitations on credit issuance, it used two measures—initial credit line and subprime account issuance—and still did not find any statistically significant changes.[384]

The Bureau agrees, as an industry commenter noted, that its analysis in this section was limited to very large banks. The Bureau addresses cost concerns specific to small entities below. Regarding the commenter's theory regarding access to credit for those with poor credit, the Bureau reiterates, as is noted above, that it had a number of controls for consumer credit that would have detected a particular effect on subprime consumers. The Bureau also acknowledges that there are a number of factors, as one commenter identified, that impact when and how banks decide to adjust pricing mechanisms.

The Bureau disagrees with the contention that its definition of the control group was invalid. As was explained in the Study, the control group contained entities that had no change in their use of arbitration agreements; whether they did or did not use such an agreement was not relevant. This group was then compared to those entities required to withdraw arbitration agreements as a result of the Ross settlement in order to diagnose whether this required change resulted in a price shock. The Bureau disagrees with the industry commenter regarding extrapolation from the results of Section 10; the Bureau did not engage in such extrapolation. In any event, the Bureau acknowledges the caveats it made in the Study and, notwithstanding those caveats, stands by the results.

Finally, regarding the commenter that said that the conclusion of this section was at odds with other available evidence, the Bureau explains below in Part VI the relevance of this part of the Study to its overall findings in this rulemaking.

E. Additional Comments Received Regarding the Study and Responses Regarding the Study

The Bureau notes that it received numerous comments from members of Congress, consumers, consumer advocates, academics, nonprofits, consumer lawyers and law firms, public-interest consumer lawyers, State legislators, State attorneys general, and others that expressed confidence in the Study and the Bureau's methods. Many of these commenters noted the Study's comprehensiveness; a few noted that it appeared to be the most comprehensive study of dispute resolution in connection with consumer financial services completed to date.

One nonprofit commenter challenged the Bureau's Study for its alleged failure to comply with the requirements of the Information Quality Act [385] and a related OMB bulletin,[386] asserting that the Study should have undergone a rigorous, transparent peer review process to ensure the quality of the disseminated information. Similarly this commenter and a trade association representing credit unions, expressed concern about the Bureau's lack of a peer review process and about the fact that no entity other than the Bureau attempted to replicate the Study. The trade association commenter also expressed concern that the Bureau had not conducted a study of general consumer satisfaction with consumer financial products and services.

Several other industry commenters criticized the Bureau for not soliciting public comments during the course of the Study process. In the view of one commenter, such a process could have enabled the Bureau to address defects and other problems with the Study before its conclusion. The industry commenters stated that the Bureau had never informed the public of the topics it had decided to study, never sought public comment on them, and never convened a public roundtable discussion on key issues. These Start Printed Page 33241commenters concluded that having not undertaken these steps, the Study was flawed and does not support the proposal.

Several industry commenters stated that the Bureau should have studied consumer satisfaction with the arbitration process through, for example, interviews of consumers who have arbitrated claims and who had been involved in class actions. One of these commenters also stated that the Bureau should have evaluated consumer experience with arbitration in other areas, such as employment, where it has existed longer.[387] Several industry commenters asserted that the Bureau's intentional refusal to study consumers' experience with arbitration was perplexing because both logic and common sense dictated that understanding consumer satisfaction with arbitration is essential to a complete understanding of whether mandating consumer arbitration was in the public interest. In support of this viewpoint, one commenter cited a 2005 Harris Interactive online poll that found that consumers found arbitration to be faster, simpler and cheaper than proceeding in court and that they would use arbitration again.

One industry commenter suggested that the Bureau should have also studied the impact on consumers and society if companies abandon arbitration as well as the costs to consumers and society of the additional 6,042 class actions that the proposal's Section 1022(b)(2) Analysis projected would be filed every five years. This commenter further noted that the Bureau did not study whether class actions are necessary as a deterrent given the impact of modern social media, explaining that in modern society providers have enormous incentive to ensure that their customers are satisfied and any disputes resolved fairly because dissatisfaction can be amplified on social media.

Another industry commenter challenged the Bureau's failure to survey market participants regarding their views on the deterrent effect of class action litigation.

A letter from some members of Congress urged the Bureau to gather more data on consumer outcomes.[388] Other comments expressed similar concerns. For example, one industry lawyer commenter suggested that the Study should have evaluated arbitration as a dispute resolution mechanism as compared to litigation for individual claims that are inappropriate for class action treatment. This commenter noted that the Bureau did not appear to consider the FTC's 2010 Study entitled “Repairing a Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration.” [389] The FTC's 2010 Study, suggested the commenter, criticized litigation as a dispute resolution mechanism and suggested that the Bureau consider this criticism in any regulatory effort that results in an increase in litigation. This same commenter also suggested that the Bureau should have examined a number of other items. Specifically, this commenter (along with another industry commenter) suggested that the Bureau should have studied whether there is any difference in the level of compliance between financial services companies with and without provisions in their contracts that can block class actions. The industry commenter suggested that the Bureau should have studied the effectiveness of its complaint process as a means of resolving consumers' issues. The industry lawyer commenter suggested that data to evaluate this might be reflected in the number or type of complaints received by the Bureau regarding each type of company. Similarly, the commenter also suggested that the Bureau should have studied whether class actions are the most efficient method of enforcing the law as compared to enforcement actions, although the commenter did not address how the Bureau should have gone farther than it did in Section 9.

Another industry commenter stated that, in its view, the Study could have been more comprehensive. This commenter listed a number of additional items that it contended the Bureau should have studied, including the evaluation of what it said were the advantages of arbitration in handling the most typical types of consumer complaints (which the commenter asserted were overcharges, duplicative charges, and other errors); in providing a less formal and more accessible forum to consumers; in the speedy resolution of claims; in actual monetary awards to claimants; and in aggregate cost to participants and related cost-savings; resolution of arbitrations without the involvement of counsel; and in consumer satisfaction. This commenter further criticized the Bureau for not making similar inquiries regarding class actions.

Several commenters, including an industry lawyer, a nonprofit, a group of State attorneys general, and two industry trade associations, criticized the Study (and the proposal) for drawing comparisons between settlements of class actions and decisions in arbitrations. These commenters all suggested that the Bureau could have drawn a more accurate comparison by comparing arbitration settlements with class action settlements. One of these commenters, a group of State attorneys general, noted that the Bureau had acknowledged that 57.4 percent of arbitrations were known or likely to have settled and asserted that it was reasonable to assume that the cases that settled were stronger claims. Some of these commenters also suggested that the Bureau should have evaluated class arbitration. The group of State attorneys general also noted that the Bureau's data on arbitration outcomes and class actions settlements was incomplete because the Bureau only had data for 20.3 percent of arbitrations and 60 percent of settlements. Relatedly, an industry commenter criticized the Bureau for focusing only on filed and adjudicated arbitrations, rather than those that settled or that were never filed in the first instance because a consumer achieved relief as a result of informal dispute resolution. A Congressional commenter also asked why the Bureau had not considered arbitration settlements in its Study.

Several industry commenters criticized the Study for comparing data regarding arbitration awards for a two-year period (2010 through 2011) to class action settlements over a five-year period (2008 through 2012). One commenter noted that the Bureau compared the fact that 34 million consumer class members received $1.1 billion in compensation over those five years to only 32 arbitration awards to consumers (that the Bureau could verify) for a total of only $172,433. This comparison is misleading, suggested the commenter, because it omitted arbitrations that resulted in a confidential settlement. This commenter further asserted that the Study was misleading because it reported the Start Printed Page 33242percentage recovery received by consumers who succeeded in arbitration (57 cents for every dollar), but did not report similar figures for payouts to consumers in class actions.

The Bureau received comments from several specific industry groups that variously asserted that the Study had omitted a fulsome analysis of their particular market or provider type. For example, a trade association commenter representing credit unions asserted that the Bureau studied only a small number of credit unions and criticized it for not engaging in more fulsome analyses of small entities more generally in its Study. A credit union commenter also expressed concern that most of the Bureau's analysis in Section 2 (prevalence) did not adequately represent products offered by credit unions and that there was limited evidence that credit unions use arbitration agreements. Relatedly, a trade association representing online lenders noted that its members were excluded from Section 2, although it acknowledged that its members almost uniformly used arbitration agreements and several installment lenders noted that both online and installment lenders were missing from Section 2.

A Tribal commenter asserted that the Bureau should have consulted with Tribal entities in order to understand how the Tribal governments resolve disputes and that the Bureau should have focused on Tribal businesses in various sections of the Study. Relatedly, a different Tribal commenter asserted that the Bureau did not examine Tribal dispute resolution and procedures or Tribal regulations that protect consumers.

Additionally, an industry trade association representing companies that are consumer reporting agencies (CRAs) said that the Bureau should have more fulsomely included CRAs in the Study in general and credit monitoring cases against CRAs and litigation pursuant to the Credit Repair Organizations Act (CROA) in particular. Although the commenter noted that the Bureau's analyses of class actions (in Section 8) included CRAs, it focused on the Bureau's failure to analyze individual disputes involving CRAs. The commenter further noted that credit reporting constituted one of the four largest product areas for class action relief but the Bureau did not define the scope of credit reporting class actions, and the Bureau only mentioned credit monitoring twice in its Study.

An industry trade association representing automobile dealers, asserted that the Bureau's Study contained virtually no information on automotive financing, and that what little evidence there was suggested that the Bureau did not understand the automotive finance industry. The commenter concluded that the Study's findings as to the automotive finance market were, at best, “murky.”

An industry commenter suggested that the Bureau should have, but did not, conduct an analysis of how arbitration and class actions operate in the “real world” and what the relative trade-offs are for consumers between each dispute resolution mechanism. Relatedly, the commenter expressed concern that the Study failed to balance adequately the actual benefits of the arbitration process against the costs of class-action lawsuits and the likely impacts of the proposal. An industry commenter criticized the Bureau for failing to study the impact of the proposal on online dispute resolution services and other methods of informal dispute resolution.[390] This commenter said that the Bureau overlooked what is potentially a large universe of consumer disputes that are addressed outside the courtroom, a universe far broader than what was addressed in the Study. Relatedly, an industry commenter suggested that the Bureau should have studied informal dispute resolution in addition to formal dispute resolution and a research center suggested that the Bureau's survey should have asked questions about informal dispute resolution. An industry commenter took issue with the Bureau's failure to study defense costs incurred by companies in defending class actions. The commenter asserted that the Dodd-Frank Act requires such an analysis. The commenter further asserted that the Bureau's assumptions in the Study regarding defense costs—that they are about 75 percent of the amounts awarded to plaintiff's attorneys in settled class actions and 40 percent in other cases—were ill-conceived.

An industry commenter asserted that the Study did not adequately assess the role of consumer choice—presumably for products with or without arbitration agreements. This commenter also stated that the Study should be re-conducted to evaluate the economic impact on providers and consumers of regulations that prohibit the use of class action waivers.

Response to General Comments on Study

In response to concerns about the Bureau's compliance with the Information Quality Act, the Bureau did comply with the IQA's standards for quality, utility, and integrity under the IQA Guidelines.[391] Moreover, the Study did not fall within the requirements of the OMB's bulletin on peer review, contrary to what the commenter suggested. The bulletin applies to scientific information, not the “financial” or “statistical” information contained in the Study.[392] The Federal financial regulators, including the Bureau, have consistently stated that the information they produce is not subject to the bulletin.[393]

Although the Bureau did not engage in formal peer review, it did include with its report detailed descriptions of its methodology for assembling the data sets and its methodology for analyzing and coding the data so that the Study could be replicated by outside parties. The Bureau is not aware of any entity that has attempted to replicate elements of the Study; to the extent that the Bureau's analysis has been reviewed by academics and stakeholders those individual critiques are addressed above. The Bureau has monitored academic commentary in addition to the comments submitted and continues to do so.

With respect to the claim that the Bureau did not provide notice of the scope of the Study, the Bureau notes that, although not required to do so by Dodd-Frank section 1028(a), the Bureau did, in fact, issue a request for information before commencing the Study to solicit public input with respect to its scope and the sources of data to which the Bureau should look.[394] Moreover, the Bureau released the Preliminary Results in late 2013, and at that time the Bureau listed the remaining topics it intended to study, thus providing clear public visibility into the Study's eventual scope. Furthermore, the Bureau held periodic meetings with stakeholders before, during, and after the Study (as discussed further in Part IV below) and Start Printed Page 33243received ongoing input regarding the appropriate Study scope.

As for the commenters concerned that the Bureau did not conduct a study of consumer satisfaction with their consumer financial products and services, the Bureau believes that even if it were to find very high levels of satisfaction, that would not affect the assessment of the various alternative dispute resolution mechanisms, especially given the potential for claims to go undiscovered by consumers. With respect to the concern that the Bureau did not evaluate consumer satisfaction with the arbitration process, the Bureau notes that it did not do so for several reasons. First, given the small number of consumers who participated in arbitration proceedings, it would have been difficult and costly to construct a sample of such consumers and obtain statistically reliable results. Second, it would have been difficult to distinguish consumer satisfaction with the process from consumer satisfaction with the outcome in particular cases. Thus, if a consumer received a poor or no settlement or award in an arbitration, he or she might view the process unfavorably even if the underlying claim was objectively poor and merited little relief. The opposite would also be true.[395] Third, given the finding that so few consumers brought individual claims in arbitration, the satisfaction of that small number of consumers who ultimately did use the process (assuming enough could be located to make a study of their satisfaction reliable) would not answer the question of whether all consumers should be limited to using arbitration to resolve disputes.

With respect to the related argument that the Bureau should have conducted a survey comparing consumers' experiences in arbitration as compared to class actions, the Bureau believes that it would have been exceedingly difficult to find consumers who had experienced arbitration, and any comparison in consumer experiences with arbitration and a class action would have suffered from selection bias (i.e., consumers who prevailed using one of the dispute resolution mechanisms would be more likely to express satisfaction with that mechanism). In any event, as is discussed further below in Part VI, the Bureau does not believe that consumers' relative satisfaction with a dispute resolution mechanism that they use quite infrequently should be afforded as much weight as the fact that the Study showed, and many commenters agreed, that arbitration agreements can preemptively limit consumers' ability to resolve disputes in class actions. Nor does the Bureau believe that other things that commenters suggested the Bureau should have studied were relevant or feasible (or both). As for studying the impacts on society of additional class actions and the potential loss of arbitration as a means of dispute resolution, these impacts are addressed in the Bureau's Section 1022(b)(2) Analysis.

As to those comments that criticized the Study for failing to compare dispute resolution outcomes, the Bureau carefully explained why such a comparison was neither feasible (because of the large volume of settlements or potential settlements where the outcome could not be determined) nor meaningful (because of potential selection bias in the choice of forum and in the cases that did not settle.)

In response to the industry lawyer commenter's criticism that the Bureau did not consider the FTC's 2010 Study of debt collectors' use of arbitration and litigation, the Bureau did review the FTC's 2010 Study in the course of analyzing materials for the 2015 Arbitration Study and, in any case, the Bureau believes the FTC's 2010 Study to be relevant to this rulemaking in offering background information on the use of arbitration in debt collection disputes brought against consumers.[396] The focus of the Bureau's Study and subsequent rulemaking, in contrast, is on the ability of consumers to seek affirmative relief for claims relating to consumer products and services—in other words, claims brought by consumers against their providers.

With respect to the claim that the Bureau should have further studied the value or necessity of class actions in deterring misconduct, the Bureau does not believe that a survey of companies or their representatives on this issue would have produced reliable information.

The Bureau believes that the review it undertook of how companies and their representatives respond to the filing and settlement of class actions, as discussed further below in Part VI, is much more probative than self-serving survey results. And, as set out below in Part VI.B, the Bureau believes that social media are insufficient to force companies to change company practices—because, among other reasons, many consumers do not know that they have valid complaints or how to raise their claims through social media. Further, in at least one study, companies ignored nearly half of the social media complaints consumers submitted, and when companies did respond, consumers were dissatisfied in roughly 60 percent of the cases.[397]

Regarding the commenter that suggested that the Bureau should have evaluated whether there is a different level of compliance for companies that use arbitration versus those that can be sued in a class action and that such an analysis can be conducted by review of the Bureau's complaint database, the Bureau disagrees with the premise of the comment; simple comparisons across companies that use arbitration versus those that do not, cannot be made using complaint data. The Bureau also notes that the largest volume of complaints concerns debt collectors, whose ability to invoke arbitration agreements is derivative of the clients they serve; credit reporting companies, which may not have contracts or arbitration agreements with consumers; and mortgage lenders and servicers, who generally are not covered by arbitration agreements. Additionally, the Study found that in certain markets—including GPR prepaid cards, payday loans, private student lending, and mobile wireless third-party billing—arbitration agreements are so common that it would be all but impossible to make the comparisons suggested. In response to the dual suggestions that the Bureau's consumer complaints database could be used to benchmark the compliance of providers with consumer laws or that the Bureau's complaints mechanism itself could be used as a form of dispute resolution instead of class actions, the Bureau observes that some industry commenters had opposed the Bureau's publication of consumer complaint narratives on the grounds that the Start Printed Page 33244Bureau's consumer complaint database contained unrepresentative data.[398]

As to whether class actions are superior methods of enforcing the law as compared to government enforcement, the Bureau does not believe this is a necessary subject of study. The more relevant question is the relative overlap between the two mechanisms and the extent to which class action cases pursue harms not otherwise addressed by government enforcement. Moreover, regardless of the outcome of this rulemaking, government enforcement will continue. The Bureau believes it more appropriate to compare, as the Study did, consumers' ability to achieve relief individually and as part of a class action. The question, analyzed in detail below, is whether government enforcement remedies all harms in the relevant markets or if class actions supplement government enforcement.[399]

In response to comments that criticized the Bureau for comparing outcomes in arbitration obtained through arbitral decisions (but not settlements) to class action settlements, the Bureau notes that the Study specifically cautioned that the two types of data were derived from different sources and should not be compared as apples to apples.[400] The Bureau conducted a fulsome analysis of all data that it could obtain but had no way to measure settlements of arbitrations that were not reported to the administrator. The Bureau notes that commenters did not suggest any way to overcome this limitation in the underlying record. Regarding the State attorneys general that commented on the incomplete nature of the Bureau's data on arbitration and class action outcomes, the Bureau notes that it expressly acknowledged the limitations of these data in the Study.[401]

The Bureau also disagrees that it overlooked the role of online dispute resolution. The Bureau had no direct way of studying the extent to which consumers were able to resolve disputes informally, and the Study specifically acknowledged that this is a means by which consumers may seek relief.[402] The Bureau did, however, use its case study of the Overdraft MDL to evaluate the extent to which informal dispute resolution obviated the need for a class action mechanism.[403] As this case study showed, even after deductions were made for previously-provided informal relief, there was still nearly $1 billion in relief provided to more than 28 million consumers in the class. This indicated that even if every consumer who sought informal relief was successful, most consumers were still without a remedy until they received a share of the class action settlement. For further discussion of individualized resolution of consumer disputes, see Part VI.B below.

As to the commenters that said that the Bureau should not have compared two years of arbitration data to five years of class action data, the Bureau studied arbitration records for the longest period practical given electronic data limitations. Although the Bureau could have similarly confined its study of class actions, the Bureau believed that studying settlements over a longer time period would provide more robust data to support firmer findings. The differences between the number of consumers involved in arbitration actions and individual actions of any type as compared to the number of consumers that benefited from class actions and the damages awarded in each were so stark as to mitigate any concerns about the difference in the time periods studied.[404] As a more technical point, the Bureau also notes that the commenter was not correct that the Bureau looked at only two years of arbitration data. The Bureau studied three years of arbitration filings, from 2010 to 2012, and two years of available arbitration outcomes for cases that were filed in 2010 and 2011 (i.e., the cases may not have been resolved in those years). As is explained in the Study, that window was chosen because 2010 was the first year that electronic records were available from the AAA.[405] As is further explained, when the Bureau conducted an analysis of the arbitration records (in 2013) complete records for many of the disputes that had been filed in 2012 were unavailable because those cases had not yet been resolved.[406]

Regarding the commenter that said that the Bureau was misleading by reporting percentage recovery in arbitration but not in class actions, the Bureau notes that it was only able to do the former because the AAA requires that the filing party specify the dollar amount of his or her claim in an arbitration.[407] Similar disclosures are typically not required by Federal or State court rules and are rarely included in class action complaints.[408] Accordingly, the Bureau was unable to calculate recovery rates for court proceedings.[409]

Regarding the focus of the Bureau on providers in specific categories, such as Tribal lenders, credit unions, online lenders, providers of automobile financing, and CRAs (including credit monitoring), the Bureau included in the Study those products and services offered by these providers to the extent that data was available and that these providers were relevant to each section of the Study. For example, to the extent a credit monitoring class action settlement occurred during the Study period, it is included in the analysis in Section 8. With respect to the Study's approach to credit unions, the Bureau notes that its review of credit cards in Section 2 included agreements offered by credit unions to the extent that credit unions are represented in the credit card agreement database mandated under the CARD Act.[410] The Bureau's review of deposit account agreements included agreements from the 50 largest credit unions. As is discussed in the Section 1022(b)(2) Analysis below, the Bureau notes that to the extent that the commenter was correct in its assertion that credit unions do not offer many products with arbitration agreements, the impact of this rule will be Start Printed Page 33245minimal.[411] As for online lenders, while the Bureau agrees that it did not specifically analyze this category in Section 2, it notes that the trade association commenter acknowledged in its letter that its members have arbitration agreements that can be used to block class actions. To state this another way, the Bureau did not specifically exclude any products or services because of the entity that offered it—whether Tribal, governmental or otherwise—although in some cases data were not specifically available for specific types of providers. As for Tribal regulations concerning dispute resolution, the Bureau focused its description on AAA and JAMS standards as the two largest arbitration administrators. As for the suggestion that the Bureau should have studied Tribal consumer protection laws, the Bureau did not study any particular jurisdiction's consumer protection laws and in any case, the commenter did not suggest the specific ways in which such Tribal laws would be meaningfully different from laws in other jurisdictions.

Regarding the comment that the Bureau should have conducted a “real world” analysis of arbitration and class actions and tradeoffs of each, the Bureau believes that the Study did attempt such an analysis. Specifically, it attempted to catalogue the cost, benefits, and efficacy (in terms of consumers involved) of each mechanism. Further, as is discussed in greater detail in the Section 1022(b)(2) Analysis below, the Bureau has considered the impacts on consumers and providers of the final rule it is adopting. To the extent that the commenter was concerned that the Study did not evaluate the relative merits of each mechanism, the Bureau believes that such an evaluation is better suited to the rulemaking process where it can consider the impacts of potential policy options. See Part VI Findings, below.

The Bureau does not agree, as one industry commenter suggested, that Dodd-Frank section 1028(a) required it to study defense costs. In any event, as set out above in Section III.D, above, the Bureau determined that it would be too difficult to gather additional information on any uniform basis about defense costs, given that at least some of this information may be considered privileged by companies. Further, as set out above, the Bureau made clear that it sought “transaction costs in consumer class actions,” but the Bureau received no such data from firms during the Bureau's Study process or in response to the proposal.

The Bureau did attempt to project such costs based on the best data available to it, and discussed their significance in the sections of the proposal analyzing whether it was in the public interest and for the protection of consumers and the proposal's potential impacts on covered persons and consumers under section 1022 of the Dodd-Frank Act. To the extent that the commenter's primary objection was to the significance that the Bureau accorded defense costs in its analyses, those are discussed in Part VI.C below.[412]

As to the commenter that urged the Bureau to study class arbitration, the Bureau notes that the Study addressed class arbitration in several ways. First, Section 2 addressed the percentage of arbitration agreements that allowed for class arbitration in the six product markets studied (the vast majority prohibit it).[413] Second, Section 4 reviewed AAA's and JAMS' class arbitration procedures.[414] Third, Section 5 reviewed the few consumer finance class arbitrations that did occur.[415]

As for the commenters that suggested that the Bureau should have studied informal dispute resolution, the Bureau notes that the Study did address informal dispute resolution in a number of contexts. For example, as noted above in the discussion of Section 8, the Bureau noted the impact of previously-resolved informal disputes on the overall amount paid out by the settling banks in the MDL overdraft litigation. The Bureau also considered the significance of the availability of informal dispute resolution mechanisms in both the proposal's Section 1028 proposed findings and Section 1022(b)(2) Analysis, and in their counterparts for the final rule below. In any event, the commenters did not specify what about informal dispute resolution the Bureau should have studied.

As for the commenter that asserted that the Bureau should have studied the role of consumer choice, the Bureau notes that the Study's consumer survey did address this question. Whether this should impact the rulemaking is addressed below in Part VI. Regarding the commenter's contention that the Bureau should have studied the economic impact of its proposal, the Bureau notes that Section 10 did attempt to analyze the likelihood that class action costs would be passed on to consumers. The Bureau also refers the commenter to the proposal's and this rule's Section 1022(b)(2) Analysis.

IV. The Rulemaking Process

A. Stakeholder Outreach Following the Study

As noted, the Bureau released the Study in March 2015. After doing so, the Bureau held roundtables with key stakeholders and invited them to provide feedback on the Study and how the Bureau should interpret its results.[416] Stakeholders also provided feedback to the Bureau or published their own articles commenting on and responding to the Study. The Bureau has reviewed all of this correspondence and many of these articles in preparing this final rule.

B. Small Business Review Panel

In October 2015, the Bureau convened a Small Business Review Panel (SBREFA Panel) with the Chief Counsel for Advocacy of the Small Business Administration (SBA) and the Administrator of the Office of Information and Regulatory Affairs with the Office of Management and Budget (OMB).[417] As part of this process, the Bureau prepared an outline of proposals under consideration and the alternatives considered (SBREFA Outline), which the Bureau posted on its Web site for review by the small financial institutions participating in the panel process, as well as the general public.[418] Start Printed Page 33246Working with stakeholders and the agencies, the Bureau identified 18 Small Entity Representatives (SERs) to provide input to the SBREFA Panel on the proposals under consideration. With respect to some markets, the relevant industry trade associations reported significant difficulty in identifying any small financial services companies that would be impacted by the approach described in the Bureau's SBREFA Outline.

Prior to formally meeting with the SERs, the Bureau held conference calls to introduce the SERs to the materials and to answer their questions. The SBREFA Panel then conducted a full-day outreach meeting with the small entity representatives in October 2015 in Washington, DC. The SBREFA Panel gathered information from the SERs at the meeting. Following the meeting, nine SERs submitted written comments to the Bureau. The SBREFA Panel then made findings and recommendations regarding the potential compliance costs and other impacts of the proposal on those entities. Those findings and recommendations are set forth in the Small Business Review Panel Report (SBREFA Report), which is being made part of the administrative record in this rulemaking.[419] The Bureau has carefully considered these findings and recommendations in preparing this proposal and addresses certain specific issues that concerned the Panel below.

C. Additional Stakeholder Outreach

At the same time that the Bureau conducted the SBREFA Panel, it met with other stakeholders to discuss the SBREFA Outline and the impacts analysis discussed in that outline. The Bureau convened several roundtable meetings with a variety of industry representatives—including national trade associations for depository banks and non-bank providers—and consumer advocates. Bureau staff also presented an overview of the SBREFA Outline at a public meeting of the Bureau's Consumer Advisory Board (CAB) and solicited feedback from the CAB on the proposals under consideration.[420]

D. The Bureau's Proposal

In May 2016, in accordance with its authority u section 1028 and consistent with its Study, the Bureau proposed regulations that would govern agreements that provide for the arbitration of any future disputes between consumers and providers of certain consumer financial products and services. The comment period on the proposal ended on August 22, 2016.

The proposal would have imposed two sets of limitations on the use of pre-dispute arbitration agreements by covered providers of consumer financial products and services. First, it would have prohibited providers from using a pre-dispute arbitration agreement to block consumer class actions in court and would have required providers to insert language into their arbitration agreements reflecting this limitation. This proposal was based on the Bureau's preliminary findings—which the Bureau stated were consistent with the Study—that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, that consumers rarely file individual lawsuits or arbitration cases to obtain such relief, and that as a result pre-dispute arbitration agreements lowered incentives for financial service providers to assure that their conduct comported with legal requirements and interfered with the ability of consumers to obtain relief where violations of law occurred.

Second, the proposal would have required providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral proceedings to the Bureau. The Bureau stated that it intended to use the information it would have collected to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that would warrant further Bureau action. The Bureau stated that it intended to publish these materials on its Web site in some form, with appropriate redactions or aggregation as warranted, to provide greater transparency into the arbitration of consumer disputes.

The proposal would have applied to providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money. Consistent with the Dodd-Frank Act, the proposal would have applied only to agreements entered into after the end of the 180-day period beginning on the regulation's effective date. The Bureau proposed an effective date of 30 days after a final rule is published in the Federal Register. To facilitate implementation and ensure compliance, the Bureau proposed language that providers would be required to insert into such arbitration agreements to explain the effect of the rule. The proposal would have also permitted providers of general-purpose reloadable prepaid cards to continue selling packages that contain non-compliant arbitration agreements, if they gave consumers a compliant agreement as soon as consumers register their cards and the providers complied with the proposal's requirement not to use arbitration agreements to block class actions.

E. Feedback Provided to the Bureau

The Bureau received over 110,000 comments on the proposal during the comment period. These commenters included consumer advocates; consumer lawyers and law firms; public-interest consumer lawyers; national and regional industry trade associations; industry members including issuing banks and credit unions, and non-bank providers of consumer financial products and services; nonprofit research and advocacy organizations; members of Congress and State legislatures; Federal, State, local, and Tribal government entities and agencies; Tribal governments; academics; State attorneys general; and individual consumers. In addition to letters addressing particular points raised by the Bureau in its preliminary findings, the Bureau received tens of thousands of form letters and signatures on petitions from individuals both supporting and disapproving of the proposal. As is discussed in greater detail in Part VI below, many thousands of consumers submitted comments generally disapproving of the Bureau's proposal (many of these comments were form comments) while many consumers submitted comments generally approving of the Bureau's proposal and, in many instances, urging a broader rule that prohibited arbitration agreements altogether in contracts for consumer financial products and services (many of these comments were form comments or petition signatures as well).

Since the issuance of the proposal, the Bureau has engaged in additional outreach. The Bureau held a field hearing to discuss the proposal and its potential impact on consumers and providers in Albuquerque, New Start Printed Page 33247Mexico.[421] The Bureau engaged in an in-person consultation with Indian Tribes in Phoenix, Arizona in August 2016 pursuant to its Policy for Consultation with Tribal Governments after the release of this notice of proposed rulemaking.[422] In addition, the Bureau received input on its proposal from its Consumer Advisory Board and its Credit Union Advisory Council. Finally, interested parties also made ex parte presentations to Bureau staff, summaries of which can be found on the docket for this rulemaking.[423]

V. Legal Authority

As discussed more fully below, there are two components to this final rule: a rule prohibiting providers from the use of arbitration agreements to block class actions (as set forth in § 1040.4(a)) and a rule requiring the submission to the Bureau of certain arbitral records and arbitration-related court records (as set forth in § 1040.4(b)). The Bureau is issuing the first component of this rule pursuant to its authority under section 1028(b) of the Dodd-Frank Act and is issuing the second component of this rule pursuant to its authority both under section 1028(b) and section 1022(b) and (c).

A. Section 1028

Section 1028(b) of the Dodd-Frank Act authorizes the Bureau to issue regulations that would “prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties,” if doing so is “in the public interest and for the protection of consumers.” Section 1028(b) also requires that “[t]he findings in such rule shall be consistent with the study.”

Section 1028(c) further instructs that the Bureau's authority under section 1028(b) may not be construed to prohibit or restrict a consumer from entering into a voluntary arbitration agreement with a covered person after a dispute has arisen. Finally, section 1028(d) provides that, notwithstanding any other provision of law, any regulation prescribed by the Bureau under section 1028(b) shall apply, consistent with the terms of the regulation, to any agreement between a consumer and a covered person entered into after the end of the 180-day period beginning on the effective date of the regulation, as established by the Bureau. As is discussed below in Part VI, the Bureau finds that its rule relating to pre-dispute arbitration agreements fulfills all these statutory requirements and is in the public interest, for the protection of consumers, and consistent with the Bureau's Study.

B. Section 1022(b) and (c)

Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.” Among other statutes, title X of the Dodd-Frank Act is a Federal consumer financial law.[424] Accordingly, in issuing this, the Bureau is exercising its authority under Dodd-Frank Act section 1022(b) to prescribe rules under title X that carry out the purposes and objectives and prevent evasion of those laws. Section 1022(b)(2) of the Dodd-Frank Act prescribes certain standards for rulemaking that the Bureau must follow in exercising its authority under section 1022(b)(1).[425]

Dodd-Frank section 1022(c)(1) provides that, to support its rulemaking and other functions, the Bureau shall monitor for risks to consumers in the offering or provision of consumer financial products or services, including developments in markets for such products or services. The Bureau may make public such information obtained by the Bureau under this section as is in the public interest.[426] Moreover, section 1022(c)(4) of the Act provides that, in conducting such monitoring or assessments, the Bureau shall have the authority to gather information from time to time regarding the organization, business conduct, markets, and activities of covered persons and service providers. The Bureau finalizes § 1040.4(b) pursuant to the Bureau's authority under Dodd-Frank section 1022(c), as well as its authority under Dodd-Frank section 1028(b).

VI. The Bureau's Findings That the Final Rule Is in the Public Interest and for the Protection of Consumers

The Bureau notes that commenters on the proposal made extensive comments on the Bureau's preliminary findings related to Dodd-Frank Act Section 1028(b), including its factual findings, its findings that the proposal would be for the protection of consumers, and its findings that the proposal would be for the protection of consumers. The bulk of these commenters did not identify whether their comments on particular topics were related to the preliminary factual findings (discussed below in Part VI.B), to the preliminary findings that the proposed rule would be for the protection of consumers (discussed below in Parts VI.C.1 and VI.D.1), or to the preliminary findings that it would be in the public interest (discussed below in Parts VI.C.2 and VI.D.2). Accordingly, for this final rule, the Bureau addresses each comment in the context of the finding it believes the comment was most likely addressing. There is significant overlap between the topics addressed in the final factual findings, the findings that the rule would be for the protection of consumers, and the finding that the rule would be in the public interest. The Bureau therefore incorporates each of its findings into the others, to the extent that commenters may have intended their comments to respond to a different preliminary finding or to more than one.

A. Relevant Legal Standard

As discussed above in Part V, Dodd-Frank section 1028(b) authorizes the Bureau to “prohibit or impose conditions or limitations on the use of” a pre-dispute arbitration agreement between covered persons and consumers if the Bureau finds that doing so “is in the public interest and for the protection of consumers.” This Part sets forth the Bureau's interpretation of this standard including a summary of its proposed standard and a review of comments received on it.

The Bureau's Proposal

As noted in the proposal, the Bureau can read this requirement as either a single integrated standard or as two separate tests (that a rule be both “in the public interest” and “for the protection of consumers”), and in order to determine which reading best effectuates the purposes of the statute, the Bureau exercises its expertise. The Bureau proposed to interpret the two Start Printed Page 33248phrases as related but conceptually distinct.

As discussed in the proposal, the Dodd-Frank section 1028(b) statutory standard parallels the standard set forth in Dodd-Frank section 921(b), which authorizes the SEC to “prohibit or impose conditions or limitations on the use of” a pre-dispute arbitration agreement between investment advisers and their customers or clients if the SEC finds that doing so “is in the public interest and for the protection of investors.” That language in turn parallels the Securities Act and the Securities Exchange Act, which, for over 80 years have authorized the SEC to adopt certain regulations or take certain actions if doing so is “in the public interest and for the protection of investors.” [427] The SEC has routinely applied this language without delineating separate tests or definitions for the two phrases.[428] There is an underlying logic to such an approach since investors make up a substantial portion of “the public” whose interests the SEC is charged with advancing. This is even more the case for section 1028, since nearly every member of the public is a consumer of financial products and services under Dodd-Frank. Furthermore, in exercising its roles and responsibilities as the Consumer Financial Protection Bureau, the Bureau ordinarily approaches consumer protection holistically. In other words, the Bureau approaches consumer protection in accordance with the broad range of factors it generally analyzes under title X of Dodd-Frank, which include systemic impacts and other public concerns as discussed further below. Therefore, the proposal explained that if the Bureau were to treat the standard as a single, unitary test, the Bureau's analysis would encompass the public interest, as defined by the purposes and objectives of the Bureau, and would be informed by the Bureau's particular expertise in the protection of consumers.

But the proposal further explained that the Bureau believed that treating the two phrases as separate tests would ensure a fuller consideration of relevant factors. This approach would also be consistent with canons of construction that counsel in favor of giving the two statutory phrases discrete meaning notwithstanding the fact that the two phrases in section 1028(b)—“in the public interest” and “for the protection of consumers”—are inherently interrelated for the reasons discussed above.[429] Under this framework, the proposal explained, the Bureau would be required to exercise its expertise to outline a standard for each phrase because both phrases are ambiguous. In doing so, and as described in more detail below, the Bureau would look to, using its expertise, the purposes and objectives of title X to inform the “public interest” prong,[430] and rely on its expertise in consumer protection to define the “consumer protection” prong.

The proposal explained that under this approach the Bureau believed that “for the protection of consumers” in the context of section 1028 should be read to focus specifically on the effects of a regulation in promoting compliance with laws applicable to consumer financial products and services and avoiding or preventing harm to the consumers who use or seek to use those products. In contrast, the proposal explained, under this approach the Bureau would read section 1028(b)'s “in the public interest” prong, consistent with the purposes and objectives of title X, to require consideration of the entire range of impacts on consumers and other relevant elements of the public. These interests encompass not just the elements of consumer protection described above, but also secondary impacts on consumers such as effects on pricing, accessibility, and the availability of innovative products. The other relevant elements of the public interest include impacts on providers, markets, and the rule of law, in the form of accountability and transparent application of the law to providers, as well as other related general systemic considerations.[431] The Bureau proposed to adopt this interpretation, giving the two phrases independent meaning.[432]

The proposal also explained that the Bureau's proposed interpretations of each phrase standing alone were informed by several considerations. As noted above, for instance, the Bureau would look to the purposes and objectives of title X to inform the “public interest” prong. The Bureau's starting point in defining the public interest therefore would be section 1021(a) of the Act, which describes the Bureau's purpose as follows: “The Bureau shall seek to implement and, where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.” [433] Similarly, section 1022 of the Act authorizes the Bureau to prescribe rules to “carry out the purposes and objectives of the Federal consumer financial laws and to prevent evasions thereof” and provides that in doing so the Bureau shall consider “the potential benefits and costs” of a rule both “to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services.” Section 1022 also directs the Bureau to consult with the appropriate Federal prudential regulators or other Federal agencies “regarding consistency with prudential, market, or systemic objectives administered by such agencies,” and to respond in the course of rulemaking to any written objections filed by such Start Printed Page 33249agencies.[434] In light of these purposes and requirements, as set forth in the proposal, the Bureau understands its responsibilities with respect to the administration of Federal consumer financial laws to be integrated with the advancement of a range of other public goals such as fair competition, innovation, financial stability, and the rule of law.

Accordingly, the Bureau proposed to interpret the phrase “in the public interest” to condition any regulation on a finding that such regulation serves the public good based on an inquiry into the regulation's implications for the Bureau's purposes and objectives. This inquiry would require the Bureau to consider benefits and costs to consumers and firms, including the more direct consumer protection factors noted above, and general or systemic concerns with respect to the functioning of markets for consumer financial products or services, as well as the impact of any change in those markets on the broader economy, and the promotion of the rule of law.[435]

With respect to “the protection of consumers,” as explained above and in the proposal, the Bureau ordinarily considers its roles and responsibilities as the Consumer Financial Protection Bureau to encompass attention to the full range of considerations relevant under title X without separately delineating some as “in the public interest” and others as “for the protection of consumers.” However, given that section 1028(b) pairs “the protection of consumers” with the “public interest,” the latter of which the Bureau proposed to interpret to include the full range of considerations encompassed in title X, the proposal explained that the Bureau believed, based on its expertise, that “for the protection of consumers” should not be interpreted in the broad manner in which it is ordinarily understood in the Bureau's work.

The Bureau instead proposed to interpret the phrase “for the protection of consumers” as used in section 1028(b) to condition any regulation on a finding that such regulation would serve to deter and redress violations of the rights of consumers who are using or seek to use a consumer financial product or service. The focus under this prong of the test, as the Bureau proposed to interpret it, would be exclusively on the impacts of a proposed regulation on the level of compliance with relevant laws, including deterring violations of those laws, and on consumers' ability to obtain redress or relief. For instance, a regulation would be “for the protection of consumers” if it adopted direct requirements or augmented the impact of existing requirements to ensure that consumers receive “timely and understandable information” in the course of financial decision making, or to guard them from “unfair, deceptive, or abusive acts and practices and from discrimination.” [436] Under this proposed interpretation, the Bureau would not consider more general or systemic concerns with respect to the functioning of the markets for consumer financial products or services or the broader economy as part of section 1028's requirement that the rule be “for the protection of consumers.” [437] Rather, the Bureau would consider these factors under the public interest prong.

The proposal stated that the Bureau provisionally believed that giving separate meaning and consideration to the two prongs would best ensure effectuation of the purpose of the statute. This proposed interpretation would prevent the Bureau from acting solely based on more diffuse public interest benefits, absent a meaningful direct impact on consumer protection as described above. Likewise, the proposed interpretation would prevent the Bureau from issuing arbitration regulations that would undermine the public interest as defined by the full range of factors discussed above, despite some advancement of the protection of consumers.[438]

Comments Received

Several commenters—a nonprofit, an industry trade association, two industry commenters, and an individual—supported the Bureau's proposal to interpret the legal standard as including two separate but related tests. A trade association of consumer lawyers argued for treating the legal standard as a single test given that other similar standards have traditionally been treated as unitary and that the Bureau's two proposed tests would have significant overlap.

One nonprofit commenter acknowledged that the phrase “public interest” is susceptible to multiple interpretations, but also stated that the Bureau's proposed interpretation of the legal standard includes factors that should not be considered. This commenter explained that, in its view, the Bureau should interpret the phrase in the context of the FAA and the longstanding Federal policy that encourages use of arbitration as an efficient means of resolving disputes. The commenter further suggested that section 1028 requires the Bureau to find that a regulation is in the public interest for reasons uniquely applicable to consumer financial products or services rather than for reasons that could apply to other types of products or services. Furthermore, this commenter contended that in enacting section 1028, Congress was not concerned with under-enforcement of laws because there is no specific reference to such considerations in that section of the statute or its brief legislative history. The commenter therefore asserted that the Bureau should not consider increased deterrence or enforcement in determining whether a regulation is “in the public interest and for the protection of consumers.”

Several commenters identified additional specific factors that, in their view, the Bureau should consider in its determination of whether the rule is in the public interest and for the protection of consumers. A group of State attorneys general and an industry commenter suggested that the legal standard should include the public's interest in the freedom of contract. The industry commenter also stated that the public interest standard should consider individuals' ability to choose whether to participate in class action litigation or to be bound by class action judgments. A group of State legislators argued that the Bureau should consider States' rights as a factor in its determination of whether the rule is in the public interest. The group stated that class waivers in arbitration clauses undermine States' ability to pass laws that will be privately enforced, measure the efficacy of those laws, or observe their development, and that the legal standard should account for such effects.

A group of State attorneys general argued that the proposed “protection of consumers” standard is incomplete because it is limited to providers' compliance with the law and consumers' ability to obtain relief. The commenters maintained that the Bureau should also consider consumers' Start Printed Page 33250interest in a “vibrant and flourishing financial market” as part of the standard.

Response to Comments

The Bureau is not persuaded by the nonprofit commenter that the standard should be treated as a single test on the ground that other similar standards have been treated as unitary and the Bureau's two proposed tests will have significant overlap. As explained in the proposal, the statutory standard is ambiguous, and while it is useful and relevant for the Bureau to consider how other similar standards have been applied, there are persuasive reasons, as set forth in the proposal, for the Bureau to adopt a different interpretation here in the context of section 1028.[439] The Bureau recognizes that the two tests will have significant overlap, but that in and of itself is not a reason to adopt a unitary test. Instead, the Bureau continues to believe that treating the two phrases as separate tests is more consistent with canons of statutory construction and may ensure a fuller consideration of relevant factors.[440]

The Bureau also disagrees with the nonprofit commenter that stated that the proposed interpretation includes factors that should not be considered. With regard to the commenter's contention that section 1028 requires the Bureau to find that a regulation is in the public interest for reasons uniquely applicable to consumer financial products or services rather than for reasons that could apply to other types of products or services, the Bureau notes that section 1028 contains no such limitation. As explained above, the proposed interpretation of the legal standard is guided by the Bureau's purposes and objectives as laid out in title X of the Dodd-Frank Act. The commenter did not identify a basis in the text of title X or the statute's underlying purposes for excluding factors derived from title X simply because they could apply to other products and services. In any event, the Bureau's findings are specific to consumer financial products and services and are based on an empirical study required by Congress that is specific to consumer financial products and services.[441]

Further, as noted above, the Bureau looks to the purposes and objectives of title X to inform the section 1028 standard, and the FAA is not referenced in those purposes and objectives. To the extent that Federal law encourages arbitration through the FAA, the Bureau notes that, as Congress has limited pre-dispute arbitration agreements in other contexts, Congress, through Section 1028, has granted the Bureau express authority to prohibit or otherwise limit the use of such agreements.[442] Thus, rather than incorporate the FAA per se into its public interest analysis, the Bureau conducted a robust analysis of the advantages and disadvantages of pre-dispute arbitration agreements as currently enforced (under the FAA) in markets for consumer financial products and services. This included whether consumers are able to meaningfully pursue their rights and obtain redress or relief in light of pre-dispute arbitration agreements with class waivers enforceable under the FAA, as discussed in Section VI.B.

The Bureau also disagrees with the commenter's contention that increased deterrence or enforcement should not be considered because section 1028 and its brief legislative history [443] do not specifically mention deterrence. As explained above, the Bureau looks to the purposes and objectives of title X to inform the “public interest” inquiry, and these statutory purposes and objectives evince a goal of enforcing the law and deterring illegal behavior as well as a mandate for the Bureau to do so.[444] Similarly, based on its expertise in consumer protection, the Bureau believes that deterring illegal behavior and enforcing the law are core aspects of the “protection of consumers.” The absence of a specific mention of deterrence or enforcement in section 1028 or its legislative history does nothing to undercut these conclusions. In fact, the Bureau believes that while the phrase “in the public interest and for the protection of consumers” is ambiguous it would be unreasonable not to consider deterrence as part of the standard.

A variety of commenters identified additional factors that they thought should be considered in the legal standard. The Bureau notes that the standard already encompasses the types of considerations suggested by these commenters, and thus, disagrees that it should specifically list these factors as a part of the legal standard. As the Bureau explained in the proposal, it interprets the public interest standard to include consideration of “benefits and costs to consumers and firms.” The standard thus accounts for impacts that a rule may have on consumers' “freedom of contract” and their ability to determine whether or not to participate in class actions. Likewise, both the public interest standard and the protection of consumers standard account for the extent to which laws are actually enforced. This includes the extent to which State laws that States intend to be privately enforced are actually enforced in this manner.

Finally, the Bureau also disagrees with the State attorneys general that suggested that the “protection of consumers” specifically (as opposed to the section 1028 standard generally or “the public interest” prong) should include consideration of a rule's impact on the general flourishing of the economy. As explained in the proposal, the Bureau generally views consumer protection holistically in its approach to fulfilling its mandate in accordance with the broad range of factors it considers under title X of Dodd-Frank. But in the context of section 1028, which pairs “the protection of consumers” with “the public interest,” the Bureau continues to believe that systemic impacts should be considered under the public interest standard rather than the protection of consumers standard. As such, the Bureau considers a variety of factors related to competition and the flourishing of the economy under the public interest Start Printed Page 33251standard rather than the protection of consumers standard. Such systemic impacts implicate benefits to consumers, including consumers' interests in “access to a vibrant and flourishing financial market” as noted by the commenter, and the Bureau considers those benefits in its public interest analysis.

The Final Legal Standard

For these reasons and those stated in the proposal, the Bureau is adopting the interpretation of the section 1028 standard largely as proposed, with minor wording changes for clarification, as restated below.

The phrase “in the public interest and for the protection of consumers” in section 1028 is ambiguous. The Bureau interprets it as comprising two separate but related standards.

The Bureau interprets the phrase “in the public interest” to condition any regulation under section 1028 on a finding that such regulation serves the public good based on an inquiry into the regulation's implications for the Bureau's purposes and objectives. This inquiry requires the Bureau to consider the benefits and costs to consumers and firms, including the more direct factors considered under the protection of consumers standard, and general or systemic concerns with respect to the functioning of markets for consumer financial products or services, as well as the impact of any changes in those markets on the broader economy and the promotion of the rule of law, in the form of accountability and transparent application of the law to providers.[445]

The Bureau interprets the phrase “for the protection of consumers” as used in section 1028 to condition any regulation on a finding that such regulation will serve to deter and redress violations of the rights of consumers who are using or seek to use a consumer financial product or service. The focus under this prong of the test is exclusively on the impacts of a regulation on the level of compliance with relevant laws, including deterring violations of those laws, and on consumers' ability to obtain redress or relief. Under the Bureau's interpretation, the Bureau does not consider more general or systemic concerns with respect to the functioning of the markets for consumer financial products or services or the broader economy as part of section 1028's requirement that the rule be “for the protection of consumers.” Rather, the Bureau considers these factors under the public interest prong.

B. The Bureau's Factual Findings Consistent With the Study and Further Analysis

The Study provides a factual predicate for assessing whether particular proposals would be in the public interest and for the protection of consumers. This part sets forth the factual findings that the Bureau has drawn from the Study and from the Bureau's additional analysis of arbitration agreements and their role in the resolution of disputes involving consumer financial products and services. The Bureau finds that all of the factual findings in this Part VI.B are consistent with the Study.

As noted in Part IV.E, above, the Bureau received many comments on the class proposal. In addition to letters addressing particular points raised by the Bureau in its preliminary findings, the Bureau received tens of thousands of letters and signatures on petitions from individuals both supporting and disapproving of the class proposal.[446]

The Bureau received letters from industry, including banks, credit unions, non-bank providers of consumer financial product and services, trade associations, academics, members of Congress, nonprofits, consumers, and others expressing disapproval of the Bureau's class proposal. The specifics of these letters are discussed in relevant part below. The majority of the letters criticizing the proposal expressed general disapproval rather than specific concerns with provisions of the proposed regulation. Many of these letters recited facts derived from the Study, such as the amount of payments received per consumer in class action settlements, the amount of relief received by consumers who obtained arbitral awards in their favor, the amount of fees paid to plaintiff's attorneys in class actions, and the proportion of class cases that do not result in classwide relief. Many of these comments expressed concerns that the proposal would raise the cost to consumers of financial services and that only plaintiff's attorneys would benefit from the class proposal because of the large fees that plaintiff's attorneys often receive when class action cases are settled. These urged the Bureau not to adopt the proposal.

The Bureau also received many comments from consumers, consumer advocates, nonprofits, public-interest consumer lawyers, consumer lawyers and law firms, academics, members of Congress, State attorneys general, State legislators, local government representatives, and others that expressed broad support for the class proposal. The specifics of these letters are also discussed in relevant part below. These commenters explained that, in their view, the proposal is in the public interest, for the protection of consumers and, if finalized, would be consistent with the Study. Many of these letters recited facts derived from the Study and cited by the Bureau in the proposal that support these findings. For example, many emphasized the need for class actions by comparing the benefits provided to consumers in individual arbitration and litigation with those provided in class actions. These letters also stated that forcing arbitration on consumers by means of form contracts is not in the public interest. Many asserted that consumers should never have to give up constitutional protections, such as the right to bring a case in court. A petition signed by many thousands of consumers asked the Bureau to restore consumers' right to join together to take companies to court. Other commenters urged the Bureau to adopt the class proposal because it would generally enhance consumer rights vis-à-vis financial institutions.

1. A Comparison of the Relative Fairness and Efficiency of Individual Arbitration and Individual Litigation Is Inconclusive

As explained in the proposal, the benefits and drawbacks of arbitration as a means of resolving consumer disputes have long been contested. The Bureau stated there that it did not believe that, based on the evidence currently available to the Bureau as of the time of the proposal, it could determine whether the mechanisms for the arbitration of individual disputes between consumers and providers of consumer financial products and services that existed during the Study period are more or less fair or efficient in resolving these disputes than leaving these disputes to the courts.[447] Accordingly, the Bureau preliminarily found that a comparison of the relative fairness and efficiency of individual Start Printed Page 33252arbitration and individual litigation was inconclusive and thus that a total ban on the use of pre-dispute arbitration agreements in consumer finance contracts was not warranted at that time.

Comments Received

Numerous industry, research center, and State attorneys general commenters disagreed with the Bureau's preliminary assessment that a comparison of the relative fairness and efficiency of individual arbitration and individual litigation is inconclusive. Instead, many of these commenters stated their belief that arbitration is a superior form of dispute resolution than individual litigation for consumers because it is less expensive, faster, and does not require the consumer to retain an attorney. For example, commenters stated that the informal nature of arbitration allows for a more streamlined process; that overburdened courts slow resolution of individual litigation; that arbitration hearings can be held via telephone or other convenient means, and that the lack of procedural complexity in arbitration minimizes the need for a consumer to have an attorney.[448] These commenters further stated that the class rule would cause providers to remove arbitration agreements from their consumer contracts altogether, thereby depriving consumers of arbitration as a forum for hearing their individual disputes and forcing them to proceed in court; the Bureau's response to these comments is addressed below in Part VI.C.1, because they relate to whether the class rule protects consumers and not these factual findings regarding a comparison of the relative fairness and efficiency of individual arbitration and individual litigation.

A group of State attorneys general commenters, a nonprofit commenter, many individual commenters, and Congressional, consumer advocate, academic, and consumer law firm commenters also disagreed with the Bureau's preliminary findings about the relative fairness of individual arbitration and individual litigation, but for reasons opposite those described above. Instead, these commenters stated that individual arbitration was so unfair relative to individual litigation that the Bureau should have protected individual consumers by banning outright the use of pre-dispute arbitration agreements. For example, several consumer advocate commenters and many individual commenters (including thousands of individuals who had signed petitions) argued that any arbitration proceeding that occurs pursuant to a pre-dispute arbitration agreement is “forced” and therefore unfair, and that arbitration agreements are contracts of adhesion that should not be permitted in any context. Other commenters argued that consumer arbitration cannot be neutral because it naturally favors repeat players—the providers who repeatedly hire arbitrators and select administrators—over consumers, who may only be involved in an arbitration once. One public-interest consumer lawyer commenter argued that only a complete ban on pre-dispute arbitration agreements would help consumers because consumers cannot find legal representation for arbitrations and few consumers file arbitrations in any case. Academic commenters stated that consumers should never be deprived of the right to go to court. A Congressional commenter noted that arbitral filing fees can be tens of thousands of dollars and thus are unaffordable to many consumers, particularly when compared to filing fees in court which vary but in some courts are as low as a few hundred dollars. Finally, another public-interest consumer lawyer commenter observed that many resources exist to help individual litigants use the court system—such as volunteer attorneys, offices that offer legal advice, publications, standardized pro se forms, videos, etc.—but that comparable resources do not exist to help individuals navigate arbitration proceedings.

Response to Comments and Findings

As noted in the proposal and explained in the Study, the Bureau believes that the predominant administrator of consumer arbitration agreements is the AAA, which has adopted standards of conduct that govern the handling of disputes involving consumer financial products and services. Commenters did not disagree with this preliminary finding. The Study showed that AAA arbitrations proceeded relatively expeditiously relative to litigation, that companies often advance consumer filing fees in arbitration, which does not occur in litigation, and that at least some consumers proceeded without an attorney. The Study also showed that those consumers who did prevail in arbitration obtained substantial individual awards—the average recovery by the 32 consumers who won judgments on their affirmative claims was nearly $5,400.[449]

At the same time, the Study showed that a large percentage of the relatively small number of AAA individual arbitration cases were initiated by the consumer financial product or service companies or jointly by companies and consumers in an effort to resolve debt disputes. The Study also showed that companies prevailed more frequently on their claims than consumers [450] and that companies were almost always represented by attorneys (90 percent of the claims analyzed) while consumers were represented significantly less (60 percent).[451] Finally, the Study showed that companies were awarded payment of their attorney's fees by consumers in 14.1 percent of 341 disputes resolved by arbitrators in companies favor' and consumers were awarded payment of their attorney's fees in 14.6 percent of the 341 disputes in which consumers prevailed and were represented by an attorney.[452]

In light of these results and in consideration of the comments received, the Bureau continues to believe that the results of the Study were inconclusive as to the benefits to consumers of individual arbitration versus individual litigation during the Study period. Nevertheless, because arbitration procedures are privately determined, the Bureau finds that they can under certain circumstances pose risks to consumers. For example, as discussed above in Part II.C and in the proposal, until it was effectively shut down by the Minnesota Attorney General, the National Arbitration Forum (NAF) was the predominant administrator for certain types of arbitrations. NAF stopped conducting consumer arbitrations in response to allegations that its ownership structure gave rise to an institutional conflict of interest. The Start Printed Page 33253Study also showed isolated instances of arbitration agreements containing provisions that, on their face, raised significant concerns about fairness to consumers similar to those raised by NAF, such as an agreement that designated a Tribal administrator that does not appear to exist and agreements that specified NAF as a provider even though NAF no longer handled consumer finance arbitration, making it difficult for consumers to resolve their claims.[453]

As first stated in the proposal, the Bureau remains concerned about the potential for consumer harm in the use of arbitration agreements in the resolution of individual disputes. Among these concerns is that arbitrations could be administered by biased administrators (as was alleged in the case of NAF), that harmful arbitration provisions could be enforced, or that individual arbitrations could otherwise be conducted in an unfair manner. The Bureau is therefore, as set out below at length in Part VI.D and the section-by-section analysis of section 1040.4(b), adopting a system that will allow it and the public, to review certain arbitration materials in order to monitor the fairness of such proceedings over time.

However, the Bureau disagrees with the consumer advocate and individual commenters that any arbitration proceeding pursuant to a pre-dispute arbitration agreement is necessarily “forced” and unfair, and that arbitration is not neutral. The Bureau recognizes that, with rare exception, contracts for consumer financial services are contracts of adhesion offered on a take-it-or-leave-it basis. In some markets, consumers may, in theory, be able to choose a provider that does not require pre-dispute arbitration but the Study found that credit card consumers generally do not understand the consequences of entering into a pre-dispute agreement or shop on that basis and the Bureau has no reason to believe that consumers in other markets are any different.[454] Furthermore, the Study found that there are markets for certain consumer financial services where pre-dispute arbitration agreements are nearly ubiquitous; consumers in those markets have little choice.[455] Thus, the Bureau generally agrees that consumers rarely affirmatively and knowingly elect to enter into pre-dispute arbitration agreements.

Nonetheless, the Bureau does not agree that the fact that consumers are largely unaware of these agreements means that the resulting arbitration proceedings are inherently unfair. As is discussed above, the Bureau finds that the Study did not provide any basis for evaluating whether individual arbitration proceedings resulted in demonstrably worse outcomes than individual litigation proceedings in a manner that warrants a more substantial intervention. The Bureau also disagrees with the comment that the Study identified a clear-cut repeat-player effect favoring of industry participants over consumer participants. As noted above, the Study showed that arbitration cases proceeded relatively expeditiously relative to individual litigation because companies often advance filing fees, the cost to consumers of arbitral filing fees was modest relative to individual litigation and at least some consumers proceeded without an attorney. The Study also showed that those 32 consumers who did prevail in arbitration obtained substantial individual awards.[456] For all of these reasons, the Bureau disagrees, at this time, with those commenters that recommended that it should completely ban the use of pre-dispute arbitration agreements.

The Bureau acknowledges that an arbitration agreement, by definition, deprives consumers of the right to bring disputes to court since an arbitration agreement permits a company to force any dispute it does not wish to litigate in court to an arbitral forum. On the other hand, an arbitration agreement gives consumers a new right—the right to force a company to resolve a dispute in arbitration. Absent such an agreement, consumers could proceed to arbitration only if the company is willing to arbitrate a particular dispute. Given the inconclusive nature of the evidence concerning the relative fairness or efficacy of individual litigation and arbitration in resolving consumer disputes, the Bureau is not prepared at this time to ban arbitration agreements.

2. Individual Dispute Resolution Is Insufficient in Enforcing Laws Applicable to Consumer Financial Products and Services and Contracts

Whatever the relative merits of individual proceedings pursuant to an arbitration agreement compared to individual litigation, the Bureau preliminarily concluded in the proposal, based upon the results of the Study, that individual dispute resolution mechanisms are an insufficient means of ensuring that consumer financial protection laws and consumer financial product or service contracts are enforced.

The Study showed that consumers rarely pursued individual claims against companies they dealt with based on its survey of the frequency of consumer claims, collectively across venues, in Federal courts, small claims courts, and arbitration. First, the Study showed that consumer-filed Federal court lawsuits are quite rare compared to the total number of consumers of financial products and services. As noted above, from 2010 to 2012, the Study showed that only 3,462 individual cases were filed in Federal court concerning the five product markets studied during the period, or 1,154 per year.[457] Second, the Study showed that relatively few consumers filed claims against companies in small claims courts even though most arbitration agreements contained carve-outs permitting such court claims. In particular, as noted above, the Study estimated that, in the jurisdictions that the Bureau studied, which cover approximately 87 million people, there were only 870 small claims disputes in 2012 filed by an individual against any of the 10 largest credit card issuers, several of which are also among the largest banks in the United States.[458] Extrapolating those results to the population of the United States suggests that, at most, a few thousand cases are filed per year in small claims court by consumers concerning consumer financial products or services.[459]

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As discussed in the proposal's preliminary findings, a similarly small number of consumers filed consumer financial claims in arbitration. The Study showed that from the beginning of 2010 to the end of 2012, consumers filed 1,234 individual arbitrations with the AAA, or about 400 per year across the six markets studied.[460] Given that the AAA was the predominant administrator identified in the arbitration agreements studied, the Bureau believes that this represents most consumer finance arbitration disputes that were filed during the Study period. Indeed, as noted in the proposal, JAMS (the second largest provider of consumer finance arbitration) reported to Bureau staff that it handled about 115 consumer finance arbitrations in 2015.[461]

Collectively, as set out in the Study, the number of all individual claims filed by consumers in individual arbitration, individual litigation in Federal court, or small claims court was relatively low in the markets analyzed in the Study compared to the hundreds of millions of consumers of various types of financial products and services.[462] As stated in the proposal's preliminary findings, the Bureau believes that the relatively low numbers of formal individual claims (either in judicial or arbitral fora) may be explained, at least in part, by the fact that legal harms are often difficult for consumers to detect without the assistance of an attorney who understands the relevant laws and whether to pursue facts unknown to the consumer that may support a claim. For example, some harms, by their nature, such as discrimination or non-disclosure of fees, can only be discovered and proved by reference to how a company treats many individuals or by reference to information possessed only by the company, not the consumer.[463] Individual dispute resolution therefore generally requires a consumer to recognize his or her own right to seek redress for any harm the consumer has suffered or otherwise to seek a dispensation from the company.

The Bureau also preliminarily concluded that the relatively low number of formally filed individual claims may be explained by the low monetary value of the claims that are often at issue.[464] Claims involving products and services that would be covered by the proposed rule often involve small amounts. When claims are for small amounts, there may not be significant incentives to pursue them on an individual basis. As one prominent jurist has noted, “Only a lunatic or a fanatic sues for $30.” [465] In other words, it is impractical for the typical consumer to incur the time and expense of bringing a formal claim over a relatively small amount of money, even without an attorney. Congress and the Federal courts developed procedures for class litigation in part because “the amounts at stake for individuals may be so small that separate suits would be impracticable.” [466] Indeed, the Supreme Court has explained that:

[t]he policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her own rights. A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor.[467]

The Study's survey of consumers in the credit card market reflected this dynamic. Very few consumers said they would pursue a legal claim if they could not get what they believed were unjustified or unexplained fees reversed by contacting a company's customer service department.[468]

As stated in the proposal, even when consumers are inclined to pursue individual claims, finding attorneys to represent them can be challenging. Attorney's fees for an individual claim can easily exceed expected individual recovery.[469] A consumer must pay his or her attorney in advance or as the work is performed unless the attorney is willing to take a case on contingency—Start Printed Page 33255a fee arrangement where an attorney is paid as a percentage of recovery, if any—or rely on an award of defendant-paid attorney's fees, which are available under many consumer financial statutes. Attorneys for consumers often are unwilling to rely on either contingency-based fees or statutory attorney's fees because in each instance the attorney's fee is only available if the consumer prevails on his or her claim (which always is at least somewhat uncertain). Consumers may receive free or reduced-fee legal services from legal services organizations, but these organizations frequently are unable to provide assistance to many consumers because of the high demand for their services and limited resources.[470]

For all of these reasons, the Bureau preliminarily found that the relatively small number of arbitration, small claims, and individual Federal court cases reflects the insufficiency of individual dispute resolution mechanisms alone to enforce effectively the relevant laws, including the Federal consumer financial laws and consumer finance contracts, for all consumers of a particular provider.

As discussed in the proposal, some stakeholders claimed that the low total volume of individual claims found by the Study in litigation or arbitration was attributable not to inherent deficiencies in the individual formal dispute resolution systems but rather to the success of informal dispute resolution mechanisms in resolving consumers' complaints. Under this theory, the cases that actually are litigated or arbitrated are outliers—consumer disputes in which the consumer either bypassed the informal dispute resolution system or the system somehow failed to produce a resolution. The Bureau preliminarily explained why it did not find this argument persuasive. As stated in the proposal, the Bureau preliminarily found that informal dispute resolution was not sufficient because—as with pursuing claims through more formal mechanisms—consumers may not know that their provider is acting in a way that harms them or that violates the law. Moreover, even when consumers recognize problematic behavior and decide to complain to their providers informally, companies exercise their discretion about whether they provide relief to particular consumers. The Bureau pointed out, for example, that a company could decide whether to provide relief to a consumer based on the customer's profitability, rather than based on the merit of the complaint. And in the Bureau's experience, even if companies resolve some disputes in favor of customers who complain, companies do not generally volunteer to provide relief to other affected customers who do not themselves complain.

Comments Received

Number of individual claims. Numerous industry, research center, and State attorneys general commenters challenged the Bureau's preliminary finding that consumers rarely pursued individual claims against their providers of consumer financial products or services. To the extent these comments relate primarily to the Study's data regarding this preliminary finding, they are summarized above in Part III.D. Various consumer advocate, public-interest consumer lawyers, nonprofit, and consumer lawyer commenters agreed with the Bureau's preliminary finding that consumers rarely pursued individual claims against providers of consumer financial products or services with whom they dealt. These commenters generally cited to the Bureau's Study and how it confirmed their own experiences concerning the relative rarity of individual cases across both arbitration and litigation. For example, a consumer advocate commenter highlighted data from the Study that indicated that borrowers of payday loans are particularly unlikely to pursue individual claims despite what the commenter asserted was evidence of broad misconduct by payday lenders. A law professor noted that there are also low numbers of consumer arbitrations in the cellular telephone industry, noting that one large company averaged less than 30 arbitrations a year despite having over 85 million customers.[471] An industry commenter asserted that the Bureau has no data on individual lawsuits filed in State court and, therefore, the Bureau has no basis for finding that consumers rarely file individual lawsuits.

Explanations for low number of individual claims. Few industry commenters addressed the Bureau's preliminary finding that consumers often are not aware that they are injured or do not fully understand their potential claims without legal advice. However, many industry, State attorneys general, and research center commenters disputed the relevance of the Study's consumer survey, which found that only 2 percent of respondents were likely to seek an attorney or file formal claims if they found an unexplained fee on their credit card bill.

On the other hand, numerous consumer advocate, public-interest consumer lawyer, and consumer lawyer and law firm commenters validated the Bureau's preliminary finding in this regard. Among the reasons given, one consumer advocate explained that consumers often do not know they are injured in the first place given the complexity of consumer finance products and the Federal and State laws and regulations governing those products. Similarly, a consumer law firm explained that their clients were often unaware of claims that they might be able to bring. Even when they are harmed, the commenter stated that consumers may not know that they may be entitled to a remedy, particularly when statutory damages are available. For example, a consumer may be frustrated by telephone calls from a debt collector but not know that the calls violate the Telephone Consumer Protection Act and that he or she is entitled to statutory damages. On the other hand, some industry commenters suggested that there are few individual consumer finance claims because public enforcement sufficiently remedies all violations of consumer finance laws.[472]

With respect to the Bureau's preliminary findings that consumers may not pursue individual claims because they are small, at least one industry commenter and one research center commenter agreed with the Bureau that consumer finance claims are often for small amounts and that it would not be rational for a consumer to pursue a very small claim, such as one for less than $200. Consumer advocates and other nonprofits commenters similarly agreed. However, other industry and research center commenters disagreed, asserting that consumer finance claims under laws Start Printed Page 33256that provide for statutory damages (sometimes as much as $1,000 or $1,500 per violation) or double or treble actual damages are not small. In one industry commenter's view, when consumers can receive statutory damages or double or treble damages, these damages create sufficient incentives for consumers to bring such claims. The commenter also suggested there may be some particular barrier to bringing small consumer finance claims in arbitration as compared to other types of small claims, because other types of small claims are more commonly filed in arbitration based on publicly available data. This commenter noted that claims under $1,000 amounted to approximately 2 percent of the consumer finance arbitrations in the Study, but that small claims generally amounted to 3.5 percent of all AAA consumer arbitrations (not limited to consumer finance) between 2009 and 2014. Another industry commenter asserted that consumers are particularly incentivized in California to pursue individual remedies because of the availability of rescission, restitution, injunctive relief, actual damages and attorney's fees under many California consumer protection statutes.

Numerous consumer advocate, individual consumer, consumer protection clinic law professors, academic, nonprofit, public-interest consumer lawyer, and consumer lawyer and law firm commenters agreed with the Bureau's preliminary finding that consumers do not pursue individual claims for many reasons, including their relative size and the difficulties inherent in bringing such claims on an individual basis. In support of the Bureau's findings in this regard, many consumer lawyers, individual consumers, and public-interest consumer lawyer commenters cited to specific examples from their own experiences with clients who were unable to pursue claims against providers of consumer financial products and services because of lack of time relative to the potential size of the claim. Similarly, a group of academic commenters concluded, based on their experience and expertise, that individual arbitrations are not and realistically never will be a sufficient substitute for consumer class actions because individual claims are worth small amounts of money and it is not worth consumers' time (or an attorney's time) to pursue them. In these commenters' view, even when consumers are motivated to do so it is hard to find legal representation, and individual consumers are often unaware of the claim in any event.

The same group of academic commenters further cited to a study looking at a broader array of consumer arbitration claims that found less than 4 percent of the claims were brought for $1,000 or less, which in their view confirms that consumers rarely bring small claims in arbitration.[473] A consumer lawyer noted that circumstances in consumers' lives can make bringing a claim difficult. This commenter explained that, in his view, consumers are busy working and providing for their families. Even assuming that arbitration is a streamlined process as compared to litigation in court, it can still involve time in drafting and filing a claim, researching and gathering documents, and other activities. In this commenter's opinion, lower-income people are less likely to make such an investment of time and resources.

An organization of public-interest lawyers also commented that in its experience, low-income consumers often have claims of no more than a few hundred dollars. While that money may be critical for low-income consumers, they are unable to invest the time and money necessary to pursue an uncertain recovery (e.g., taking time off of work, finding child care, etc.). A public-interest consumer lawyer relatedly commented that arbitration rules (citing AAA's 44-page consumer rules document) are incomprehensible to the average consumer. Similarly, a nonprofit commenter representing servicemembers commented that servicemembers and their families might find it particularly difficult to pursue individual claims against providers due to deployment, frequent moves, and other logistical challenges.

One consumer advocate commenter noted that the threat of extensive litigation prior to receiving a hearing on the merits of a claim discourages legitimate claims. This same commenter also noted that filing fees could discourage some claims. Relatedly, a consumer law firm commenter stated that, in its view, most consumers find the prospect of litigating (in small claims court or arbitration) pro se against a well-represented corporate entity to be far too intimidating and risky to be considered a legitimate avenue.[474] This commenter cited the small number of claims documented by the Bureau in the Study as evidence of these dynamics. A law professor commenter stated that, in her opinion, consumers rarely use arbitration because of the minimal oversight of arbitration's fairness and lawfulness, the failure to require a comprehensive system of fee waivers, and the limited access accorded third parties.

One public-interest consumer law firm commenter explained that, in its experience, it is hard to bring claims of fraud, unfair, or deceptive practices in individual consumer financial services cases because the value of such claims is small. A consumer law firm commenter stated that, in its experience, individual actions are inefficient because damages can be low or hard to quantify and that these challenges impact consumers' and attorneys' risk-reward calculus. Another consumer lawyer commented that the laws underlying consumer finance are complicated and often impenetrable to laypersons. As an example, this commenter cited to complicated judicial interpretations of New York's usury law that are based on precedents over one hundred years old.[475] A consumer advocate commenter explained that, in its opinion, consumers will take lower settlements when they do not have an attorney or if they fear not getting a fair decision from an arbitrator due to the arbitrator's potential bias.

A nonprofit commenter provided the Bureau with data from its own survey of consumers that found that most consumers know it is not practical to take legal action when the harm against them is relatively small.[476] A different nonprofit commenter suggested that the Start Printed Page 33257reason the Bureau's Study showed that most individual claims that reach a judgment in arbitration were of relatively high value was that these were the only cases most consumers wanted to pursue. A consumer advocate commenter agreed that individuals are likely to pursue only relatively high-dollar claims. On the other hand, a comment letter from a group of academics noted that while consumers may be discouraged from pursuing claims on an individual basis, consumers are motivated to pursue actions that can protect other consumers from being similarly injured; put another way, they are emboldened to pursue actions that will force providers to change their conduct.

With respect to the Bureau's preliminary finding that it is difficult for consumers to find attorneys to file small claims, few commenters disagreed. However, an industry commenter and a research center commenter stated their belief that consumers should be able to find attorneys for small claims asserting violations of statutes that provide for recovery of attorney's fees. On the other hand, several industry, consumer advocate, public-interest consumer lawyer, and consumer lawyer and law firm commenters agreed with the Bureau's preliminary findings that it is difficult for consumers to find attorneys for small individual claims. One industry commenter cited a study that showed that attorneys are unlikely to accept contingency fee cases for claims below $60,000.[477] The consumer lawyer and law firm commenters stated that only in rare cases did they find it economically sensible to bring individual small dollar claims regardless of the availability of statutory attorney's fees or contingent recoveries. For example, several public-interest consumer lawyer commenters explained that they lacked resources to handle all of the small-dollar claims that are brought to them by consumers on an individual basis and that, as a result, these consumers frequently abandoned these claims because they could not find other legal help. These commenters also noted that a typical attorney's hourly rate—were a consumer to decide on a fee-based arrangement with an attorney—would quickly eclipse the value of any such claim. In addition, even when attorney's fees are available under a statute (e.g., ECOA and TILA [478] ), commenters asserted that the uncertainty behind any legal claim and the ability to actually recover fees made both consumers and attorneys unwilling, in most cases, to bear that risk. A consumer lawyer discussed a particular case that the court sent to arbitration on an individual basis after it had been originally filed as a class action. The lawyer explained that it quickly became apparent that the client would not recover a fraction of the amount necessary to cover the time the lawyer had invested in the case by proceeding individually in arbitration, and the case was thus abandoned. Another public-interest consumer lawyer commenter suggested that, based on its experience, there are not enough legal services programs or private attorneys to pursue individually the claims of all victims.

Consumer attitudes regarding arbitration. Industry, research center, and government commenters suggested alternative reasons for why the Bureau found relatively few individual arbitration claims. Instead of the Bureau's explanations, these commenters stated that consumers are either unaware of arbitration or do not understand it which discourages them from bringing individual claims, and that such factors could be mitigated either by the Bureau or by the market. For example, one industry commenter suggested that consumers would file more claims in arbitration if they were more educated about the benefits of arbitration or if arbitration agreements were required to include consumer-friendly provisions, such as no-cost filing or “bonuses” for consumers who win claims in certain circumstances.[479] Another industry commenter suggested that consumers might not use arbitration because it is relatively new to consumer finance and that consumers may not yet know about how it can help them achieve relief for their claims. This commenter, who appeared to acknowledge that the number of consumers using arbitration is quite low, predicted that consumers would become more accustomed to using arbitration to resolve disputes given time. This same commenter suggested that the opponents of arbitration and the Bureau itself have helped create a negative public perception of arbitration that has discouraged consumers from pursuing it.

Informal dispute resolution. Many industry and research center commenters and a group of State attorneys general commenters suggested that there were relatively few individual claims because consumer harms were sufficiently remedied through informal dispute resolution. In so doing, these commenters disagreed with the Bureau's preliminary finding that informal dispute resolution is not sufficient to enforce the relevant laws, pointing to evidence in some court cases that large numbers of consumer complaints are resolved by informal dispute resolution. Some credit union commenters stated that there were particularly strong informal dispute resolution procedures in that market. One such commenter contended that the Study was flawed in failing to analyze informal resolution of disputes between companies and consumers. This commenter stated that the evidentiary record in AT&T v. Concepcion established that AT&T had awarded more than $1.3 billion to consumers in informal relief during a 12-month period. The same industry commenter noted that the Bureau's consumer complaint process facilitates informal resolution of consumer claims; the commenter emphasized in particular that over four years of the existence of the process, consumers had submitted more than 500,000 complaints and consumers had not disputed the company's response in more than two-thirds of the cases in which companies filed such a response.[480] One research center commenter asserted that in the Overdraft MDL case at least $15 million was refunded to consumers through informal dispute resolution, supporting the claim that consumers received significant relief from that process.

This research center commenter also cited studies showing that companies do provide informal relief to some consumers who complain. For example, the commenter cited a 2014 survey of 983 credit card users, in which 86 percent of consumers who asked their credit card company to reverse a late fee were successful and further asserted that success is likely not correlated to socioeconomic status because unemployed customers had about the same rate of success as those who were employed.[481] That commenter cited Start Printed Page 33258another study—referenced by the Bureau in the proposal—showing that almost two-thirds of consumer complaints to a mid-sized regional bank in Texas were voluntarily resolved in favor of the customer in the form of a full refund.[482] The commenter stated that that study further showed that the number of consumers who received full refunds varied based on the city in which the consumer lived or the type of complaint the consumer raised, but ranged from 56 percent to 94 percent.[483] Other commenters asserted that consumers can close their accounts and move to new financial service providers if they do not like how their providers handle informal disputes. Relatedly, an industry commenter asserted that the Bureau had overlooked complaints that consumers file with State attorneys general or other State agencies.

In contrast, many commenters agreed with the Bureau's preliminary findings as to the role of informal dispute resolution. A consumer advocate and a public-interest consumer lawyer commenter both explained that low-income consumers are significantly less likely to raise concerns directly with a company because they have limited time, resources, or confidence in their rights. Relatedly, a public-interest consumer lawyer commenter stated that it is much easier for low-income consumers to access justice through the courts than it is arbitration because arbitration lacks many of the procedural safeguards available in court. A different public-interest consumer lawyer commenter asserted that profitability models impact companies' treatment of consumers and thus low-income consumers who may be less profitable are less likely to be treated favorably.

Like the public-interest consumer lawyer commenter referred to above, a consumer law firm commenter agreed with the Bureau's preliminary finding that consumers may experience varied amounts of success through informal dispute resolution even when similarly situated. This commenter suggested that a particular consumer's sophistication, language skills, socioeconomic status, and tenacity all play important roles in determining whether the company will remedy the problem. Several commenters suggested that low-income consumers particularly benefit from class actions because these consumers are less likely than others to pursue relief individually. According to one consumer advocate, limited time, resources, or confidence may explain why low-income consumers are substantially less likely to advocate for their interests by complaining informally to a company or by pursuing formal relief. A public-interest consumer lawyer commenter suggested that low-income and vulnerable consumers may not realize that they have been the victim of unlawful predatory practices. Thus, the commenter asserted, class actions represent the only reasonable, private means for such consumers to obtain relief. Two commenters suggested that the specific characteristics of consumer financial services class action settlements make them favorably structured to provide consumers with meaningful relief. For example, one of these commenters noted that damages usually can be calculated with precision (e.g., if based on an improperly charged fee) and that classes are often readily ascertainable because providers typically have accurate records of their customers.[484]

With respect to the Bureau's preliminary finding that informal dispute resolution is not sufficient because a company can choose to respond (or not) to any consumer complaint, industry, research center, and a group of State attorneys general commenters asserted that companies with arbitration agreements have stronger incentives to provide relief to consumers who complain. For example, an industry and a research center commenter both asserted that companies have strong incentives to resolve complaints informally because companies' arbitration agreements typically require them to pay all of the filing fees for arbitration, which can be as high as $1,500, plus all expenses, and that this is a feature unique to arbitration. Therefore, these commenters contended that companies would rationally settle any claim raised by a consumer that was under $5,000, which the commenters asserted is the approximate cost to the company of any single arbitration. These commenters further noted that there is even greater incentive for companies to resolve claims informally when the arbitration agreements include “bonus provisions” requiring companies to pay consumers double or triple the company's highest settlement offer if the consumer wins on his or her arbitration claim in an amount that exceeds that settlement offer.

At least one research center commenter agreed with the Bureau's assertion that a consumer's profitability could factor into the provider's decision on how to resolve a dispute with that consumer, citing data that credit scores can influence whether providers decide to waive fees for particular consumers while also asserting that the Bureau cited faulty or incomplete data to support the theory that providers decide how to handle complaints based on consumer profitability.[485] This commenter contended, however, that profitability would be an appropriate standard for a provider to use in determining whether to resolve a dispute with a consumer because it is in the interest of consumers for the provider to keep only profitable customers. To the extent that providers retain unprofitable customers, the commenter asserted that fees become higher for all customers.

Other industry commenters and a research center commenter stated that there is sufficient incentive for providers to change general practices in response to informal complaints because it is time-consuming for providers to respond to complaints one by one, and thus they would prefer to change their practices wholesale with respect to all consumers for the sake of efficiency. For this reason, these commenters disagreed with the Bureau's assertion that companies are unlikely to globally change practices for all consumers when only a fraction of consumers complain. Offering a different opinion, a consumer law firm commenter stated that, in its experience, only hard-fought litigation can get a company to change its underlying practices; piecemeal, informal, individual complaints are too small and too easily ignored by most companies.

Additionally, several commenters, including industry, research center, and State attorneys general commenters, contended that consumers do not file formal individual claims because they prefer instead to move their business to other companies. The State attorneys general commenters and an industry commenter cited data from the Bureau's consumer survey that they contend shows a small number of consumers Start Printed Page 33259would pursue a legal remedy as opposed to a market-based one. Thus, to keep customers happy, companies maintain positive policies and comply with the law regardless of the availability of private enforcement. Similarly, a few industry commenters suggested that there was no need for consumers to file claims in arbitration or litigation or to pursue informal dispute resolution because consumers can use social media to address business practices that consumers believe to harm them. In one commenter's view, a consumer's social media complaint about their provider can quickly attract support from many other consumers and cause a company to change its practices.

Response to Comments and Findings

Number of individual claims. Comments that asserted that the Study methodology undercounted the number of individual claims filed in court or arbitration are addressed above in Part III.D. Beyond the debates about specific sources and counting methodologies, the Bureau emphasizes that it did not purport to provide a comprehensive report of the entire universe of individual consumer financial claims but instead offered data that is indicative of the larger market. Taken together, the total number of individual consumer financial claims identified in the Study was approximately 2,400 per year.[486] Even multiplying those 2,400 claims by 10 or 100 to account for the markets and jurisdictions the Study did not analyze would amount to less than 250,000 individual claims. The result would still be a low number of individual claims in relation to the hundreds of millions of individual consumer financial products and services. The Bureau believes this supports the finding that a small number of consumers seek individual redress either through arbitration or the courts.[487] Accordingly, the Bureau finds, in accordance with the preliminary findings, that the number of individual filings is low in comparison to the relative size of the market for consumer financial products and services.

Explanations for number of individual claims. Many industry commenters disagreed with the Bureau's preliminary findings as to why consumers do not file many individual claims. For example, one research center commenter stated that claims under certain of the consumer financial laws that provide for statutory damages or double or treble actual damages if the consumer prevails are necessarily large enough to incentivize consumers and attorneys to pursue the claims. The Bureau disagrees. First, as a matter of logic and as supported by examples provided by several public-interest consumer lawyer and consumer lawyer and law firm commenters, statutory damages cannot incentivize a consumer to bring a claim about which he or she is unaware. For example, consumers who do not receive the disclosures to which they are entitled may not know that something was missing. Consumers who are subject to discrimination may not know that others are being treated more favorably. Consumers who are charged a fee disallowed by State law or contract may not know that the fee was impermissible. In some cases, consumers may not even be aware that any action has been taken with respect to them. For example, the Bureau recently settled an enforcement action with a large bank related to its widespread practice of opening consumer accounts without their knowledge.[488] Because most of the victims of this conduct were unaware that the accounts were being opened, those customers could not have complained about those accounts to the bank through either formal or informal mechanisms.

Second, even if a consumer is aware that he or she was harmed, the availability of statutory damages and attorney's fees (or even particularized types of relief like restitution and rescission available under certain State's laws, as one commenter suggested) could only incentivize filing a claim over a small harm if the consumer were aware of those statutory provisions. While there may be some well-informed consumers who are aware and thus seek out an attorney to pursue such claims, the Bureau believes—based on its expertise and experience with consumer financial markets and as was noted by several commenters—that those consumers are likely in the minority. Indeed, the consumer survey conducted as part of the Study, as well as the nonprofit's survey noted above, is indicative of how unlikely consumers are to pursue claims even when they are confident they have been wronged and contradicts industry comments suggesting otherwise.[489]

Third, even if a consumer is both aware of a wrong and aware of the availability of statutory damages and attorney's fees, the statutory damages or attorney's fees may be insufficient motivation for the consumer or his or her attorney given the uncertainty of recovery and the potential size of such recovery relative to the time required to pursue the claim even if the potential value of that claim is larger than the consumer's actual damages.[490] Notably, most industry commenters did not disagree with the Bureau's preliminary finding that it is difficult for consumers to find attorneys for small claims; indeed, one industry commenter cited a study finding that attorneys will not take a claim valued at less than $60,000—much higher than the $1,000 or $1,500 in statutory damages provided by many of the consumer financial statutes. Thus, even if, as one commenter suggests, most claims are above $1,000, they may still be too small to be worth the time for most consumers to find an attorney to pursue them. And as discussed further below, even if individual arbitration reduces the amount of time and need for attorney representation relative to individual litigation, the Bureau believes that the time required to pursue small claims is still sufficient to discourage many consumers from doing so. Moreover, there are many claims concerning consumer financial products or services for which statutory damages are not available, including common law tort and contract claims.

A research center commenter also suggested that small claims are more commonly filed in arbitration with respect to non-consumer financial Start Printed Page 33260products and services than for consumer finance claims, which the commenter believes may reflect something particular about consumer finance claims. While a small claims filing rate of 3.5 percent for all types of claims is higher than a small claims filing rate of 2 percent for consumer finance claims, both are low rates of filing. Indeed, even if the number of consumer finance arbitration cases involving small claims were to double, to 4 percent, that would mean only an additional 25 cases per year, still a very low figure.[491] With respect to commenters that suggested that consumers do not file individual claims because their disputes are adequately resolved through public enforcement, the Bureau will respond to that argument in depth below in Part VI.B.5.

Consumer attitudes regarding arbitration. With respect to the comments that suggested that consumers' current attitudes and awareness levels about arbitration tend to suppress the number of individual arbitrations but could be shifted over time, the Bureau views those suggestions as speculative and not persuasive. Arbitration agreements have existed in consumer finance contracts since the early 1990s, meaning consumer have had more than 20 years to become aware of arbitration and yet the Study found that consumers file only a few hundred arbitrations a year. Thus, arbitration is hardly novel and the Bureau doubts that novelty is depressing consumer filings in arbitration. Indeed, the availability of individual litigation is not novel, yet consumers rarely bring individual cases in court either.

Even assuming for the sake of argument that the low use of arbitration were attributable to awareness levels, the Bureau is skeptical as to whether it is realistic to believe that all or most consumers could be educated about the terms of arbitration agreements to significantly improve consumer attitudes or awareness. Indeed, even if every consumer subject to an arbitration agreement received education about arbitration, understood the agreement's terms and had a positive attitude toward arbitration—and even if every arbitration agreement provided for company-paid filing fees and minimum award amounts—it still would be the case that use of the arbitration system would be limited by consumers' lack of awareness of potential legal violations, reluctance to pursue formal claims, and the low value of their claims relative to the time required to pursue their claims.

For all these reasons, the Bureau finds that there are structural and behavioral factors that prevent individual dispute resolution systems—including both arbitration and litigation—from providing an adequate or effective means of assuring that harms to consumers are redressed.

Informal dispute resolution. As for the industry commenters that disagreed with the Bureau's preliminary finding that informal dispute resolution cannot explain the low volume of individual cases observed, the Bureau is not persuaded. The Bureau acknowledges that informal dispute resolution provides at least some relief to some consumers who are harmed by and complain to their consumer financial service providers. The Bureau stated in the proposal that it understands that when an individual consumer complains about a particular charge or other practice, it is often in the financial institution's interest to provide the individual with a response explaining that charge and, in some cases, a full or partial refund or reversal of the practice, in order to preserve the customer relationship. Indeed, the Bureau cited such evidence in the proposal arising out of the Overdraft MDL (approximately $15 million in informal relief had been provided by defendants in those cases), and commenters provided evidence of studies reflecting that companies sometimes provide informal relief to consumers.[492] The Bureau's consumer complaint function is specifically designed to facilitate informal dispute resolution and has been successful in doing so for many thousands of consumers. The Bureau's concern, however, is not with those complaints that are resolved, but with those situations in which consumers are unaware of harm in the first instance or are aware of harm but do not advocate for informal resolution as effectively as other complainants, as well as with those complaints that are resolved in ways that do not affect the financial institution's future behavior.

As noted in the proposal and discussed further above, for a variety of reasons, many consumers may not be aware of whether a company they deal with is complying with the law or not. Furthermore, consumers may not even think about a company's customer service function as a way of seeking redress for certain types of wrongs. For example, the Bureau believes, based on its experience and expertise, that consumers are unlikely to know when they have received inadequate disclosures and, even if they do, they are unlikely to call a customer service department over such an issue. Similarly, the Bureau is not aware of informal dispute resolution successfully resolving complaints of discrimination, systematic miscalculations of interest rates, certain types of deceptive advertising,[493] improper furnishing of credit information about which the consumer was unaware, and other common harms that are largely imperceptible to the average consumer. Consumers are more likely to use a customer service function, for example, to question charges that appear on their bill, including fees assessed by the financial institution. Even in those cases, the consumer first must notice the charge and, in some instances, further recognize that there is some basis to challenge or question the charge if the initial request is rebuffed. Based on its experience, the Bureau does not believe that even a majority of consumers have such an awareness. Thus, an informal dispute resolution system is unlikely to be used by most or all consumers who are adversely affected by a particular illegal practice. For example, one survey cited by a commenter showed that only 28 percent of consumers surveyed had ever asked to have such fees waived and not all of these were successful.[494] In other words, most consumers simply do not seek informal resolution of wrongful Start Printed Page 33261actions. Moreover, commenters noted and studies have found that poorer and less educated consumers are less likely to seek resolution of disputes through informal means because they lack sufficient information to pursue claims informally, are unfamiliar with the process, or do not have the time to pursue it.[495] As to commenters who suggested that the Bureau overlooked that consumers can pursue claims informally by contacting their State attorneys general or other regulators, the Bureau does not believe that it overlooked a substantial number of complaints that consumers file with State attorneys general or other State regulators. To the extent that they do, the Bureau addresses the ability of State enforcement agencies to remedy harms in section VI.B.5 below.

Further, none of the evidence cited by commenters refuted the Bureau's preliminary finding that companies can and do choose—for any reason—not to resolve complaints informally, and that the outcome of these disputes may be unrelated to the underlying merits of the complaint.[496] As noted in the proposal, nothing requires a company to resolve a dispute in a particular consumer's favor, to award complete relief to that consumer, to decide the same dispute in the same way for all consumers, or to reimburse consumers who had not raised their dispute to a company. Regardless of the merits or similarities between the complaints, the company retains discretion to decide how to resolve them. This is true even with respect to providers that are member-owned, like credit unions. For example, if two consumers bring the same dispute to a company, the company might resolve the dispute in favor of a consumer who is a source of significant profit while it might reach a different resolution for a less profitable consumer.[497] Indeed, as the Bureau stated in the proposal, in the Bureau's experience it is quite common for financial institutions (especially the larger ones that interact with the greatest number of consumers) to maintain profitability scores on each customer and to cabin the discretion of customer service representatives to make adjustments for complaining consumers based on such scores.[498] For example, in the study of a midsize bank in Texas cited by some commenters, 44 percent of consumers who complained about one type of fee were not offered a refund in one city in which the bank operated.[499] While there is no way to know whether the complaints that consumers made in that study reflect violations of the law, it shows the differential treatment that can occur. Furthermore, in some markets, consumers have no choice as to their provider, and thus companies need not worry about losing the consumer's business if complaints are left unresolved. This is most obviously true with respect to servicing markets, such as student loan servicing and debt collection.

One research center commenter agreed with the Bureau's preliminary findings in this regard and stated its belief that a company should deny informal relief to less profitable consumers in order to maintain reasonable fees for other more profitable consumers. The Bureau agrees that in the context of informal complaint handling systems—which do not adjudicate the merits of claims but rather exist to enhance a company's business interests—it is rational for a company to forgive a fee charged to a profitable consumer and not to do so for an unprofitable consumer. But that is precisely the point: in the eyes of the law, wrongful fees should be reimbursed without regard to the profitability of the customer incurring the fee. This commenter's argument thus illustrated one of the limitations of informal dispute resolution as a method of enforcing the consumer protection laws. In this realm, a company can choose which complaints it wishes to resolve for which consumers, and that choice is likely to be very different than the decision made by a neutral judge after a consumer has filed a claim alleging violations of the law.

As noted in the proposal, the Study's discussion of the Overdraft MDL provided an example of the limitations of informal dispute resolution and the important role of class litigation in more effectively resolving consumers' disputes.[500] In the cases included in the Overdraft MDL, certain customers lodged informal complaints with banks about the overdraft fees. The subsequent litigation revealed that banks had been ordering transactions based on the size of the transaction from highest to lowest amount to maximize the number of overdraft fees. As far as the Bureau is aware, these informal complaints, while resulting in some refunds to the relatively small number of consumers who complained, produced no changes in the bank practices in dispute. Ultimately, after taking into account the relief that consumers had obtained informally, nearly 29 million bank customers received cash relief in court settlements over and above relief through informal dispute resolution Start Printed Page 33262processes.[501] Furthermore, the litigation resulted in fundamental changes in the banks' transaction ordering processes that had not previously occurred as a result of the informal complaints and informal relief. While industry commenters cited this example as an instance where informal dispute resolution provided significant relief, it also supports the Bureau's conclusion that informal dispute resolution does not provide systemic relief of consumer harms.

As to commenters' arguments that companies with arbitration agreements have strong incentives to resolve complaints in consumers' favor in order to avoid the cost of arbitral fees and the risk of paying a “bonus” award, the Bureau acknowledges that companies with arbitration agreements have at least some incentive to resolve informal disputes with consumers especially when the company suspects that the consumer, if unsatisfied, will file an arbitration case and cause the company to incur filing fees. It is also true that companies without arbitration agreements have an incentive to resolve informal disputes with consumers when they suspect that litigation will otherwise result, since litigation can result in defense costs which exceed the costs of arbitral fees or of arbitral defense. It is unclear, at best, whether arbitration agreements create greater incentives to resolve a complaint informally than the risk of litigation and commenters did not provide data or evidence to show otherwise.[502] Indeed, one recent news article about AT&T—a company that includes a “bonus” provision in its arbitration agreements—reports that only 18 of its approximately 150 million customers filed claims in arbitration against the company over a two-year period.[503] In any event, whatever the source of the incentives that might encourage a company to settle a consumer dispute informally, these incentives only go so far, particularly when the company knows that the vast majority of consumers who complain will not formally pursue the matter and that individual complaints can be resolved informally without systemic change. For example, as discussed above in this Part VI.B.2 with respect to the explanation for the low number of individual claims consumers file, the Bureau recently settled an enforcement action with a large bank concerning its employees' practices of opening unauthorized accounts on behalf of customers that had pre-existing accounts with the bank.[504] During the Bureau's investigation of that bank, it uncovered that some individual consumers had discovered the unauthorized accounts and complained about them; but the bank's employees nevertheless continued the widespread practice with respect to many other customers. Similarly, the Bureau settled another enforcement case with a buy-here, pay-here automobile dealer concerning violations of the FDCPA and the FCRA in which the Bureau discovered that several customers had disputed the improper credit reporting information with the dealer without the dealer taking any corrective action.[505] In some instances, the dealer informed the customers in writing that the account information had been corrected when it had not been.[506]

With respect to the comments that suggested that there were few individual claims because companies will change practices that harm consumers when consumers complain on social media, the Bureau believes that social media are insufficient to force companies to change company practices and, by extension, to enforce the consumer protection laws for the same primary reason that informal dispute resolution is insufficient—because many consumers do not know that they have valid complaints or how to raise their claims through social media. Further, companies can choose either to ignore or resolve such complaints at their own option especially in markets where consumers cannot take their business elsewhere; and companies can resolve complaints on a one-off basis with the individual complainant. Indeed, as discussed above in Part II.E, at least one study of social media complaints found that companies ignored nearly half of the complaints consumers submitted and that when companies did respond, consumers were dissatisfied in roughly 60 percent of the cases.[507]

Thus, while informal dispute resolution systems may provide some relief to some consumers, the Bureau finds that these systems alone are inadequate mechanisms to resolve potential violations of the law that broadly apply to many customers of a particular company for a given product or service. The Bureau further finds that the prevalence of these systems cannot and does not explain the low volume of individual cases pursued through arbitration, small claims courts, and in Federal court.

3. Class Actions Provide a More Effective Means of Securing Significant Consumer Relief for Large Numbers of Consumers and Changing Companies' Illegal and Potentially Illegal Behavior

The Bureau preliminarily found, based on the results of the Study and its further analysis, that the class action procedure provides an important mechanism to remedy consumer harm. More specifically, the Bureau preliminarily found, consistent with the Study, that class action settlements are a more effective means than individual arbitration (or litigation) for assuring that large numbers of consumers are able to obtain monetary and injunctive relief for wrongful conduct, especially for claims over small amounts.

As noted in the preliminary findings, in the five-year period studied, the Bureau was able to analyze the results of 419 Federal consumer finance class actions that reached final class settlements. These settlements involved, conservatively, about 160 million consumers and about $2.7 billion in Start Printed Page 33263gross relief of which, after subtracting fees and costs, made $2.2 billion available to be paid to consumers in cash relief or in-kind relief.[508] Further, as set out in the Study, nearly 24 million class members in 137 settlements received automatic distributions, meaning they received payments without having to file claims.[509] In the five years of class settlements studied, at least 34 million consumers received $1.1 billion in payments.[510] In addition to the monetary relief awarded in class settlements, consumers also received non-monetary relief from those settlements. Specifically, the Study showed that there were 53 settlements covering 106 million class members that mandated behavioral relief that required changes in the settling companies' business practices beyond simply to comply with the law. The Bureau further preliminarily found that the fact that many cases filed as putative class cases do not result in class relief does not change the significance of that relief in the cases that do provide it, both because putative class members may still be able to obtain relief on a classwide basis after those individual outcomes and because the cost of defending a putative class case that ends in this manner is relatively low in comparison to the cases that provide class relief.

Based on its experience and expertise—including its review and monitoring of these settlements and its enforcement of Federal consumer financial law through both enforcement and supervisory actions—the Bureau also preliminarily found that behavioral relief could be, when provided, at least as important for consumers as monetary relief. Indeed, prospective relief can provide more relief to more affected consumers, and for a longer period, than retrospective relief because a settlement period is limited (and provides a fixed amount of cash relief to a fixed number of consumers), whereas injunctive relief lasts for years or may be permanent and may apply to more than just the defined class.

In the discussion that follows, the Bureau reviews comments on these two preliminary findings, addresses concerns raised in those comments, and makes its final findings on these issues. At the outset, the Bureau notes that the bulk of the critical comments it received on these preliminary findings concern the actual cash compensation to consumers in class action settlements and other related concerns commenters have about class actions, with far fewer commenters addressing behavioral relief despite its relative importance to the Bureau's preliminary findings. Thus, while the bulk of the discussion focuses on the former preliminary finding, the Bureau emphasizes below the non-monetary benefits of class actions.[511]

Comments Received

Monetary Relief Provided by Class Actions. Many industry and research center commenters disagreed with the Bureau's preliminary finding that class actions provide significant monetary relief to consumers who have been harmed; instead, these commenters highlighted the fact that the Study showed that individuals received, on average, only $32 per person from the class action settlements studied.[512] Some of these industry and research center commenters further pointed out that the average recovery of $32 is particularly low if compared to the Study's finding that consumers who win claims in arbitration recover an average of nearly $5,000 per claim. One commenter provided examples of specific cases involving low payouts. A group of automobile dealers and a law firm representing automobile dealers in California similarly commented that in the class actions studied concerning automobile loans, the average relief provided was $337 per consumer, less than a typical consumer's monthly car payment. In this commenter's view, that average recovery is very low in light of the value of the claims asserted in a typical case concerning automobile loans. Relatedly, the same group of automobile dealers and another group of trade associations representing automobile dealers criticized class action settlements as unnecessary for cases in which consumers have claims worth higher dollar amounts, such as, in the commenter's view, claims concerning automobile purchase loans. These commenters asserted that individual consumers have sufficient incentive to bring individual claims concerning these products, which the commenter asserted were typically for $1,000 or more (though it cited no data in support of this figure).[513]

Numerous consumer advocates, academics, consumer law firms and research center commenters agreed with the Bureau's preliminary finding that class actions provide substantial monetary relief to consumers. Many of these commenters highlighted the sums reported by the Bureau in the Study—that at least 160 million class members were eligible for relief via class action settlements over the five-year period studied; that those settlements totaled $2.7 billion in cash, in-kind relief, and attorney's fees and expenses; and that consumers actually received at least $1.1 billion in those cases. The commenters stated that, in their view, these are substantial sums and that if many providers had not used pre-dispute arbitration agreements, these sums would have been substantially higher. The academic commenters, citing the Study, concluded that class actions are a powerful tool that can help consumers vindicate their rights under Federal and State law. They cited both funds returned to consumer and the deterrent effect of class actions.

Numerous consumer advocates, public-interest consumer lawyer, and Start Printed Page 33264consumer lawyers and law firms provided specific examples from their own experiences where class actions caused defendants to stop harmful practices and consumers received substantial monetary amounts as a result of class action settlements. One of the consumer law firms reported that it had obtained millions in relief for consumers via class actions. Another consumer law firm commenter noted that, in its experience, these cases frequently involved automatic payouts to class members, who did not need to submit a form or other documentation to receive the benefit of the settlement. Another commenter noted that class actions provide a practical and efficient way to allow consumers to recover for relatively low-value abuses. Similarly, several commenters suggested that by allowing class actions, the Bureau would make it possible for consumers to achieve relief when they largely would be unable to do so if arbitration agreements continue to be used as they are now. A public-interest consumer lawyer and a consumer advocate commenter each stated that the very nature of class action claims—that they are often low value—emphasizes their overall importance because consumers will not otherwise receive relief for those claims. The commenter further asserted that, when multiplied out, the practices at issue in those cases often generate substantial profits to providers. A consumer law firm commenter noted that class actions require the settling company to repay all consumers who are members of the affected class, not just those individuals who take the time to assert a claim.

Other industry and research center commenters suggested that consumers do not obtain significant relief from class actions because settlements often require consumers to file claims to obtain relief, which most consumers do not do. For example, many industry commenters noted that in settlements requiring consumers to file a claim to obtain relief, the Study showed that only 4 percent of consumers filed a claim.[514] Thus, these commenters contended that class action settlements do not serve their compensatory purpose. Further, a few industry commenters contended that taking into account both the 4 percent claims rate in class settlements where consumers were required to submit a claim and the fact that the Study found that only 12 percent of putative class cases in the six selected markets resulted in a classwide settlement as of the Study cutoff date, there is a very low likelihood that a consumer in a putative class case actually receives any compensation from any case filed as a class action. One industry commenter cited a study of class action settlements concerning claims under certain consumer protection statutes that estimated that only 9 percent of the total monetary award in those cases actually went to the plaintiffs as further support for its positions that class actions do not provide significant relief to consumers.[515] Expressing a related concern, an industry commenter stated that it did not find data in the Study of how consumers fared in class action settlements. This commenter stated that the 4 percent claims rate indicated that awards were so small as to not be worth the effort required to make a claim. The commenter asserted that the Study did not contain enough detail on the nature of the settlements or explain how the Bureau was able to conclude that class actions were preferable to arbitration (where 32 consumers recovered over $5,000). A research center commenter further stated its belief that low-income consumers are less likely to file claims and thus such settlements function as a regressive tax on low-income consumers in favor of plaintiff's attorneys. Relatedly, an industry commenter asserted that the Bureau overstates the benefit provided by most class actions—gross relief in almost half of the settlements was $100,000 or less and the gross relief in 79 percent was $1 million or less.

Several industry and research center commenters further criticized the Bureau's reliance on the Study to support its findings that class actions provide significant relief to consumers on the basis that certain cases should have been excluded from the analysis. For example, one research center commenter asserted that a large settlement involving a credit reporting agency should have been excluded as distorting the overall effect because it provided $575 million of “in-kind” relief rather than actual cash relief. A number of others commented that the Study's findings on the overall amount of relief provided in class actions was not representative of consumer finance class actions generally because the Overdraft MDL class-action settlements included in the Study were atypically large and unlikely to recur. A research center commenter also noted that if those large settlements were excluded from the Study's data, the average payment to an individual consumer from a class action settlement analyzed in the Study would be $14, a significant reduction from the $32 per consumer average payment for the Study as a whole.[516] In these commenters' view, the overdraft settlements distorted the Study to make it seem that consumers get much more relief than class actions typically provide. Further, one industry commenter asserted that the overdraft settlements may not have been as large had the overdraft activity occurred later because the practices could have been the subject of a Bureau enforcement action. That same industry commenter suggested that the Bureau failed to assess the extent to which consumers' overdraft complaints were resolved through informal channels before the class actions commenced. The commenter also suggested that the conduct at issue was not actually illegal.

One research center commenter contended that the value of the overdraft settlements should be discounted because the settlements do not make customers of those providers better off, overall. This commenter hypothesized that most of the overdraft fee refunds went to low-income consumers and that the defendant banks likely perceived those customers as less profitable following the settlements (since they could no longer assess as many overdraft fees). The commenter posited that, in the event such customers become unprofitable, the settling banks will screen those low-income customers from their customer base in the future, resulting in higher fees for the customers who remain. This commenter stated that after the Overdraft MDL settlements, minimum balance requirements to avoid checking account fees have generally increased and asserted that this may be linked to class action liability, though that link has not been empirically established.

Behavioral and In-Kind Relief in Class Actions. Several industry and research center commenters disagreed with the Bureau's preliminary findings that class settlements benefit non-class members because they cause companies to change their harmful practices with respect to all consumers, asserting that companies agreed to behavioral relief in only 13 percent of the class action settlements analyzed. Many industry and research center commenters further stated their belief that class actions do not provide significant relief to consumers because of the prevalence of non-cash and coupon relief in lieu of providing cash Start Printed Page 33265directly to consumers in class action settlements.[517] For example, one industry commenter noted that the Study found relief other than direct cash payments, including coupon settlements, are provided nearly 10 times as often (for 316 million consumers) as cash relief (for 34 million consumers). The same commenter criticized class actions settlements generally but cited only to examples that did not involve consumer finance that provided consumers with “worthless” coupons for future service from the defendant company, rather than with cash.

In contrast, many consumer advocate, consumer law firm and nonprofit commenters agreed with the Bureau's assertion that companies often change their behavior in ways that benefit consumers as the result of class action settlements. One such commenter emphasized the fact that many class action settlements include injunctive relief, such as requiring companies to stop harmful practices that led to the class action, to agree to outside monitoring to ensure that further misconduct does not occur, or to provide increased training or other safeguards to improve future compliance with the law. As an example, one nonprofit commenter cited a class action settlement involving two money transmission companies that agreed to not only compensate consumers but also to halt their use of unfavorable exchange rates, provide better disclosures, and develop a community fund. As another example, a consumer law firm commenter explained how a class action was able to provide complete relief to all affected consumers. This relief included not only cash compensation for their injuries but also injunctive relief that was able to resolve the problem permanently and for all affected in a way that an individual action would not have been able to do. Other commenters provided similar examples.

Proportion of Cases Filed as Class Actions That Ultimately Provide Classwide Relief. Many industry and research center commenters criticized the Bureau's preliminary finding that class actions provide significant relief to consumers based on a contention that the majority of cases filed as class actions do not, in fact, result in class settlement. The commenters asserted that such cases do not provide any relief to consumers other than the named plaintiff when the case settles on an individual basis, while imposing significant costs on providers. As noted above, numerous such commenters noted that only 12 percent of the putative class action filings analyzed in the Bureau's Study resulted in a class action settlement as of the Study cutoff date, while the remainder of the cases filed as class actions resulted in no classwide relief at all.[518] These commenters pointed out that just over 60 percent of the cases filed as putative class actions resulted in either an individual settlement between the defendant(s) and the named plaintiff or a voluntary withdrawal of the case by the named plaintiff (which could also signal that the parties reached an individual settlement). Some commenters further contended that when putative class cases end in a settlement or potential settlement with only the named plaintiff, that outcome may indicate that the case lacked merit.

One industry commenter cited further studies indicating that only a fraction of cases filed as class actions ultimately result in classwide relief to consumers.[519] One such study found that around one-third of the putative class cases resulted in classwide settlement, while another found that 20 percent to 40 percent resulted in such relief.[520] A credit union commenter provided an example of a putative class action case in which the credit union was a defendant; a settlement was reached with the named plaintiff on an individual basis for a few thousand dollars, but the case cost the credit union tens of thousands in defense costs. The credit union commenter asserted that the plaintiff's attorney in that case privately admitted in oral conversation that the claims filed were meritless; the commenter did not explain why it chose to settle a case it knew to be meritless.

Some industry commenters challenged the Bureau's preliminary finding that non-class settlements in putative class action cases do not undermine the benefits of those cases that do result in classwide settlements. For example, one commenter disagreed with the Bureau's finding that putative class members could pursue subsequent claims after a case was settled on a non-class basis because the putative class members would not be bound by the non-class settlement. In this commenter's view, there is no evidence that such follow-on claims are actually brought and, in any event, the commenter asserted that such claims would likely lack merit and thus that it would be difficult for putative class members to find attorneys to assert them on a class basis.

Merits of Claims Resolved by Class Action Settlements. Many industry commenters disagreed that class actions benefit consumers because they contended the Bureau erroneously assumed that a class action settlement necessarily redresses a violation of the law. For example, some industry commenters contended that companies agree to class action settlements when they have not violated the law or where the claims asserted are frivolous to avoid the significant expense of litigating and to avoid the risk of a much higher payout if the case were to survive certain stages of court review. In cases like these, the commenters contended that the settlement represents a failure of the litigation system because the company felt forced to settle claims that lacked merit, rather than a benefit to consumers or a redress of harm. One industry commenter supported this point by citing court decisions recognizing the pressure on companies to settle in class action cases. Some Tribal commenters stated their view that Tribal treasuries are at risk from the prospect of frivolous class action settlements which contradicts longstanding Federal law that provides that protecting the Tribal treasury against legal liability is essential to the protection of Tribal sovereignty.[521]

Another industry commenter contended that the Study's data that dispositive motions were granted before class settlement in 10 percent of the class actions studied is not relevant to whether the allegations in those cases were meritorious because defendants may choose to settle a case even after winning a dispositive motion to avoid the costs of litigation and appeal. The commenter stated that the low frequency of classwide judgments for consumers and plaintiffs who prevailed on dispositive motions suggests that the underlying claims in putative class cases lack merit or are frivolous. Some industry commenters expressed their view that class action litigation is inferior to other forms of dispute resolution, such as arbitration, because class action cases do not reach decisions Start Printed Page 33266“on the merits” given that class actions almost never go to trial, although they did not explain why the lack of a decision at trial necessarily makes class action litigation inferior. A few industry commenters pointed out that none of the cases identified in the Bureau's analysis of settlements went to trial and therefore that the class members in those putative class action cases never got a “day in court.”

A State attorney general commenter noted that, in his State, class action plaintiffs seeking to pursue a claim of consumer fraud were required to get approval from his office that the putative claim was not frivolous before it could be filed in court.[522] His office has concluded that not a single one of these complaints was frivolous as alleged. This commenter made a similar point regarding a provision in CAFA that permits State attorneys general to review settlements.[523] This review (done by a team of State attorneys general) has seldom found a settlement that was abusive or unfair.

Other Concerns Regarding Class Actions. A few industry commenters noted that class actions proceed slowly and asserted that the value of the relief that they do provide is diminished by the length of time it takes to receive that relief. One industry commenter further noted that class actions proceed much more slowly than individual arbitration and asserted thus that individual arbitration is therefore a superior forum than class litigation.

Several industry commenters noted that the Study found that consumers filed more individual arbitrations per year (411) than they did Federal class actions (187) and asserted that the Bureau should not have counted putative class members in those class actions as supporting its finding that class actions benefited more consumers than individual arbitration or litigation.

Response to Comments and Bureau Findings

Monetary Relief Provided by Class Actions. Many industry commenters disagreed with the Bureau's preliminary findings that class actions provide significant monetary relief to consumers because they concluded that class action settlements provide, on average, small amounts of relief per consumer (what many commenters calculated as $32 per consumer as shown by the Study) and that, as a result, they provide no meaningful benefit to consumers. For several reasons, the Bureau does not agree that the fact that class actions sometimes provide a small amount of relief per consumer compels a finding that they do not provide significant relief to consumers in the aggregate or detracts from the Bureau's preliminary finding that class actions provide a more effective mechanism of securing relief than individual litigation or arbitration. The Bureau was not surprised to find average individualized monetary recoveries in class actions in such amounts, given that the class action procedure is designed to aggregate claims for small damages precisely because rational consumers do not spend the time or the money to litigate them on their own.

First, in assessing the relevance of the small size of the average relief obtained, it is important to compare that to the alternative in which these consumers obtain no relief at all—because, as discussed above in Part VI.B.2, virtually none of them will pursue their individual claims. The Bureau finds that relief of $32 (or even $14, as some commenters suggest is a more accurate figure reflecting their attempts to exclude the overdraft settlements from the Bureau's data) is a better result for harmed consumers than no relief at all. As noted above, there were only about 25 disputes a year involving affirmative claims in arbitration by consumers for $1,000 or less.[524] Second, companies are less likely to harm consumers when they face the threat of class action liability (this “deterrent effect” is discussed in more detail below at Part VI.C.1). While a single harm may be small, that amount of that harm (and the value of claims concerning that harm) multiplied by thousands or millions of consumers is substantial.[525] Yet the single harm remains much less than the amounts for which consumers will choose to challenge or the amounts attorneys typically will take individual cases on contingency; as cited by industry commenters and discussed above, studies have shown that attorneys generally will not accept individual claims worth less than $60,000 on contingency.[526]

Further, the Bureau agrees with some consumer advocate commenters that stated that consumers who are unaware that they have been harmed nonetheless can benefit from a class action. For these reasons, the Bureau finds that consumers who fall victim to legally risky practices are better protected by receiving relatively small amounts from a class action settlement than being relegated to a system in which their only alternative is to pursue relief individually which, in practice, will result in most of them receiving nothing. This is especially true given that class members invest little (and in many cases none) of their own time or money to receive relief in a class action. The Bureau finds that the overall relief provided by class actions, coupled with the large number of consumers that receive payments as part of this relief, are the correct measure of their efficacy and that overall relief is not undermined by the fact that each of these individuals may receive relatively small monetary amounts.

The Bureau also finds that commenters' comparison between the average payment to consumers in a class action (around $32) to the average individual consumer award in arbitration (around $5,000) is not apt. Many commenters have made this comparison to contend that consumers fare better in individual arbitration than in class litigation and, by extension, that class actions do not provide significant relief to consumers. This is an apples-to-oranges comparison. As discussed above, there is not much money at stake in the typical claim of a putative member of a class action, and thus there is little incentive for an individual to devote time and money to litigating the claim. In contrast, the Study found the average claim amount demanded in an arbitration to be $29,308, and the median to be $17,008.[527] No commenters adduced evidence suggesting that the amounts at stake in most consumer class actions are even approaching this magnitude on a per consumer basis. Thus, arbitration claims are not the same magnitude as claims that are brought in class actions. Not surprisingly, the Study found that individual arbitration filings for amounts less than $1,000 were quite rare—only 25 per year. In other words, individuals rarely file claims in individual arbitration over small amounts, whereas class actions more often provide recovery to consumers for those claims.[528] Thus, the disparity Start Printed Page 33267between the recoveries of an individual consumer in class actions and those in individual arbitration is unsurprising.

With respect to the view asserted by an automobile industry commenter that class actions are not necessary for claims related to that industry because claims are typically for $1,000 or more, the Bureau does not find it to be supported that claims in that industry are typically for $1,000 or more (i.e., that small claims generally do not exist in that market). The commenter asserted that because the principal balance of an automobile loan is higher than the amount of credit extended for other consumer financial products and services, the frequency of small claims is therefore substantially reduced. The Bureau disagrees, however, that the principal balance of a loan is the primary indicator of the likelihood of small claims.[529] Regardless of the size of the loan, claims can arise with respect to, for example the assessment of late fees or other ancillary fees, the application of individual payments, or the failure to provide required disclosures. Even claims of discriminatory pricing may not be for more than $100 on average, as has been true in certain enforcement actions the Bureau has brought involving automobile lending.

Furthermore, even if it were true that automobile loans claims are typically for $1,000, the Bureau does not believe that the existence of a $1,000 claim is sufficient incentive to encourage large numbers of consumers to file individual claims, for all of the reasons discussed above in Part VI.B.2, nor did the commenter cite evidence to the contrary. Indeed, multiple consumer lawyer and law firm commenters noted that it is economically unfeasible for them to represent consumers who have claims of this magnitude on an individual basis; such claims are only viable when they can be aggregated. For these reasons, the Bureau finds that the availability of class actions concerning automobile financing benefits consumers notwithstanding the possibility that the average claims amount in those cases in the Study may be higher than in some other markets.[530]

Many industry and research center commenters criticized the efficacy of class actions because the settlements often require consumers to submit claims to obtain relief and consumers frequently do not do so. The Bureau disagrees that the low claims rate in claims-made settlements undermines the conclusion that significant relief is provided to consumers from class actions generally. Most of the commenters ignored the fact that in many consumer finance class actions, the company's records make it possible to identify the class members entitled to relief and the amount of relief to which they are entitled, thus obviating the need for a claims process. The Study identified 24 million consumers who received automatic payouts in the 133 class settlements that identified the number of class members paid.[531] Moreover, for the 251 settlements where the Bureau had data on the amount consumers were paid, the Study found as many cases that provided automatic relief as provided claims-made relief.[532] In total, the Study found that consumers received $709 million through automatic payment settlements, $322 million by submitting claims, and another $63 million in cases involving both automatic and claims-made relief.[533] No commenters disputed these amounts. The combined total of $1.1 billion in actual payments to consumers represents about half of the total $2.0 billion in cash relief awarded through the settlements analyzed. Further, the actual amounts paid to consumers from the settlements analyzed in the Study are almost certainly higher than what was reported because the Bureau was unable to obtain payments data for 79 of the 208 class settlements it analyzed that required consumers to make claims in order to receive monetary relief.[534] Thus, the class settlements in the Study showed that a substantial portion of the relief awarded was paid, which is contrary to the suggestions of commenters that very little of the settlement amounts is delivered to consumers. Numerous comments from consumer advocates, nonprofits, public-interest consumer lawyers, and consumer lawyer and law firms confirmed this through their own experiences regarding class actions that provided substantial benefits to class members.

The Bureau acknowledges that, in the 105 class settlements analyzed in the Study requiring claims where there was data on the potential class size and claims rates, the unweighted average claims rate was 21 percent and the weighted average was 4 percent. While these figures may understate the percentage of consumers actually eligible for relief who submitted claims (since the claims rate is sometimes calculated based on the number of potential members of a class, and since additional class members may have submitted claims after the Study's release), the figures do indicate that a large majority of consumers potentially entitled to claim relief from class actions do not file a claim when one is required.[535] Nevertheless, the Bureau finds that, even taking into account the fact that many consumers do not file claims in class settlements that require them to do so, a system which enabled 4 percent of consumers to obtain relief for small claims still would be more effective in providing redress than one in which the only alternative is for individuals to pursue their claims individually. Moreover, given the important role that automatic payment settlements play in consumer finance class actions, such actions can deliver relief to far more than 4 percent of class members. Simply stated, the over $200 million in relief provided per year on average to an average of almost 7 million consumers through a combination of automatic payments and claims made by consumers is significant relief to consumers.

With respect to the paper that commenters cited for the proposition that consumers receive only about 9 percent of the settlement amounts in class actions, the paper cited does not state the number of settlements that it analyzed that required consumers to submit claims as compared to the number of settlements that provided automatic relief, if any. Instead, the paper reached that 9 percent conclusion by estimating a 15 percent claims rate rather than through any substantive analysis.[536] Indeed, the author stated Start Printed Page 33268that she did not actually obtain the claims rates in the settlements analyzed (by contrast, the Bureau's Study did so). Thus, the Bureau does not believe that the author's 9 percent estimated figure is representative of consumer finance class actions overall because, as discussed above, consumer finance class actions are often particularly amenable to automatic payments.

Further, the paper's author limited the settlements analyzed to a subset of class action cases under particular statutes the author classified as “no-injury.” [537] As that paper acknowledges, there is no generally accepted definition of a “no-injury” case, and the Bureau does not agree, for reasons discussed below at Part VI.C.1 discussing deterrence, with the characterization of claims under these statutes as “no injury.” [538] In addition, the bulk of those cases involved claims under the FDCPA, TCPA, FCRA, and EFTA, each of which cover activity that extends beyond the scope of the Study and this rulemaking, to include claims involving nonfinancial goods or services that were not covered in the Study, that are not subject to the final rule, and that are more likely to involve claims-made settlements.[539] For example, FCRA class actions can involve merchants and employers and thus would not be consumer financial in nature, while EFTA class actions in this period were often ATM “sticker” claims that no longer violate EFTA and, in any event, involve individuals who did not have contractual relationships with the provider and thus could not involve an arbitration agreement. As the proposal noted, and as finalized, the rule would have no impact on such cases. Similarly, FDCPA class actions cover collection of all types of debt, including debt that does not arise from a consumer financial product or service (such as taxes, penalties and fines), whereas the Study and the rule only cover collection of debt to the extent it is collection on a consumer financial product or service. Finally, TCPA class actions often involve marketing communications unrelated to consumer finance. Such claims are often brought against a merchant or a company with whom the consumer otherwise has no relationship, contractual or otherwise.[540] It may well be that claims rates in TCPA cases could be low, perhaps in some part because there is no contractual relationship between the harmed consumer and the company and thus it is more difficult to reach those consumers.

Many commenters pointed to the fact that in the Study, a small number of settlements—specifically, those that occurred as part of the Overdraft MDL litigation—accounted for a large portion of the relief obtained and a large portion of the consumers obtaining relief. The Bureau notes that, rather than indicating a problem with the Study, this simply reflects the fact that the distribution of class action settlement amounts is right-skewed. Such distributions are commonplace in business and finance: For instance, a small number of banks represent a large fraction of all depository accounts, and a relatively small proportion of individuals hold a majority of household wealth.[541] Similarly, as shown in the Study, smaller settlements are more common than larger ones, even setting aside the overdraft settlements.[542] Mathematically, the inevitable result of very small settlements being common and very large settlements being somewhat uncommon is that the large settlements will represent the bulk of the total dollars.

Insofar as these commenters have suggested that this makes the results observed in the Study unrepresentative of the benefits that class actions can provide in other time periods, the Bureau does not agree. The Bureau believes that the large overdraft settlements reflect, in part, that there was an industry-wide practice in a very large market that harmed many consumers. While class actions concerning such industry-wide practices may not occur every year, they do occur from time to time and can provide significant relief for consumers.[543] Similarly, multidistrict litigations involving many millions of affected consumers come along regularly. And even class actions against a single institution can produce large numbers depending on the scope of the practice and customer base; for instance, one class action against a large bank whose employees routinely opened unauthorized accounts for existing customers recently reached a preliminary settlement of $142 million.[544]

The Bureau thus finds that the body of class actions, when taking into account their overall results, including both the large and small settlements, provides significant relief to consumers. Some commenters suggested that given the existence of the Bureau, in the future public enforcement can be expected to substitute for large class action settlements so that settlements of the magnitude of those that occurred in the Overdraft MDL litigation are unlikely to occur. However, an analysis of the complaints in the overdraft cases indicates that many of the claims were predicated on State law and on the terms of the consumers' contracts, and thus may not have been claims that the Bureau could have brought. Moreover, while it may seem easy, in hindsight, to identify “big” cases and assert that these are cases that public authorities like the Start Printed Page 33269Bureau would have brought, the view in real time is far murkier. The Bureau certainly hopes that, given the resources available to it and the limitations on its enforcement authority, it will succeed in identifying instances in which large numbers of consumers are subject to harm and will seek and obtain redress. The Bureau acknowledges that, to the extent this occurs, the impact of the rule could be marginally reduced as consumers and class action attorneys might be less likely to pursue class actions with respect to that harm. However, as discussed further below in Part VI.B.5, given both resource and authorities constraints, the Bureau cannot be certain that it or other regulators can or will identify and redress all instances of large-scale consumer harm and thereby displace all large class action settlements.

Moreover, even if it were appropriate to disregard the overdraft cases in assessing the Study's findings, the relief provided to consumers by the class action settlements analyzed in the Study that was unrelated to overdraft is itself significant. Indeed, the Study breaks out the relief provided to consumers through class settlements by product and that relief includes at least four large settlements of more than $50 million in markets other than checking and savings accounts (where the settlements concerning overdraft occurred).[545] Setting aside all of the cash relief provided by cases related to checking and savings accounts, which includes cases beyond the overdraft cases, the payments actually made to consumers totaled $622.8 million, or an average of overage $130 million per year.[546] Many of these cases also resulted in significant behavioral relief as well.

Further, many of the settlements analyzed in the Study were for cases alleging violations of statutes for which the recovery in a single case is capped, such as the FDCPA which is capped at the smaller of $500,000 or 1 percent of the defendant's net worth.[547] It is therefore not possible for there to be settlements of tens or hundreds of millions of dollars under the FDCPA, but the Bureau believes that those smaller settlements, in aggregate, continue to provide significant relief for consumers and deter wrongdoing by debt collectors. The Bureau finds consumers were eligible to receive and did receive substantial relief from class action settlements separate and apart from the overdraft settlements. Again, the Bureau received numerous comments from consumer lawyers and law firms, consumer advocates, and public-interest consumer lawyers regarding their own experiences within which companies provided substantial payouts to consumers. Most of these examples did not concern the overdraft cases, but nonetheless they all involved large sums provided to consumers.[548]

As to commenters' criticisms of the Bureau's inclusion of the overdraft settlements in the Study because the Bureau did not attempt to assess the extent to which companies in those settlements provided informal relief to consumers, the Bureau did in fact address that issue in the Study and in the proposal, and discussed above in Part VI.B.2.[549] In fact, as noted in the Study, the settlement amounts in those cases nearly all took into account the amount of informal relief that companies had provided to consumers prior to the settlement.[550] More precisely, in 17 of the 18 Overdraft MDL settlements, the settlement amounts and class members were determined after specific calculations by an expert witness who took into account the number and amount of fees that had already been reversed based on informal consumer complaints to customer service. Even after controlling for these informal reversals, nearly $1 billion in relief was made available to more than 28 million class members in these MDL cases.[551] These results are consistent with the Bureau's more general concerns that, as discussed above at Part VI.B.2, consumers are often unable to pursue informal dispute resolution and, when they do, experience varying amounts of success.

With respect to the contention that consumers were not made better off by the overdraft settlements because the effect of the agreements to cease maximizing overdraft revenue through reordering drove up the price on all consumer checking accounts, the Bureau acknowledges that to the extent class actions succeed in curtailing unlawful practices that generate revenue for financial institutions, the institutions may respond by changing their pricing structures. Even if the effect of the overdraft litigation was to cause banks to substitute transparent, upfront fees on checking accounts for back-end fees paid by a small percentage of vulnerable consumers,[552] the Bureau does not agree that it would follow that consumer welfare was unchanged or negatively impacted, especially since up-front fees are more likely to generate competition and shopping than more shrouded elements of pricing. In any event, the Bureau believes that consumers generally are made better off when companies follow the law even if in a particular case the effect of doing so is to eliminate a subsidy that one group of consumers is effectively providing to another. For this reason, too, the overdraft settlements made consumers better off in that those banks provided a remedy to consumers for the banks' violations of the law.

Behavioral and In-Kind Relief in Class Actions. In addition to preliminarily finding that class actions were a relatively effective means for securing monetary relief for consumers victimized by unlawful practices, the Bureau also preliminarily found that class actions were effective as a means of providing other forms of relief as well. With respect to behavioral relief, the Study found that behavioral relief was provided for in about 13 percent of the settlements analyzed. That relief inures to the benefit of all consumers, whether the consumers were part of the settlement class or not. Further, as is discussed below in the Section 1022(b)(2) Analysis in Part VIII, the Study's definition of “behavioral relief” was quite narrow and referred to class settlements which contained a commitment by a defendant to alter its behavior prospectively, for example by promising to change business practices in the future or implementing new compliance programs.[553] The Bureau did not count as behavioral relief a defendant's agreement simply to comply with the law, even though such a commitment often does, in fact, result in material changes in the company's Start Printed Page 33270behavior.[554] There were many class action settlements in which companies agreed to stop violating the law, behavior that inures to the benefit of all consumers, which are not reflected in the number of cases reporting behavioral relief in the Study.[555] And neither type of behavioral relief was accounted for in the Study's monetary calculations.

No commenters took significant issue with any of these findings; to the extent that some industry commenters were dismissive of behavioral relief based on the Study's stating that it occurred in only 13 percent of cases, they appeared to overlook the fact that the Bureau was using a very narrow definition for this determination. Accordingly, in addition to cash relief provided, the Bureau finds that the behavioral relief—understood broadly—provided by class action settlements is a significant component of the relief provided to consumers. Indeed, as the Bureau noted in the proposal, the Bureau believes that this form of relief is often more meaningful to consumers than monetary recovery in individual class actions, an opinion echoed by several consumer advocate commenters. In resolving a class action, many companies stop potentially illegal practices either as part of the settlement or because the class action itself informed them of a potential violation of law and of the risk of future liability if they continued the conduct in question. Any consumer affected by that practice—whether or not the consumer is in a particular class—benefits from the enterprise-wide change. For example, if a class settlement only involved consumers who had previously purchased a product, a change in conduct by the company might benefit consumers who were not included in the class settlement but who purchase the product or service in the future. The Study found 53 class settlements in which defendants agreed to change their behavior to the benefit of at least the 106 million class members, including, for example agreeing to improve disclosures or stop charging certain fees.[556]

One example of this appears to have occurred with respect to overdraft practices. In Gutierrez v. Wells Fargo, the court ruled that the defendant bank's overdraft practices were illegal.[557] Although that judgment was limited to a California class of the bank's consumers, the bank thereafter appears to have also changed its overdraft practices in other jurisdictions in the United States, presumably out of concern regarding other State's laws.[558] Similarly, the Bureau bases this finding on its understanding of the important benefits gained by consumers through behavioral changes companies agree to make that benefit both existing customers and future customers. This is, for example, why the Bureau frequently tries to secure such behavioral relief from companies through its own enforcement actions. Although the values of these behavioral changes are typically not quantified in case records, the Bureau believes, based on its experience and expertise, that their value to consumers is significant.[559]

With respect to commenters' criticisms of coupon settlements that they contended provide little tangible relief to consumers and to one commenter's criticism of a large settlement included in the Study, the Bureau notes that its analysis of class action settlements in the Study specifically separated such “in-kind” or “coupon” relief from cash relief and that the data discussed above regarding cash relief provided to consumers does not include the value of in-kind relief.[560] Only slightly more than 2 percent of the class settlements analyzed in the Study provided for only in-kind relief (as opposed to cash relief by itself or in combination with other kinds of relief).[561] Moreover, most of the examples cited by commenters of “worthless” coupon settlements are in cases that do not concern consumer financial products and thus are outside the scope of this rule, such as a case involving a ticket broker. As used in the Study, the term “in-kind relief” refers to class settlements in which consumers were provided with free or discounted access to a service, such as credit monitoring. The Bureau believes that in-kind relief can, in appropriate cases, provide additional benefits to class members. The Bureau valued such relief in the Study based upon the difference between the market price of a service given to class members and the price the class members were required to pay.[562] The Bureau recognizes, that Congress, through CAFA, has provided for the courts to apply heightened scrutiny on in-kind relief, and the Bureau does not believe that such relief is, by itself, generally the primary benefit that consumers receive from class actions.[563]

Proportion of cases filed as class actions that ultimately provide classwide relief. The Bureau has considered commenters' criticism that only a fraction of the cases brought as putative class actions reach a class settlement that provides relief for consumers in the class. While many of these commenters focused on the fact that the Study reported that 12 percent of the cases had resulted in class relief as of 2012, the proposal reported that the percentage of cases in which a final class settlement was approved or pending approval had increased to 18.1 percent as of April 2016.[564] Approximately 60 percent of the putative class actions analyzed either were settled on an individual basis or resolved in a manner consistent with an individual settlement.

The Bureau believes, as it stated in the proposal, that the best measure of the effectiveness of class actions for all consumers is the absolute relief they provide in light of the number of Start Printed Page 33271consumers who receive this relief, and not the proportion of putative class cases that result in other outcomes. The fact that many cases filed as putative class cases do not result in class relief does not change the significance of that relief in the cases that do provide it. Moreover, when a named plaintiff agrees in a putative class action to an individual settlement, by rule it occurs before certification of a class, and thus does not prevent other consumers from resolving similar claims in court or arbitration, including by filing their own class actions. Beyond the named plaintiff, an individual settlement of a class case does not bind other consumers or affect their right to pursue their claims; in this sense they are no worse off than if the individually settled case had never been filed at all. Accordingly, the Bureau believes it more appropriate to evaluate class actions based on the number of consumers who obtain relief and the magnitude of relief that these cases collectively (including the many that do result in class settlements) deliver to consumers.[565] Thus, even if, as one commenter noted, the likelihood that any case filed as a putative class action results in actual cash relief to a consumer is low, the amount ultimately provided in those cases that do is large enough to compel a finding that class actions provide significant relief to consumers.

The Bureau acknowledges that when a case is filed as a putative class action and settled individually, the defendant may incur higher defense costs than if the case had been filed individually. Further, while the purpose of the class rule is to preserve the ability for there to be class mechanisms to compensate consumers when they are harmed, the prospect of which deters companies from further harming consumers as discussed in more detail below in Part VI.C.1, the Bureau agrees that the putative class cases that do not end in class settlement may not themselves further this purpose. Nevertheless, it would not be possible for a rule to allow the filing of only such cases that would ultimately end in class settlement or favorable judgments for consumers because the purpose of litigation is to sort such outcomes. Accordingly, while the Bureau considers the prevalence of these outcomes and the cost of defending these cases further below in discussing whether the proposed rule is for the benefit of consumers and in the public interest (and in its Section 1022(b)(2) Analysis below in Part VIII as well), it does not believe these outcomes detract from the Bureau's finding that class actions provide an effective means of providing consumer relief.

Many of the commenters also suggested that the high proportion of putative class cases that resulted in individual settlements or potential individual settlements (around 60 percent) demonstrates that the underlying claims were not meritorious. Even if that were true, it still would not suggest that the class action mechanism as a whole is ineffective as a means of redressing harm to consumers for the reasons discussed above. But the Bureau also notes that there is no way to know with certainty whether the putative class cases settled on an individual basis had merit or involved potentially classable claims; the commenters did not provide evidence to support their assertions that those cases are, on the whole, meritless. Settlement between parties to a lawsuit is an everyday occurrence. Parties may choose to settle a putative class case on an individual basis for any number of reasons, such as because the defendant threatened to move the case to arbitration or offered the named plaintiff full relief on his or her individual claim, which a company may do in litigation in an effort to avoid defense costs or to avoid providing broader relief to other affected consumers. Indeed, there are numerous factors that go into any defendant's decision to settle, including the legal framework of the claims asserted, the facts underlying the allegations, and the costs of defense. When a consumer files an action in court alleging the consumer's individual claims affect a class of other consumers, the rules of civil procedure generally allow that consumer to conclude the action by resolving their individual claims before a court certifies the case is a class action. Sometimes, a consumer who has filed a putative class action may be unwilling to pursue that case if the company decides to make the consumer whole, while in other cases, the law may not have allowed the class claims to proceed if the company offered full relief to the named plaintiffs.[566] This outcome is available at the election of the parties and generally not subject to approval by the court. Therefore, the Bureau does not agree that there is a valid basis to draw inferences about the quality of the claims alleged in these cases based solely on how the parties chose, as a voluntary matter, to resolve them.

In addition, the Bureau finds that individual settlements in putative class cases, when they occur, typically occur relatively early in the class action process. The Study's data on time to resolution of putative class cases suggested that defense costs are likely much lower for putative class cases that result in individual settlement than for a putative class case that reaches classwide settlement. The Study obtained information on the amount of time to resolution for the cases it analyzed and the Bureau expects that a company's defense costs likely increase as the time to resolution of the case increases. This data showed that the median number of days to close for a case filed as a class case but that resulted in a known individual settlement was 193 days; for such a case that resulted in a potential individual settlement, the median days to close was 130 days.[567] In contrast, the median number of days to close when a case was settled on a classwide basis was 670 days.[568] In other words, cases filed as class actions that settled on a classwide basis typically closed more than a year after similar cases that resulted in an individual settlement or a potential individual settlement. These cases settled on an individual basis therefore involved less litigation and thus likely lower defense costs. The relevance of these findings is discussed further below in Part VI.C.2 in the discussion of whether the class rule is in the public interest.

Merits of Claims Resolved by Class Actions. With respect to commenters that contend that class action settlements do not benefit consumers because they often occur in cases where the defendant may have agreed to settle the case but did not actually violate the law or where the claims were frivolous, the Bureau does not dispute that there is some pressure to settle contested matters of all kinds, whether individual Start Printed Page 33272suits or class actions, to avoid defense costs or the risk of a judgment. Nevertheless, the Bureau does not agree that the existence of this pressure means that a settlement has no correlation with merit or violations of the law. To the contrary, a defendant's assessment of the merits of the plaintiff's claim—specifically, the plaintiff's likelihood of succeeding at trial—is a key factor influencing a defendant's decision to settle.[569] The central role that the merits of a plaintiff's claim plays in this framework is reflected in the fact that it is among the primary factors courts assess when reviewing proposed class settlements.[570]

Further, the Study showed that certification in a class case almost invariably occurs coincident with a settlement, and thus that certification is not typically the force that drives settlement. The Study further found that, not infrequently, settlements follow a decision by a court rejecting a dispositive motion (e.g., a motion to dismiss) filed by the defendants. Such motions provide some evidence as to the merit of the legal theories underlying the complaint and, in the case of summary judgment motions, of the factual allegations as well. In particular, court decisions granting such motions would suggest that the claims lack merit. Yet the data show that courts grant dispositive motions relatively infrequently, indicating that they rarely find that these cases are devoid of legal merit as pled.[571]

The Study analyzed these data in two different case sets: Class action filings in State and Federal courts in six consumer finance markets, and cases with Federal class action settlements across consumer finance markets more generally. Among class action filings in the six markets, the Study found that companies filed dispositive motions in 37.9 percent of the 562 cases analyzed, and that courts granted such a dispositive motion and dismissed at least one company party entirely from the case in only 10 percent of the same cases.[572] Among Federal class action settlements analyzed in the Study, 40.3 percent were approved by courts only after a defendant filed dispositive motions and the court denied at least one such motion.[573] In short, in both case sets, the Bureau found that companies regularly sought to challenge the legal or factual basis for claims asserted in the litigation, and that courts infrequently granted these challenges. The Bureau does not believe that the Study's finding that few class cases conclude with a court granting a defendant's dispositive motions or a trial verdict in favor of the plaintiff is consistent with a lack of merit in the underlying allegations.[574]

With respect to commenters that hypothesized that defendants could nevertheless agree to enter into a class action settlement after winning a dispositive motion, the Bureau notes that these commenters cited no examples, and this did not happen in the class action filings analyzed in the Study.[575] Regardless, if a defendant settles on a classwide basis after winning a motion to dismiss, the Bureau believes that the settlement amount is likely to be lower than it would have been if the defendant had lost the motion to dismiss.[576] This is because among the factors a court considers in reviewing a settlement is likelihood of success on the merits, and if the court has already found a claim to lack merit, that will naturally affect its view of the likelihood of success of such a claim on appeal.[577]

Given the mechanisms within the litigation process for testing the relative merit of allegations short of trial, the Bureau does not agree with commenters that suggested that the dearth of trials in class action cases suggests that the merit of these cases go untested.[578] As discussed, short of verdicts, courts have and use mechanisms to test the merit of and dispose of claims that cannot succeed as pled. Courts dismiss claims that fail to state a plausible claim for relief [579] and can sanction attorneys that Start Printed Page 33273file frivolous claims without evidentiary support for the allegations.[580] In addition, Congress, through amendments to the Federal Rules of Civil Procedure and enactment of CAFA, has and continues to consider further adjustments to class action procedures.[581] The Supreme Court has also rendered a series of decisions making clear that Federal Rule 23 “does not set forth a mere pleading standard” and establishing a number of requirements to subject putative class claims to close scrutiny.[582] Thus as noted above in Part II.B, the law expects courts to act to limit frivolous litigation. Further, the Bureau understands that class action attorneys will typically earn nothing for the time invested in developing, filing, and litigating a class case that is dismissed on a dispositive motion. The Bureau believes this may serve as an incentive not to bring cases that would be dismissed for lacking merit.

With respect to Tribal commenters that asserted that frivolous class action settlements threaten Tribal treasuries, the Bureau notes that Tribal governments are generally immune from private lawsuits and therefore that class actions should not affect their Tribal coffers, as discussed in detail below in the section-by-section analysis of § 1040.3(b)(2) in Part VII. Further, the Bureau clarifies in § 1040.3(b)(2) of this Final Rule that any Tribal government or an arm of such government that is immune from private suit is exempt from the class rule.

Other Concerns Regarding Class Actions. With respect to comments that criticized the value to consumers of class action settlements because they proceed slowly and it takes a long time for consumers to obtain relief, the Bureau recognizes that class actions can proceed slowly. As discussed above in this Part VI.B.3 with respect to the monetary relief provided by class actions, however, the Bureau believes that most consumers who obtain relief in class actions likely would not have pursued relief through other individual litigation or arbitration. For this reason, the Bureau finds that the relief provided to these consumers through class actions, even if slow to arrive, benefits these consumers relative to a system which proceeds faster but only handles individual cases and thus provides relief to few consumers. In an economic sense, if a consumer receives $32 three years from now, instead of immediately, the present value of the later income may be about $8 less (approximately $24), but it is more than zero.[583] Similarly, the Bureau does not believe that it is instructive to compare the duration of an individual arbitration proceeding to the duration of a class action case that ends in a settlement. Very few individuals pursue claims in individual arbitration, and those who do typically do so because they have a claim worth a significant amount of money. As commenters seem to agree, those claims are not the types of claims typically redressed in a class action. In addition, as one consumer advocate suggested, if all consumers harmed by a provider's widespread practice actually did bring their claims individually, or if even a significant portion of them did, the time and expense for consumers and providers alike would likely far exceed what would occur if the claims could be addressed in a single class action.

With respect to one industry commenter's argument that each class action lawsuit should be counted as one filing (despite covering claims of many consumers) and compared to single individual filings in either litigation or arbitration, the Bureau disagrees that that is the relevant comparison. Instead, the Bureau maintains that because there are thousands or even millions of consumers who benefit from class action settlements, the relevant comparison when analyzing individual and class action suits is the number of consumers who ultimately benefit from the suit, rather than the number of consumers who file the suit.

For these reasons, the Bureau finds that the class action mechanism is a more effective means of providing relief for violations of law or contract affecting groups of consumers than other mechanisms available to consumers, such as individual formal adjudication (either in court or arbitration) or informal efforts to resolve disputes.

4. Arbitration Agreements Block Some Class Action Claims and Suppress the Filing of Others

In the proposal, the Bureau made a number of preliminary findings regarding the impact that arbitration agreements have on consumers and, in particular, consumers' ability to pursue relief on a classwide basis. Specifically, the Bureau preliminarily found, based upon the Study, that arbitration agreements are frequently used by providers of consumer financial products and services, that the agreements have the effect of blocking a significant portion of class action claims that are filed. Indeed, the Study found nearly 100 putative class action cases that were blocked by arbitration agreements.[584] The Bureau further preliminarily found that consumers rarely filed claims on an individual basis once a class action was blocked by an arbitration agreement, citing to the Study. The Bureau further cited to its case study of opt-outs from settlements in the Preliminary Results of the Study further demonstrates that consumers who opt of receiving cash relief in a class settlement rarely take the opportunity to file a claim in arbitration.

For instance, for the 46 class cases identified in the Study in which a motion to compel arbitration was granted, there was only an indication of 12 subsequent arbitration filings in the court dockets or the AAA Case Data, only two of which the Study determined were filed as putative class arbitrations.[585]

The Bureau also preliminarily found that the existence of arbitration agreements suppresses the filing of class action claims in the first place, citing in support of this proposition a survey of consumer lawyers who had declined to file class cases concerning products covered by an arbitration agreement.[586]

Comments Received

Frequency of use of arbitration agreements to block class actions. Several industry commenters disagreed that arbitration agreements are frequently used to block class actions. One such commenter noted that in the 562 Federal class actions analyzed by the Study, companies filed motions to compel in only 17 percent of the cases and those motions were successful in only 8 percent of the 562 cases. Accordingly, this commenter suggested that arbitration agreements were not widely used to block class actions and that few class actions were actually blocked. The same industry commenter noted that the Study showed that arbitration agreements were used rarely Start Printed Page 33274to block individual cases—motions to compel arbitration were filed in only 1 percent of the 1,200 individual Federal cases analyzed. This commenter disputed the Bureau's assertion that there were “large” numbers of individuals in the putative classes that were compelled to arbitration on the basis of arbitration agreements because there was no way to know class size if the case was not certified before the motion to compel was granted.

On the other hand, consumer advocates, public-interest consumer lawyers, consumer lawyers and law firms, and several nonprofits asserted that arbitration clauses frequently block and chill the filing of class action cases. In many instances, commenters proffered examples from their personal experiences. For example, one consumer law firm commenter provided two examples of class actions that could not proceed due to the existence of an arbitration agreement—one case was voluntarily dismissed (and thus would not be counted in the Bureau's Study) and one in which arbitration was compelled upon appeal. Another stated that he had turned away over 100 cases involving arbitration agreements. A different consumer lawyer contrasted her experience with a series of automobile finance class actions involving what she characterized as plainly unlawful behavior; the commenter noted three cases that defendants had successfully blocked by invoking an arbitration agreement and contrasted those to others in which she had successfully recovered damages for a class where there was no arbitration agreement. Another consumer law firm commenter stated that it had turned away 27 cases in the prior year because it lacked the resources to try each of these cases individually, although it would have had the resources and an interest in pursuing them as class actions if there had not been arbitration agreements prohibiting class proceedings. Several public-interest consumer lawyer commenters said that one of the first questions they ask is whether consumers have disputes that may be governed by arbitration agreements and, if so, that they turn down those clients.

A group of Congressional commenters cited the example of a large bank whose employees opened millions of unauthorized accounts in the names of the bank's existing customers over a period of years. The bank successfully used arbitration agreements in its agreements with customers for the authorized accounts to block lawsuits by customer's asserting violations of the law with respect to the unauthorized accounts.[587] In the view of these Congressional commenters, the bank's use of arbitration agreements to block those lawsuits allowed the bank to continue its illegal practices for significantly longer than it would have been able to had the lawsuits been allowed to proceed in court when they were filed. One public-interest consumer lawyer commenter noted several instances in which companies have said informally to him that they maintained arbitration agreements in order to block class actions.

Pursuit of individual claims after class actions blocked. Some industry commenters further challenged the Bureau's preliminary finding that consumers rarely pursued a claim on an individual basis after a putative class claim was dismissed or stayed on the basis of an arbitration agreement. For example, one industry commenter challenged findings in a case study presented in the Bureau's Preliminary Results indicating that only three of the 3,605 individuals who opted out of class action settlements analyzed (comprising approximately 13 million consumers) filed individual claims in AAA arbitration. The commenter contended that the Bureau's data is too limited to support its conclusion because the consumers who opted out could have filed individual claims with JAMS or in court, but the Bureau had data only concerning AAA arbitrations.

Several consumer advocates, nonprofits, and consumer law firms and lawyers agreed with the Bureau's finding. Specifically, one consumer lawyer stated that in his experience individual claims are never filed when class claims are stayed or dismissed. Two public-interest consumer lawyer commenters explained that, in most cases, only the named plaintiff even knows that a claim exists, and even that individual might not have an incentive to pursue the claim in arbitration if there is no promise of benefitting others who are similarly situated given the relative size of the claim and the costs of pursuing it further.

Suppression of claims. With respect to the Bureau's preliminary finding that arbitration agreements suppress the filing of class claims, several industry commenters stated that the survey of consumer lawyers on which the Bureau relied to support this conclusion is flawed because it did not examine whether a case turned down by one attorney was later filed by another nor does it purport to show the total number of cases not filed. Other consumer lawyer and law firm commenters disagreed, asserting that the survey was accurate and, as noted above, in accordance with their own experiences. Specifically, consumer lawyers and law firms stated in their comments examples from their own experiences of not bringing cases due to the existence of an arbitration agreement that a defendant could use to block the case from proceeding. For example, one consumer lawyer explained how, after a case where it was apparent that his fee would take a large portion of his client's potential recovery, he concluded that it was economically impossible for him to continue to handle such individual cases and thus decided to no longer take them at all.

Response to Comments and Findings

Frequency of use of arbitration agreements to block class actions. As noted above in Part III.D.1, the Study showed that arbitration agreements are widespread in consumer financial markets and hundreds of millions of consumers use consumer financial products or services that are subject to arbitration agreements. Arbitration agreements give companies that offer or provide consumer financial products and services the contractual right to block the filing of class actions in both court and arbitration. When a plaintiff files a class action in court regarding a claim that is subject to an arbitration agreement, a defendant can seek a dismissal or stay of the litigation in favor of arbitration.[588] If the court grants such a dismissal or stay in favor of arbitration, the class case could potentially be refiled as a class arbitration.[589] However, the Study showed that, depending on the market, between 85 to 100 percent of the contracts with arbitration agreements the Bureau reviewed expressly precluded an arbitration proceeding on a class basis.[590] The Study did not identify any contracts with arbitration agreements that explicitly permitted class arbitration, nor did any commenters indicate that such agreements exist. The combined effect of these provisions is to enable companies that adopt arbitration agreements effectively to bar all class proceedings, whether in litigation or arbitration, to which the agreement Start Printed Page 33275applies. No commenters disagreed with any of the Bureau's findings in this regard.

As set out above in Part II.C, the public filings of some companies confirmed that the effect—indeed, often the purpose—of arbitration agreements is to allow companies to shield themselves from class liability.[591] Further, companies have stated both to the Bureau and in public news reports after the proposal was released, that they adopted arbitration agreements for the primary purpose of blocking private class action filings.[592] Commenters did not dispute this. Indeed, many industry commenters stated that the class action waiver is integral to their offering of individual arbitration; they asserted that the cost of arbitrating individual claims is too great to bear when they must also defend class action litigation. (This argument is addressed below in Part VI.C.1.)

The Study showed that defendants were not reluctant to invoke arbitration agreements to block putative class actions and were successful in many cases.[593] With respect to industry comments that suggested that arbitration agreements were not widely used to block class actions because companies filed motions to compel arbitration in only 16.7 percent of the class cases analyzed in the Study, the 16.7 percent figure is correct but reflects only one of two data sources in the Study on motions to compel arbitration. The Study cited 92 cases out of 562 putative class cases analyzed in Section 6 of the Study in which motions to compel arbitration were filed (16.7 percent) and in 46 of those cases, the motions were granted and the case was dismissed or stayed. The Study also found an additional 50 putative class cases that were filed outside of the period analyzed in the Bureau's review of filings in court and were dismissed on the basis of an arbitration agreement.[594] Thus, over a period of approximately five years, nearly 100 Federal and State putative consumer class actions were dismissed or stayed because companies invoked arbitration agreements in motions to compel arbitration.[595] While it is true, as one industry commenter noted, that every putative class case blocked by an arbitration agreement might not have been certified or ultimately provided relief to any consumers, it is reasonable to expect that at least some of those 100 cases would have done so. Because one settled class action case can provide relief to many consumers, the Bureau finds that arbitration agreements blocking nearly 100 putative class cases indicates that use of arbitration agreements affects large numbers of consumers.

As just one example, the Bureau notes that in the matter discussed above in Part VI.B.3 involving a large bank that opened unauthorized accounts on behalf of millions of customers in violation of the law, that bank relied on arbitration agreements in its contracts with customers for the authorized accounts to block many of those customers from pursuing classwide relief in court with respect to the unauthorized accounts. Plaintiffs filed two putative class action lawsuits in 2015 against the bank for opening unauthorized accounts, and both lawsuits were later dismissed in response to the bank's motions pursuant to its arbitration agreements.[596] Because those lawsuits were blocked, those consumers were not able to pursue relief in court for the bank's violations of the law. The parties in the latter case later agreed voluntarily to withdraw an appeal of the arbitration dismissal and have recently come to agreement on a proposed class settlement, nearly two years after the class action was first filed.[597]

Moreover, while the Bureau was unable to determine in what percentage of all class action cases analyzed defendants had arbitration agreements and were in a position to invoke an arbitration agreement, in a sample of class action cases against credit card companies known to have arbitration agreements, motions to compel arbitration were filed 65 percent of the time and, when filed, they were successful 61.5 percent of the time.[598] This is strong evidence that companies that do include arbitration agreements in their consumer contracts are very likely to use them to block class actions filed against the company. As noted, the experiences of many public-interest consumer lawyer and consumer lawyer and law firm commenters buttress this finding, as does the evidence with respect to companies' articulated reasons for including arbitration agreements in their consumer finance contracts.

The Study further indicated that companies were at least 10 times more likely to move to compel arbitration in a case filed as a class action than in a non-class case.[599] Put another way, companies used arbitration agreements far more frequently to block class actions than to move individual court cases to arbitration. While some industry commenters disputed the relevance of this comparison because they contended the overall frequency of class actions blocked by arbitration agreements is low, the Bureau finds that this data showed that most companies are more concerned with stopping putative class actions from proceeding than they are with determining in what forum (court or arbitration) individual disputes are resolved. Indeed, this data confirmed the direct evidence that the primary reason many companies include arbitration agreements in their contracts is to discourage the filing of class actions and block those that are filed. While some industry and research center commenters have touted the benefits of arbitration as a forum of individual dispute resolution because it is, for example, quicker and simpler than litigation, as discussed below in Part VI.C.1, for many providers, those Start Printed Page 33276benefits seem ancillary to their ability to limit class actions. Indeed, many industry commenters stated that they would no longer include arbitration agreements in their consumer contracts if the class rule were finalized, indicating that the primary purpose of those arbitration agreements is in fact to block class actions.

Pursuit of individual claims after class actions blocked. The Bureau further finds that when courts grant a motion to dismiss class claims based on arbitration agreements, most consumers who would have constituted the putative class are unlikely to pursue the claims on an individual basis in any forum and are even less likely to pursue them in class arbitration. For instance, for the 46 class cases identified in the Study in which a motion to compel arbitration was granted, there was only an indication of 12 subsequent individual arbitration filings in the court dockets or AAA case data, only two of which the Study determined were filed as putative class arbitrations.[600] More broadly, the overall volume of AAA consumer-filed claims—just over 400 individual cases per year—suggests that individual arbitration is not the destination for any significant number of putative class members.

The Bureau's case study of opt-outs from settlements in the Preliminary Results of the Study further demonstrated this.[601] It reviewed Federal and State class action settlements that involved 13 million class members eligible for $350 million in relief from defendants that used arbitration agreements in their consumer contracts, all naming AAA as the arbitration administrator. In these settlements, 3,605 of the 13 million class members chose to opt out of receiving cash relief.[602] Nevertheless, just three out of these 3,605 individuals appear to have taken the opportunity to file arbitrations in AAA against the same settling defendants.[603] Although the case study is a limited sample, the Bureau has little reason to believe (nor have commenters put forth evidence to the contrary) that consumers in putative class cases that never even go through certification and opt-out processes would be more likely to refile in arbitration. Indeed, as two consumer law firm commenters noted, most members of putative classes do not even know they have a potential claim. With respect to the industry commenter that criticized this data as too limited because the Bureau searched only for arbitrations filed before AAA and did not search for whether those consumers who opted out filed in a JAMS arbitration or in a case filed in court, as noted in the proposal, the Bureau obtained data from JAMS—not disputed by any commenter—indicating that the number of consumer arbitrations filed in that forum in 2015 was 115 or approximately one-quarter the number filed with AAA.[604] Thus, even if every single arbitration filed with JAMS involved a consumer that opted out of a class action, that number would be small in comparison to the number of consumers for consumer financial products and services. With respect to the commenter's argument that cases may have been re-filed in court, the Study found that individuals file very few cases in Federal court in comparison to the size of the consumer financial marketplace, as discussed in detail above in Part VI.B.2.

Suppression of claims. In addition to blocking class actions that are actually filed, the Bureau finds that arbitration agreements inhibit putative class action claims from being filed at all for several reasons. Numerous public-interest consumer lawyers and consumer lawyer and law firm commenters indicated that—based on their own experiences—they did not file class actions when they knew that a class claim might be blocked by an arbitration agreement. These commenters explained that plaintiffs and their attorneys frequently choose not to file such claims because arbitration agreements substantially lower the possibility of classwide relief. Given this evidence and the fact that attorneys incur costs in preparing and litigating a case under a contingency pricing structure, attorneys decline to take such cases at all if they calculate that they will incur costs with little chance of recouping them. Not surprisingly, when a consumer or an attorney considers whether to file a class action, the existence of an arbitration agreement that, if invoked, would effectively eliminate the possibility for a successful class claim likely discourages many of these suits from being filed at all.

The Bureau admittedly cannot quantify this effect because there are no records of cases that were never filed in the first instance. Nevertheless, stakeholders that surveyed attorneys found that respondents reported frequently turning away cases—both individual and class—when arbitration agreements were present.[605] The consumer lawyer and law firm commenters that provided details on their personal experiences with cases they declined to pursue support these surveys. While industry commenters criticized that data as anecdotal and not taking into account whether a case rejected by one attorney was taken up by another, these commenters produced no evidence, anecdotal or otherwise, to suggest that the existence of an arbitration agreement does not have a bearing on whether an attorney would pursue a class claim against a company.

For all of these reasons, the Bureau finds that arbitration agreements block class actions and suppress the filing of others.

5. Public Enforcement Is Not a Sufficient Means To Enforce Consumer Protection Laws and Consumer Finance Contracts

In the proposal, the Bureau preliminarily concluded, based upon the results of the Study and its own experience and expertise, that public enforcement is not itself a sufficient means to enforce consumer protection laws and consumer finance contracts. This conclusion was based upon several findings: Consumer protection statutes explicitly provide for both public and private enforcement; the market for consumer financial products and services is enormous and public enforcement resources are limited; the Study results supported a conclusion Start Printed Page 33277that private class actions complement public enforcement; and there are some claims concerning consumer financial products and services for which there is no public enforcement.

Comments Received

Statutes provide for class actions. Few commenters disagreed with the Bureau's preliminary findings that consumer protection statutes explicitly provide for both public and private enforcement and that when Congress and State legislatures authorized private enforcement, that generally includes private class actions.[606] Indeed, consumer advocate and nonprofit commenters emphasized the consumer protection role of specific statutes as a reason not to allow arbitration agreements to block class actions. A research center commenter opined that unfettered and meaningful access to the courts has long played a critical role in the effective functioning of the United States' system of governance. A public-interest consumer lawyer commenter highlighted the role of private litigation under fair housing laws as an example of where private litigation has provided clear benefits to class members. This commenter also noted that public regulatory bodies may also be geographically distant from sites of harm and generally have access to less information about unlawful conduct as compared to private litigants.

Public enforcement resources are limited. With respect to the Bureau's assertion that public enforcement resources are limited in comparison to the size of the market for consumer financial products and services, numerous industry commenters disagreed. One such commenter noted that the Bureau has broad enforcement authority and has produced approximately $11 billion in consumer relief through the end of 2015, thus demonstrating the extent of the Bureau's resources to enforce the relevant laws. Another industry commenter stated that Bureau enforcement actions typically provide more relief to consumers than the relief provided from class actions. As compared to the approximately $32 per person that consumers received from class actions in the Study, another industry commenter reported that Bureau enforcement actions provided $440 on average in relief per consumer to more than 25 million consumers. This commenter contended that the threat of public enforcement creates sufficient deterrence to ensure that companies will comply with the relevant laws. Indeed, another industry commenter cited a survey showing that 86 percent of companies surveyed have increased their compliance spending since 2010, when the Bureau was created.[607] One industry commenter stated that public enforcement actions are preferable to private enforcement (i.e., class actions) because private class action attorneys are motivated to bring cases for their own financial self-interest and care little about curtailing harmful conduct or compensating injured consumers. At least one industry commenter asserted that the preliminary findings were deficient because the Study did not prove that public enforcement alone is insufficient to enforce the consumer protection laws. One trade association commenter representing consumer reporting agencies stated its belief that the Bureau has sufficient resources to supervise and enforce consumer reporting agencies because the Bureau supervises only 30 such companies pursuant to its larger participant rule for that market. According to the commenter, the Bureau should have no resource constraints with respect to supervising those 30 entities.

Consumer advocate commenters, on the other hand, agreed with the Bureau's preliminary findings regarding public enforcement. Specifically, these commenters referenced examples of strained public resources for consumer protection. One public-interest consumer lawyer commenter suggested that private enforcement of some claims saves taxpayers money because such activity allows public enforcement agencies to concentrate their resources on cases that private claims cannot reach or that are more appropriate cases for public enforcement. One consumer advocate noted that industry commenters were inconsistent in arguing that the public enforcement by the Bureau provides a sufficient deterrent given that these same commenters are asking Congress and others to substantially reduce or eliminate altogether the Bureau's enforcement powers.

Class actions complement public enforcement. With respect to the Bureau's preliminary finding that the Study showed that private class actions are a necessary companion to public enforcement of consumer finance injuries, several industry commenters disagreed. One commenter asserted that the Study's finding that public enforcement cases overlap with private class actions in 32 percent of the cases analyzed represents a significant amount of duplication. An industry commenter then suggested that overlap would increase because it expected the number of Bureau enforcement actions to rise. Another industry commenter disagreed with the relevance of the Bureau's preliminary finding that many private class action settlements occur without a corresponding public enforcement action. Another industry commenter stated that when a private class action is filed without a corresponding government action, the class action could have been based on a news story or other public information, and thus may not involve situations in which the plaintiff's attorney independently discovered the wrongdoing. In addition, the commenter noted that private class actions filed in the absence of a public enforcement action could have been based on government investigations that uncovered wrongdoing but did not lead to an enforcement action, perhaps because the wrongdoing harmed only a few individuals or because there was no wrongdoing at all.

Another industry commenter criticized the Study's finding that class actions are often filed without a corresponding public enforcement action as simply wrong. The commenter suggested that most class actions are “copycats” of government enforcement actions, citing law review articles supporting this theory.[608] In addition, the commenter cited examples of settled class actions in which the FTC filed amicus briefs requesting that fees for class counsel be reduced because the settled case followed directly from an FTC investigation and enforcement action.[609]

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Consumer advocates and public-interest consumer lawyers disagreed. For example, one consumer advocate asserted that companies know that public enforcers cannot police every instance of financial fraud and that companies therefore make compliance decisions accordingly. A separate nonprofit commenter stated that legislatures designed laws to have both public and private enforcement; where the latter is effectively blocked, the laws' intended effect cannot be achieved. Another nonprofit commenter contended that private class actions are a necessary supplement to public enforcement in the areas of fair lending and equal credit and that this was the view of Congress in passing the nation's fair lending laws. This commenter also noted that individually, privately filed cases can spur subsequent public enforcement actions.

A group of State attorneys general charged with enforcing the laws in their States expressed similar concerns about the inability of public enforcement authorities—including themselves—to enforce all of consumer protection law. They noted that, in their experience, public enforcement is benefited when consumers can also take advantage of private enforcement. The commenters noted that many States' unfair competition and consumer protection laws expressly permit private enforcement, often through class actions. As an example, they quoted a decision by the Massachusetts Supreme Judicial Court finding that that State's law had been amended to allow private enforcement specifically because the public enforcement agency lacked capacity to handle the complaints it was receiving.[610] Another State attorney general, writing separately, made a similar point.

A nonprofit organization commented that private enforcement was important because it may advance more aggressive legal theories and seek more substantial remedies as compared to government agencies. Other public-interest consumer lawyer commenters similarly emphasized that, in their view, public enforcement is insufficient. A public-interest consumer lawyer commenter opined that public enforcement agencies are unlikely to have the resources to uncover all instances of unlawful conduct and that these agencies can be subject to political pressures and limitations by the executive or legislative branches of government.[611]

Academic commenters explained that, in their view, the United States legal system depends in large part on private enforcement of the laws. This comment letter contrasted the American system with those of other countries that invest more in public enforcement. They also noted, and cited the Study, that consumer class actions provide relief for injuries that are not the focus of public enforcers. An individual consumer noted in her letter that class actions, unlike increased public enforcement budgets, do not increase government bureaucracy. Relatedly, another individual consumer commenter and a nonprofit both suggested that while class actions should be generally available, they especially should be available for claims brought pursuant to statutes that expressly provide for classwide civil liability.

Response to Comments and Findings

Statutes provide for class actions. As noted by many commenters, including a group of State attorneys general, most consumer protection statutes provide explicitly for private as well as public enforcement mechanisms. For some laws, only public enforcement is available because lawmakers sometimes decide that certain factors favor allowing only public enforcement. For other laws, lawmakers have expressly decided that there should be both public and private enforcement. For example, on several occasions, Congress expressly recognized the role class actions can have in effectuating Federal consumer financial protection statutes. Commenters noted that State legislators have often done the same. As described in Part II.A, for instance, Congress amended the TILA in 1974 to limit damages in class cases to the lesser of $100,000 or 1 percent of the creditor's net worth. In reports and floor debates concerning the 1974 TILA amendments, the Senate reasoned that the damages cap it imposed would balance the objectives of providing adequate deterrence while appropriately limiting awards (because it viewed potential TILA class damages as too high).[612] Two years later, when the 1976 TILA amendments increased the cap to the lesser of $500,000 or 1 percent of the creditor's net worth, the primary basis put forth for the increase was the need to adequately deter large creditors.[613] No commenters disagreed with any of these findings and several consumer advocate commenters highlighted other, similar examples from State law.[614]

Public enforcement resources are limited. The market for consumer financial products and services is vast, encompassing trillions of dollars of assets and revenue and tens if not hundreds of thousands of companies. As discussed further in the Section 1022(b)(2) Analysis in Part VIII, this rule alone would cover about 50,000 firms. In contrast to the size of the market, the resources of public enforcement agencies are limited. For example, the Bureau enforces over 20 separate Federal consumer financial protection laws (including the Dodd-Frank Act's prohibition on unfair, deceptive and abusive practices) with respect to every depository institution with assets of more than $10 billion and non-depository institutions. Yet the Bureau has about 1,600 employees, less than half of whom work in its Division of Supervision, Enforcement, and Fair Lending, which supervises for compliance and enforces violations of these laws.[615] Furthermore, the Bureau Start Printed Page 33279is the only Federal agency exclusively focused on enforcing these laws. Other financial regulators, including Federal prudential regulators and State agencies, have authority to supervise and enforce other laws with respect to the entities within their jurisdictions, but they face resource constraints as well. Additionally, those other regulators often have many different mandates, only part of which is consumer protection. By authorizing private enforcement of the consumer financial statutes, Congress and the States have allowed for more comprehensive enforcement of these statutory schemes.

With respect to commenters that believe the amount of relief that the Bureau has provided to consumers through its enforcement cases demonstrates that the Bureau has sufficient resources to enforce the relevant consumer protection laws with respect to all potential wrongdoers, the Bureau acknowledges that it has provided significant relief to consumers since 2012. At the same time, the Bureau is also aware that its enforcement and supervision efforts have not been able to examine the conduct of every provider subject to its jurisdiction under every law that it enforces.[616] As noted above, excluding the mortgage market and certain other types of financial services not covered by this rule, there are at least 50,000 companies that fall within the Bureau's jurisdiction. The Bureau cannot conceivably supervise or investigate all of those firms or even necessarily take action each time it uncovers some evidence of wrongdoing. Thus, with respect to the trade association commenter's contention that the Bureau could easily supervise all 30 larger participant consumer reporting agencies, the Bureau emphasizes that its resources are spread not just among those 30 agencies but among the tens of thousands of other entities within the Bureau's jurisdiction. While the number of larger participant entities in any particular market may be small, the total number of entities for which the Bureau is tasked with enforcing the law is enormous. Indeed, the Bureau has recognized it must prioritize when it brings public enforcement actions and generally chooses to do so where the harms are most egregious and the most consumers are affected by those harms. This prioritization may leave harms that affect relatively fewer consumers, such as some harms by smaller providers, unremedied by public enforcement. As to the amount of money recovered by the Bureau, commenters did not state that it represents all (let alone a meaningful percentage) of the harm that exists in the marketplace, nor is there evidence to support such a contention. Based on its experience and expertise, the Bureau believes that the amounts it has recovered do not represent all of the harm.

Furthermore, as several consumer advocate commenters noted, the Bureau does not have jurisdiction to enforce all violations of the law pertaining to consumer finance. Specifically, the Bureau cannot enforce claims for violation of State statutes, or claims arising in tort (which includes claims sounding in fraud) or those that allege breach of contract. The Bureau also cannot pursue claims against depository institutions and credit unions with less than $10 billion in assets. For all of these reasons, the Bureau finds that its enforcement authority alone is insufficient to remedy all violations of the law and deter future violations.

With respect to the quantity of relief the Bureau has provided to consumers, for the years of 2013 through 2016, the Bureau brought 165 enforcement actions or an average about 41 enforcement actions per year. This is significantly fewer than the 85 class action consumer finance settlements on average identified in the Study per year (a figure that the Bureau's Section 1022(b)(2) Analysis predicts will be 165 per year once this rule takes effect). And while the number of Bureau enforcement cases has increased year-over-year in the near past, the number of cases that the Bureau brings every year is subject to change, as some commenters noted. Further, only some of these enforcement actions and a portion of the approximately $11 billion in relief provided by the Bureau through its enforcement actions over the past four years concern claims that would be covered by this rule. For example, over $2.5 billion of that relief concerned mortgages, a product not covered by this rule.

The Bureau acknowledges, as several commenters noted, that the Bureau's enforcement actions provided, on average, more relief per consumer than did class action settlements. This reflects the fact that Bureau enforcement may target higher value cases. It may also reflect the fact that the Bureau may be able to pursue cases more effectively than private class actions because, for example, the Bureau has authority to issue civil investigative demands, the Bureau does not need to cover its costs out of recoveries, does not need to certify a class, and can pursue certain claims unavailable to private litigants.[617] But the fact that public enforcement may be a more effective mechanism to secure relief for some consumers on some claims does not mean that it is a sufficient mechanism in and of itself to secure relief on all claims for all consumers. Indeed, private class actions are able to pursue violations of law that the Bureau does not have the resources or enforcement authority to pursue, thereby providing additional relief to consumers and deterring companies from future violations of the law.

With respect to commenters that contended that public enforcement actions are better avenues to address violations of the law because public enforcers are not motivated by their own self-interest to bring cases, the Bureau disagrees that differing motives, if they exist, are relevant. Whatever the motivations of plaintiff's attorneys to bring cases, the Bureau has observed that public enforcers do not have the resources to bring sufficient cases to remedy all violations of the law, and thus that private enforcement of such violations is necessary. Further, as discussed more fully in Part VI.C.2, the Bureau does not agree that the motivation of private plaintiff's attorneys determines whether class action settlements benefit consumers. Indeed, the prospect of fee awards is specifically designed to incentivize plaintiff's attorneys to bring class action cases that individuals might not otherwise pursue, and courts monitor attorney's fee awards to ensure that they are fair and reasonable.

The Bureau notes that most of the commenters critical of the Bureau's preliminary findings regarding public enforcement focused on the Bureau's own enforcement authorities and accomplishments, and to a large extent did not address enforcement by other Federal and State regulators. Most of these other regulators, as the comment letter from the group of State attorneys general noted, enforce not only consumer protection laws but also many other laws and must allocate their enforcement resources accordingly. In addition, as several commenters noted, these regulators, like the Bureau, must manage general budgetary constraints, changing legislative priorities, and Start Printed Page 33280limitations on jurisdiction and authorities, such as over tort or contract claims, that are more suited to private actions.

Finally, the Bureau notes that if the commenters were correct in claiming that public enforcement is sufficient to address all misconduct in the covered consumer finance markets and secure relief for those affected, the Bureau would expect to see a low incidence of class action litigation due to incentives facing plaintiff's attorneys. Further, the Bureau would expect to see small settlements given that settlements are generally a function of the expected value of the claims. As discussed above, the evidence with respect to number, size, and relief obtained in class actions belies the claim that public enforcement is sufficient to fully vindicate consumers' rights under the consumer protection laws.

Class actions complement public enforcement. The Study showed private class actions complement public enforcement rather than duplicate it. In 88 percent of the public enforcement actions the Bureau identified, the Bureau did not find an overlapping private class action.[618] Similarly, in 68 percent of the private class actions the Bureau identified, the Bureau did not find an overlapping public enforcement action. Moreover, in a sample of class action settlements of less than $10 million, there was no overlapping public enforcement action 82 percent of the time.[619]

In response to commenters that asserted that this still left significant amounts of overlap between private and public cases, the Bureau notes that where there was overlap, private class actions appear to have preceded public enforcement actions roughly two-thirds of the time. Moreover, when there are private cases that follow public enforcement, courts can and do take the earlier public case into account when approving settlements and calculating attorney's fees. For example, one commenter noted cases where the FTC filed an amicus brief requesting that the court reduce plaintiff's attorney fees for a class action settlement that followed a public enforcement matter on the same facts.[620] Further, resources for judges who manage class actions have favorably cited this case as a model for Federal judges handling such follow-on private litigation.[621] As for the commenters that suggested that private class actions that did not overlap with public enforcement cases are somehow less valuable because they may have been based on public news reports or on evidence uncovered by public enforcers in investigations that were not pursued, the Bureau does not believe the origin of those private cases is relevant. Instead, regardless of origin, those cases provided relief to consumers for violations of the law that public enforcers otherwise did not or were not able to pursue.

C. The Bureau Finds That the Class Rule Is in the Public Interest and for the Protection of Consumers

In the proposal, the Bureau preliminarily found, in light of the Study and the Bureau's experience and expertise, that precluding providers from blocking consumer class actions through the use of arbitration agreements would better enable consumers to enforce their rights under Federal and State consumer protection laws and the common law and obtain redress when their rights are violated. Allowing consumers to seek relief in class actions, in turn, would strengthen the incentives for companies to avoid legally risky or potentially illegal activities and reduce the likelihood that consumers would be subject to such practices in the first instance. The Bureau further preliminarily found that because of these outcomes, allowing consumers to seek class action relief was consistent with the Study and would be in the public interest and for the protection of consumers. The Bureau made this preliminary finding after considering costs to providers as well as other potentially countervailing considerations, such as the potential impacts on innovation in the market for consumer financial products and services. In light of all these considerations, the Bureau preliminarily found that the statutory standard was satisfied.

The sections below discuss the bases for the preliminary findings, comments received, and the Bureau's further analyses and final findings in support of the class rule in the reverse order, beginning with a discussion of the protection of consumers and then addressing the public interest. As discussed further below, the Bureau recognizes that creating incentives to comply with the law and causing companies to choose between increased risk mitigation and enhanced exposure to liability imposes certain burdens on providers. These burdens are chiefly in the form of increased compliance costs to prevent violations of consumer financial laws enforceable by class actions, including the costs of forgoing potentially profitable (but also potentially illegal) business practices that may increase class action exposure, and in the increased costs to litigate putative class actions themselves, including, in some cases, providing relief to a class and payment to its attorneys. The Bureau also recognizes that providers may pass through some or all of those costs to consumers, thereby increasing prices. Those impacts are delineated and, where possible, quantified in the Bureau's Section 1022(b)(2) Analysis below in Part VIII and, with regard in particular to burdens on small financial services providers, discussed further below in Part VII in the section-by-section analysis to proposed § 1040.4(a) and in the final Regulatory Flexibility Analysis below in Part IX.

1. Enhancing Compliance With the Law and Improving Consumer Remuneration and Company Accountability Is for the Protection of Consumers

In the proposal, the Bureau preliminarily found that the class rule, by changing the status quo, creating incentives for greater compliance, and restoring an important means of relief and accountability, would be for the protection of consumers.

To the extent that laws cannot be effectively enforced, the Bureau explained in the proposal that it believed that companies may be more likely to take legal risks, i.e., to engage in potentially unlawful business practices, because they know that any potential costs from exposure to putative class action filings have been materially reduced. Due to this reduction in legal exposure (and thus a reduction in risk), companies have less of an incentive to invest in compliance management in general, such as by investing in employee training with respect to compliance matters or by carefully monitoring changes in the law and making appropriate changes in their conduct.

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As discussed in the proposal's Section 1022(b)(2) Analysis, economic theory supports the Bureau's belief that the availability of class actions affects compliance incentives. The standard economic model of deterrence holds that individuals who benefit from engaging in particular actions that violate the law will instead comply with the law when the expected cost from violation, i.e., the expected amount of the cost discounted by the probability of being subject to that cost, exceeds the expected benefit. Consistent with that model, Congress [622] and the courts 623 have long recognized that deterrence is one of the primary objectives of class actions.

The preliminary finding that class action liability deters potentially illegal conduct and encourages investments in compliance was confirmed by the Bureau's own experience and its observations about the behavior of firms and the effects of class actions in markets for consumer financial products and services. The Bureau analyzed a variety of evidence that, in its view, indicates that companies invest in compliance to avoid activities that could increase their exposure to class actions.

First, the Bureau stated that it was aware that companies monitor class litigation relevant to the products and services that they offer so that they can mitigate their liability by changing their conduct before being sued themselves. This effect was evident from the proliferation of public materials—such as compliance bulletins, law firm alerts, and conferences—where legal and compliance experts routinely and systematically advise companies about relevant developments in class action litigation,[624] for instance claims pertaining to EFTA,[625] FACTA,[626] FCRA,[627] FDCPA,[628] and the TCPA.[629]

Relatedly, where there is class action exposure, companies and their representatives will seek to focus more attention and resources on general proactive compliance monitoring and management. The Bureau stated in the proposal that it had seen evidence of this motivation in various law and compliance firm alerts. For example, one such alert, posted shortly after the Bureau released its SBREFA Outline, noted that the Bureau was considering proposals to prevent arbitration agreements from being used to block class actions. In light of these proposals, the firm recommended several “Steps to Consider Taking Now,” including, “Evaluate your consumer compliance management system to identify and fill any gaps in processes and procedures that inure to the detriment of consumers under standards of unfair, deceptive, and abusive acts or practices, and that could result in groups of consumers taking action.” [630] Another alert relating Start Printed Page 33282to electronic payments litigation noted that firms could either improve their compliance efforts or adopt arbitration agreements to limit their class action exposure.[631] Similarly, the Bureau noted that industry trade associations routinely update their members about class litigation and encourage them to examine their practices so as to minimize their class action exposure. For example, a 2015 alert from a credit union trade association describes “a new potential wave of overdraft-related suits. . . . target[ing] institutions that base fees on `available' instead of `actual' balance” and advises credit unions to take five compliance-related steps to mitigate potential class action liability.[632]

The Bureau also stated in the proposal that while it believed that such monitoring and attempts to anticipate litigation affect the practices of companies that are exposed to class action liability, the impacts can be hard to document and quantify because companies rarely publicize changes in their behavior, let alone publicly attribute those changes to risk-mitigation decisions. The Bureau, however, identified instances where it believed that class actions filed against one or more firms in an industry led to others changing their practices, presumably in an effort to avoid being sued themselves. For example, between 2003 and 2006, 11 automobile lenders settled class action lawsuits alleging that the lenders' credit pricing policies had a disparate impact on minority borrowers under ECOA. In the settlements, the lenders agreed to restrict interest rate markups to no more than 2.5 percentage points. Following these settlements, a markup cap of 2.5 percent became standard across the industry even with respect to companies outside the direct scope of the settlements.[633] The use of caps has continued even after the consent decrees that triggered them have expired.[634]

As another example, the Bureau noted in the proposal that since 2012, 18 banks have entered into class action settlements as part of the Overdraft MDL,[635] in which plaintiffs challenged the adoption of a particular method of ordering the processing of payment transactions that increases substantially the number of overdraft fees incurred by consumers compared with alternative methods. Specifically, the litigation challenged banks that commingled debit card transactions with checks and automated clearinghouse transactions that come in over the course of a day and reordered the transactions to process them in descending order based on amount. Relative to chronological or a lowest-to-highest ordering, this practice typically produces more overdraft fees by exhausting funds in the account before the last several small debits can be processed. In the years since the litigation, the industry has largely abandoned this practice. According to a 2015 study, from 2013 to 2015, the percentage of large banks that used commingled high-to-low reordering decreased from 37 percent to 9 percent.[636]

The proposal noted a third example of companies responding to class actions by changing their practices to improve their compliance with the law that relates to foreign transaction fees and debit cards. In re Currency Conversion Fee Antitrust Litigation (MDL 1409) was a class action proceeding in which plaintiffs alleged, in part, that banks that issued credit cards and debit cards violated the law by not adequately disclosing foreign transaction fees to consumers when they opened accounts.[637] In the settlement, two large banks agreed to list the rate applicable to foreign transaction fees in their initial disclosures for personal checking accounts with debit cards.[638] A review of the market subsequent to the 2006 settlement indicated that this type of disclosure is now standard practice for debit card issuers across the market, not merely by the two large banks bound by the settlement.[639]

As the proposal explained, these are a few examples of industry-wide change in response to class actions that the Bureau believed support its preliminary Start Printed Page 33283finding that exposure to consumer financial class actions creates incentives that encourage companies to change potentially illegal practices and to invest more resources in compliance in order to avoid being sued.[640] The cases help to illustrate the mechanisms, among others, by which the proposed class rule would deter potentially illegal practices by many companies. The Bureau stated in the proposal that it believes that the result would be more legally compliant consumer financial products and services that would advance the protection of consumers.

As discussed in more detail in the proposal's Section 1022(b)(2) Analysis, the Bureau did not believe it possible to quantify the benefits to consumers from the increased compliance incentives attributable to the class proposal due in part to the difficulty of measuring the value of deterrence in a systematic way. Nonetheless, the Bureau preliminarily found that increasing compliance incentives would be for the protection of consumers.

The Bureau recognized that some companies may decide to assume the resulting increased legal risk rather than investing more in ensuring compliance with the law and foregoing practices that are potentially illegal or even unlawful. Other companies may seek to mitigate their risk but may miscalibrate and underinvest or under comply. To the extent that this happens, the Bureau preliminarily found that the class proposal would enable many more consumers to obtain redress for violations than do so now while companies can use arbitration agreements to block class actions. As set out in the proposal's Section 1022(b)(2) Analysis, the amount of additional compensation consumers would be expected to receive from class action settlements in the Federal courts varies by product and service—specifically, by the prevalence of arbitration agreements in those individual markets—but is substantial nonetheless and in most markets represents a considerable increase.[641]

Furthermore, the Bureau preliminarily found that through such litigation consumers would be better able to cause providers to cease engaging in unlawful or legally risky conduct prospectively than under a system in which companies can use arbitration agreements to block class actions. Class actions brought against particular providers can, by providing behavioral relief into the future to consumers, force more compliance where the general increase in incentives due to litigation risk are insufficient to achieve that outcome.

The Bureau offered the Overdraft MDL as an example to help illustrate the potential ongoing value of such prospective relief. A 2015 study by an academic researcher based on the Overdraft MDL settlements offered rare data on the relationship between the settlement relief offered to class members compared to the sum total of injury suffered by class members that has important implications for the value of prospective relief. The analysis reviewed settlement documents and found that the value of cash settlement relief offered to the class constituted between 7 and 70 percent (or an average of 38 percent and a median of 40 percent) of the total value of harm suffered by class members from overdraft reordering during the class period.[642] The total value of injuries suffered by class members can be estimated using these settlement relief-to-total consumer harm ratios and the sum of cash settlement relief. Using the average settlement-to-harm rate of 38 percent, and the total cash relief figure of about $1 billion in the Overdraft MDL settlements, an estimate of the total value of harm suffered by consumers in the settlements identified by the Bureau would be approximately $2.6 billion.[643] More concretely, this figure estimates the total amount of additional or excess overdraft fees class members paid to the settling banks during the class periods because of the banks' use of the high-to-low reordering method to calculate overdraft fees.

This sum—$2.6 billion—can also be used as a basis for determining the potential future value of the cessation of the high-to-low reordering practice. If $2.6 billion is the total amount of excess overdraft fees class members paid during their respective class periods because of the high-to-low reordering practice, the same figure (converted to an annualized figure using the class period) may be used to estimate how much the same class members save every year in the future by no longer being subject to high-to-low reordering practice for purposes of calculating overdraft fees.[644] The prospective benefits to consumers as a whole are often even larger because companies frequently change their practices not just with regard to class members, but to their customer base as a whole, and other companies that were not sued may also preemptively change their practices. As this one example showed, prospective relief—because it can continue in perpetuity—can have wide-ranging benefits for consumers over and Start Printed Page 33284above the value of retrospective relief, and can, through changing the behavior of providers subject to a suit, benefit other customers of these providers who are not class members.

For all of these reasons, the Bureau stated in the proposal that it believed that the class proposal would increase compliance and increase redress for non-compliant behavior and thus would be for the protection of consumers. To the extent that the class proposal would affect incentives (or lead to more prospective relief) and enhance compliance, consumers seeking to use particular consumer financial products or services would more frequently receive the benefits of the statutory and common law regimes that legislatures and courts have implemented and developed to protect them. Consumers would, for example, be more likely to receive the disclosures required by and compliant with TILA, to benefit from the error-resolution procedures required by TILA and EFTA, and to avoid the unfair, deceptive, and abusive debt collection practices proscribed by the FDCPA and the discriminatory practices proscribed by ECOA.[645] In those States that provide for private enforcement of their unfair competition law, consumers similarly would be less likely to be exposed to unfair or deceptive acts or practices. Consumers also would be more likely to receive the benefits of their contract terms and less likely to be exposed to tortious conduct.

The Bureau also discussed in the proposal that some stakeholders had predicted during the SBREFA phase and other early outreach that pursuing a class rule would lead them to remove arbitration agreements, either because arbitration agreements served no purpose if they did not operate to block class actions or because the costs of individual arbitration to providers were substantial enough that providers would want to eliminate that dispute resolution channel in the absence of offsetting benefits from blocking class actions.[646] The Bureau acknowledged in the proposal that it was possible that providers would not maintain their arbitration agreements if they concluded that individual arbitration provides no benefit to themselves or their customers, but was not persuaded that such an outcome was certain simply because the rule would change the outcome on class proceedings. In particular, the Bureau noted that because providers would still face some individual disputes in any event, it was not entirely clear how providers would evaluate the tradeoffs between different channels for resolving those disputes in isolation, if class proceedings were subject to the proposed rule.

For example, the Bureau noted that while some companies may have to pay fees to the arbitration administrators that they would not have to pay in court, the empirical evidence indicates that the absolute number of cases in which these fees are incurred is low (and that the total fees in any one case are also low).[647] Moreover, the costs of the upfront fees would be offset against potential savings from arbitration's streamlined discovery and other processes, which some stakeholders have argued are a substantial benefit to all parties. Indeed, as explained in the proposal's Section 1022(b)(2) Analysis, providers generally already maintain two systems to the extent that most arbitration agreements allow for litigation in small claims courts. Thus, the Bureau did not understand why the costs of resolving a few cases in arbitration, even if somewhat greater than resolving these cases in litigation, would alone cause companies to withdraw an option that they often asserted benefits both themselves and consumers. Further, the Bureau stated that it did not believe that any resulting constraints on individual dispute resolution would be so severe as to outweigh the broader benefits of the class rule to consumers.

Comments Received

Deterrence. Many industry, research center, State attorneys general, and individual commenters took issue with the Bureau's preliminary finding that the threat of private class actions deters companies from violating the law. However, these commenters generally did not disagree with the Bureau's basic premise that a system that provides for liability for violations of law promotes deterrence; instead they asserted that while deterrence in general may exist in such a system, class actions themselves either do not achieve increased deterrence or to the extent that they do increase deterrence, that increase is unnecessary or even harmful to consumers.

Many of these industry, research center, and individual commenters contended that class actions do not deter violations of the law because they exert pressure on companies to settle whether or not the claims asserted have merit. The commenters asserted that such risk is unavoidable regardless of an entity's compliance efforts, and that companies will therefore not in fact increase such efforts. The pressure to settle exists in part, the commenters asserted, because defendant companies must bear high discovery and defense attorney costs and must consider the risk, no matter how small, of a large judgment in a case that is certified as a class action. The commenters asserted that providers are not willing to tolerate the risk that such a judgment would involve substantial payouts to each member of the class, even if the likelihood of the judgment occurring is low. These commenters contended that the pressure to settle regardless of the merit of the claims means that class actions do not deter wrongdoing, they are simply a “cost of doing business.”

One trade association commenter representing defense lawyers held the opposite view: class actions do deter violations of the law and in fact, they create “over-deterrence.” In this commenter's view, many class actions in the financial services market involve ambiguities and uncertainties in the law, rather than clear violations. Thus, when companies settle class actions without final adjudication of these uncertain legal issues and change their behavior to cease the conduct at issue, the commenter asserted that the companies may be avoiding behavior that is lawful, creating over-deterrence. Relatedly, another industry commenter stated its view that class action settlements are unfair when the law is ambiguous or uncertain and thus companies cannot predict that their conduct may violate the law and subject them to a class action. A nonprofit commenter also agreed that class actions deter wrongdoing, but contended that compliant providers are more likely to be sued in class actions than “bad actor” providers because the latter are likely judgment proof. In the commenter's view, this fact creates an imbalance wherein compliant providers are more deterred from bad behavior than non-compliant ones.

In the Study, the Bureau found that class action settlements typically occur in conjunction with class certification, Start Printed Page 33285which the Bureau stated in the proposal suggests that class certification does not itself pressure defendants to settle.[648] Some industry commenters disagreed with the significance of this finding, contending that there is pressure to settle class actions at every stage of litigation, not just after class certification. Many industry and research center commenters further contended that the pressure to settle non-meritorious class actions is particularly acute in cases asserting claims under statutes that provide for statutory damages, such as FACTA, FCRA, and FDCPA, because the statutory damages multiplied by hundreds or thousands of potential class members can create potential liability of hundreds of millions or even billions of dollars.[649] In these commenters' view, statutory damages were designed to incentivize individual claims, and when claims pursuant to those statutes are pursued using the class action device, they can create the potential for ruinous liability that creates massive pressure for companies to settle.

Some industry commenters agreed that the threat of class action liability deters at least some violations of the law, but contended that its deterrent effect is imprecise and inefficient because of statutes that provide for recovery of attorney's fees and double or treble damages. In these commenters' view, these remedy features incentivize attorneys to bring claims under statutes that have them (as opposed to bringing claims under other statutes or common law without those features) in order to maximize their own profit. One commenter asserted that the lawsuits themselves therefore bear no relation to the merit of the claims and thus do not deter wrongdoing.[650] This inefficiency is compounded, according to the commenters, by the fact that statutory damages often provide for significant liability for technical violations of the law even where there has been no actual harm to consumers. For example, another commenter pointed out that companies can face massive liability class actions against merchants under FACTA for accidentally printing credit card expiration dates on a receipt, activity which the commenter contends does not harm consumers. A law firm commenter representing individual automobile dealers in California stated that the remedy for violations of certain State disclosure requirements for automobile purchases is restitution of the vehicle purchase price, resulting in enormous pressure for those dealers to settle cases alleging violations of those laws. As another example, a trade association representing consumer reporting agencies that offer credit monitoring products directly to consumers identified the penalty of disgorgement of all fees paid for the service for violations of CROA as disproportionate. In the view of the commenter, the prospect of such catastrophic damages does not deter wrongdoing; instead the commenter contends that compliance with CROA for its products is impossible, for reasons discussed below in this Part VI.C.1 and in the section-by-section analysis of § 1040.3(b) below in Part VII.

On the other hand, a consumer advocate commenter, quoting Judge Richard Posner, contended that this is precisely the point:

Society may gain from the deterrent effect of financial awards. The practical alternative to class litigation is punitive damages, not a fusillade of small-stakes claims. The deterrent objective of [EFTA] is apparent in the provision of statutory damages, since if only actual damages could be awarded, the providers of ATM services . . . might have little incentive to comply with the law.[651]

One research center commenter cited the Overdraft MDL settlements as an example of massive liability where consumers were not actually harmed and thus disagreed with the Bureau's reliance in the preliminary findings on those settlements as evidence of deterrence. The commenter asserted that banks lose money on free checking accounts and that overdraft fees were therefore necessary in order for banks to subsidize free checking accounts for consumers. The commenter therefore believed that the overdraft settlements did not remedy harm to consumers, but actually caused harm by decreasing the likelihood that banks will offer free checking accounts going forward. The same commenter criticized the Bureau's inclusion of the overdraft settlements as an example of litigation that prompted companies to change behavior because some banks continue to reorder consumer overdrafts in such a way as to maximize the fees charged to the consumer, despite that settlement. The commenter agreed, however, that the percentage of banks that employ this practice has diminished since the overdraft class action litigation began. An industry commenter asserted that the Bureau's examples of deterrence were misplaced because they concerned settlements, not actual findings or admissions that the defendants had broken the law and thus the Bureau lacked examples of illegal conduct being deterred. Asserting a similar concern, another industry commenter contended that to the extent that the class actions affect change in business practices, private class action settlements are not an efficient policymaking tool. One industry commenter further contended that because it views class actions as inefficient, the Bureau could more efficiently deter violations of the law by deciding which practices are unfair or deceptive and then informing companies of them.

Several industry commenters disagreed with the Bureau's preliminary finding that class actions deter wrongdoing because they believe that the threat of public enforcement from the Bureau, other Federal agencies, or State attorneys general is more likely to deter companies from violating the law than any class action could. A group of State attorneys general similarly asserted that State consumer protection laws and the threat of State public enforcement are sufficient to deter violations of the law. Other industry commenters contended that companies are more likely to be deterred from violating the law by the threat of individual lawsuits or the threat that consumers will take their business elsewhere once they learn of the companies' violations; one of these commenters cited the Study's survey data on the likelihood of this occurring. A Tribal commenter stated its belief that consumers who obtain products or services from Tribes are sufficiently protected through Tribal regulation and enforcement of those regulations and thus there is no need for the deterrent effect of class actions with respect to Tribes.

Several industry commenters asserted that even if class actions do deter wrongdoing, the deterrence they provide is not necessary because companies already comply fully with the law. In support, a credit union commenter provided data on the amount credit unions already spend to comply with regulations ($6.2 billion) and what it asserted was a similar additional financial impact of those Start Printed Page 33286regulation to its business practices. Separately, one industry commenter rejected what it characterized as an assertion by the Bureau that companies are “scofflaws.” Such commenters cited data noting that companies have significantly increased their spending on compliance since the Bureau was established. Other industry, research center, and State regulator commenters contended that there is no empirical evidence that compliance with the law is currently under-incentivized and that there is nothing in the Study that supports the Bureau's contentions to the contrary. Similarly, one industry commenter criticized the preliminary finding regarding deterrence because the Bureau did not study compliance rates of companies with and without arbitration agreements, arguing that the Bureau thus had no empirical evidence that companies with arbitration agreements have lower levels of compliance. Relatedly, an industry commenter asserted that the rulemaking record, including the SBREFA Report, indicates that companies do not intend to spend more on compliance and thus it has no deterrent effect. One State regulator commenter also urged the Bureau to do a thorough quantitative analysis to determine whether companies currently comply with the consumer financial laws at less than optimal levels. Relatedly, a comment from a group of State attorneys general asserted that market forces sufficiently encourage firms to comply with the law because they do not want to be perceived as “bad actors” relative to their competitors such that they might lose customers.[652] Similarly, a nonprofit commenter stated its belief that individual lawsuits sufficiently deter violations of the law because an individual lawsuit can alert a company to its violation of the law as well as a class action lawsuit can. Accordingly, this commenter contended that class actions are not necessary to deter violations of the law.

Some industry commenters stated their belief that class actions were not necessary to deter violations of the law with respect to providers of certain products or services because the markets for these products or services have particular features which, in their view, encouraged full compliance by providers.[653] A trade association representing debt collectors stated that because arbitration agreements may not always be written in such a way that the class action prohibition can be relied upon by a debt collector, whether a debt collector may be subject to class action liability is typically uncertain. Because of this uncertainty with respect to the arbitration agreements, the commenter stated that debt collectors fully comply with the law and thus that the threat of class actions does not serve to deter debt collectors. Several credit union and credit union association commenters asserted that their member-owned, not-for-profit cooperative structure provides adequate accountability incentives to fully comply with the law, such that the prospect of class actions are not necessary to deter them from violations of the law. Similarly, a community bank commenter stated that community banks are relationship-oriented, and the need to develop customer relationships and retain customers provide an adequate incentive for them to comply with the law.

A few commenters challenged the examples the Bureau cited in the proposal (and summarized above in this Part VI.C.1) of companies that monitor class action lawsuits and adjust their conduct accordingly as supporting the Bureau's preliminary finding that class actions deter violation of the law. However, none of the commenters disagreed with the general observation that companies monitor class action litigation to minimize their class action exposure and at least one industry commenter agreed that doing so is a prudent business practice. One commenter criticized the Bureau's consideration of law firm alerts about class action cases concerning ATM fee notices pursuant to EFTA as evidence that class actions create deterrence because those cases were not analyzed as part of the class action litigation filings in the Study and because Congress has since amended EFTA such that the conduct at issue in those cases is no longer unlawful. That same commenter criticized the Bureau's citation to foreign currency litigation, contending that the only behavioral change companies made in response to that litigation was to add more consumer disclosure, which, in the commenter's view did not benefit consumers because disclosure is ineffective.

In contrast, numerous individuals, consumer advocates, public-interest consumer lawyers, nonprofits, and consumer lawyers and law firms agreed with the Bureau's findings that class action exposure deters wrongdoing and encourages others to comply with the law. One of these consumer advocate commenters suggested, as the Bureau preliminarily found, that the deterrent effect of class actions is their most potent benefit. Several of these commenters remarked that the public nature of class actions and class settlements deter wrongdoing. One consumer law firm commenter noted that companies often require notification to upper management and boards of directors about class actions because of their potentially large liability, emphasizing that such senior leaders are capable of changing the underlying policies at issue. By contrast, the commenter stated that individual actions are often resolved at lower levels of the company and that upper management may not be made aware of the problem. Academic commenters suggested that many named plaintiffs pursue classwide relief not so that they can be compensated but to prevent the company from harming similarly situated consumers in the future. Similarly, a public-interest consumer lawyer and consumer advocate suggested that class action exposure deters bad behavior and prevents harm to victims other than the named plaintiff. A consumer law firm commenter explained that class actions deter misconduct in ways that individual actions cannot. Similarly, a consumer advocate commenter stated that class actions are critically important not only for compensating victims of corporate law-breaking but also for the deterrent effect of civil litigation.

Commenters also provided specific examples, from their personal experience, of deterrence. For example, two public-interest consumer lawyer commenters described class actions involving automobile dealer markups that resulted in an industry-wide agreement to put in place caps on compensation so as to avoid future litigation over this issue. A consumer advocate commenter cited examples of deterrence in the auto-lending, payday loan, deposit account, and credit card industries.

Commenters offered various explanations for why, in their view, class actions deter violations of the law. For example, a consumer advocate Start Printed Page 33287asserted that the risk of damages and reputational harm from a class action helps deter wrongdoing. Similarly, a consumer law firm commenter suggested that the public nature of class actions provides an important deterrent effect against wrongdoing. Another consumer advocate stated that the civil justice system reinforces the efforts of regulatory programs aimed at preventing such harms before they can occur, and that the threat of incurring civil liability adds a complementary deterrent factor that can discourage individuals and businesses from breaking the law and engaging in other kinds of harmful behavior. A public-interest consumer lawyer commenter asserted that, if a company could block class actions, it may have a powerful incentive to engage in widespread violations of law that result in small, but significant, individual harms while benefiting the company significantly in the aggregate. The commenter further suggested that this incentive has led companies to act deceptively in small ways to reap additional profits.

A consumer law firm cited to the Gutierrez overdraft case cited in the proposal and described above, asserting that it demonstrates how defrauding consumers over small amounts can increase a company's profits. The commenter noted that there was little risk to the company that adopted those practices because it had an arbitration agreement in its customers' contracts and few consumers noticed the fee practices at issue. When companies know consumers can sue in class actions regarding such conduct, the commenter said that they are deterred. A local government commenter explained that, in its experience, class actions have the potential of changing corporate policy. Two consumer advocate commenters asserted that deterrence works because of the risk of damages and reputational harm from a class action; when this risk is low, unfair or deceptive practices become easier to adopt. Similarly, another consumer advocate commenter stated that without the deterrent effect of class actions, companies' worse instincts are unleashed—they become more driven to maximize profits and executive compensation at the expense of protecting consumers. One public-interest consumer lawyer commenter provided examples specific to civil rights class actions, explaining that it viewed private class actions as critical to protect civil rights in the financial markets and that civil rights consumer class actions provide relief beyond the named plaintiff by remedying and deterring civil rights violations and systemic discrimination. Members of Congress cited to a fact sheet written by a consumer advocate regarding discrimination class actions. This fact sheet, which summarized others' work on the topic, asserted that individual discrimination cases are an unrealistic option for remedying discrimination because, among other reasons, it is expensive to prove institutional discrimination, and that class actions may be the only way to prove and remedy a pattern or practice of discrimination.[654] Without class actions deterring companies, stated one consumer advocate commenter, financial services companies would be able to go on enriching themselves by breaking the law at the expense of their largely unsuspecting customers. A consumer law firm commenter stated that class actions force corporate decisionmakers to think twice before inflicting harms that would otherwise escape review if consumers could only proceed on an individual basis.

With respect to the Bureau's preliminary finding that precluding providers from using arbitration agreements to block class actions would better enable consumers to enforce their rights and obtain redress when their rights are violated by providers, many consumer advocate and consumer law firm commenters agreed. By contrast, many industry commenters asserted that the rule would lead companies to remove arbitration agreements from their contracts which would make it more difficult for consumers to obtain relief in arbitration, a forum that the commenters viewed as superior to litigation. As discussed above, however, some industry, research center, and State government and State attorneys general commenters asserted that consumers have adequate alternative means of obtaining relief, whether through the informal dispute resolution channel, pursuing individual disputes via litigation or arbitration or enforcement. Consumer advocate and nonprofit commenters disagreed with these assertions.

Whether the rule will cause providers to remove arbitration agreements. With regard to the debate over whether adopting the class proposal would harm consumers by prompting providers to remove arbitration agreements from their contracts entirely, many industry commenters and a comment from a group of State attorneys general contended that providers would, in fact, remove arbitration agreements from their contracts and that depriving consumers of access to individual arbitration would harm them.[655] With regard to the first point, these commenters asserted that providers incur significant costs in connection with providing arbitration to their customers. As examples, commenters cited the filing fees, hearing fees, and arbitrator compensation that providers often agree to pay when consumers file arbitrations against them. These commenters suggested that providers are not willing to pay these costs for individual arbitration unless they can use arbitration agreements to block class actions and thereby avoid class action defense costs. A few industry commenters argued that it is inevitable that companies would remove their arbitration agreements because it is economically impossible for companies to pay arbitration costs related to individual arbitration and also pay class action defense costs. Nevertheless, no commenter provided a specific accounting of providers' costs or any other concrete evidence to buttress these assertions.

This lack of evidence is particularly important because the Bureau stated in the proposal that it was skeptical that the class rule would cause providers to incur significant additional costs by maintaining “two tracks” of dispute resolution (arbitration and court) given that many providers already maintain two tracks for dispute resolution in small claims court and arbitration and that few companies compel arbitration when an individual consumer first files in court. Several industry commenters explained why, in their view, the class rule would impose significant additional costs and why providers currently permit small claims court filings and rarely move to compel arbitration in individual litigation. A few industry commenters asserted that litigating disputes in both arbitration and small claims court is not substantially more burdensome for providers than litigating disputes only in arbitration, because small claims courts have many of the same streamlined procedures as arbitration, such as limits on discovery and individualized proceedings. Consequently, in the commenter's view, the fact that businesses litigate disputes Start Printed Page 33288in both arbitration and small claims court does not indicate that they can afford to “subsidize” arbitration while paying class action defense costs (and therefore continue to maintain two tracks if the Bureau finalized the class rule). The commenter also disagreed that the Study showed that companies already maintain two tracks of litigation because they move to compel arbitration in only about 1 percent of individual cases filed in Federal court and about 5 percent of the 140 cases against companies known to have an arbitration agreement. The commenter asserted that the Bureau's sample size of 140 cases is too small to draw the conclusion that companies rarely invoke arbitration agreements in individual litigation, although no commenter cited any evidence to the contrary. The commenter also argued that companies' low rate of invocation is not evidence of companies' willingness to litigate in both arbitration and court, because there are many reasons why a provider may not move to compel arbitration despite its preference for litigating disputes in arbitration, such as the consumer opting out of the arbitration agreement, a provider's offer of settlement, or the consumer's failure to prosecute the case.

In response to the Bureau's skepticism in the proposal as to whether the costs of individual arbitration will cause providers to remove arbitration agreements if the class rule is finalized, other industry commenters noted that many arbitration agreements include “anti-severability provisions,” which state that if the agreement's no-class provision is held unenforceable, the entire arbitration agreement is unenforceable as well.[656] The commenters stated that through these anti-severability provisions, providers have already effectively chosen to eliminate their arbitration agreements if the no-class provision is not available and thus the Bureau's skepticism is unfounded.

Whether loss of individual arbitration harms consumers. Numerous Congressional, industry, and research center commenters, as well as a group of State attorneys general asserted that arbitration is a superior form of dispute resolution for consumers relative to individual litigation and that consumers would therefore be harmed if the class rule causes providers to remove arbitration agreements from their consumer contracts. These commenters cited several factors in support of their argument. Many stated that arbitration is a superior forum for resolving individual disputes because filing fees are less expensive for consumers than comparable fees in court. For example, these commenters noted that the AAA's consumer arbitration rules require consumers to pay no more than $200 in costs for arbitration, and that many providers use arbitration agreements that require the provider to pay the consumer's entire filing fees in certain circumstances. In contrast, commenters noted that filing fees for individual suits in Federal court are $400, and that State court filing fees vary but are often more than $200. A research center noted that arbitration saves money for both consumers and businesses.

Many of these same industry, research center, and State attorneys general commenters noted that individual disputes filed in arbitration are, on average, resolved more quickly than those filed in individual litigation. One industry commenter noted that arbitrations analyzed in the Study were resolved in a median of four to seven months, depending on whether the consumer appeared at the hearing and whether that hearing was in person or by telephone. By contrast, the commenter noted that the average time to reach trial for an individual suit filed in Federal court was 26.7 months.[657] Several of these industry commenters further stated that many State courts have significant backlogs, thus increasing the time to resolution in those courts.

Many industry and research center commenters also stated their belief that arbitration is a better forum for consumers to resolve their disputes with consumer finance companies than individual litigation in court because consumers may proceed without an attorney in arbitration. These commenters believe that arbitration's streamlined process, which does not typically include motions or discovery practice common to litigation and has simpler pleading requirements, allows consumers to pursue their own claims without an attorney and are far lower than what one industry commenter asserted is the astronomical cost of litigation. Indeed, these commenters noted that the Study showed that unrepresented consumers more often received favorable decisions from arbitrators than did consumers represented by attorneys. On the other hand, one industry commenter asserted that when consumers do have an attorney in an arbitration, that attorney is likely to have prior arbitration experience. Some industry commenters and a group of State attorneys general noted that arbitration hearings were typically held in locations that were convenient for consumers and often occurred via telephone, Skype or email without the consumer having to appear in person. In contrast, these commenters noted that litigation typically requires consumers to appear in person and often during the day, requiring them to miss work. An industry and research center commenter and a group of State attorneys general noted that the arbitration process is simpler than litigation and therefore easier for consumers to navigate. Relatedly, an industry commenter noted that fees are modest and disclosed in arbitrations and that arbitrators may waive or reduce them further. An industry commenter asserted that arbitration is better than litigation because consumers can play a role in choosing their arbitrator, while they cannot choose a judge. An industry commenter and several State attorneys general asserted that arbitration benefits consumers because they are more likely to receive a decision on the merits as compared to class actions, where the Study showed no trials occurred in class actions.

Many of the industry and research center commenters noted that the Study showed that consumers prevailed on their claims in arbitration at least as much as they did in litigation. They noted, for example, that the Study showed that consumers received a favorable decision from an arbitrator 6 percent of the time and settled with companies 57 percent of the time in arbitration (appearing to reflect data from the Study that identified known and likely settlements), while consumers received a favorable judgment in 7 percent of their claims in individual litigation and settled 48 percent of claims filed in court (appearing to reflect data from the Study that identified known settlements only). Many industry commenters and a group of State attorneys general further contended that successful consumers won significant amounts in arbitration; according to the Study, the average consumer who received a favorable award received more than $5,000 and a group of State attorneys general noted that arbitration agreements rarely limit consumers' recovery.

Several of these same commenters also asserted that arbitration is at least as fair for consumers as litigation because the major arbitration administrators, AAA and JAMS, each have due process standards that require arbitrators to handle claims fairly. An industry commenter and a research Start Printed Page 33289center both further noted that courts have authority under the FAA to invalidate arbitration agreements that impose unfair terms on consumers, such as those that limit consumers' right to recovery in ways not permitted by Federal or State law. In addition, these commenters noted that the Study found that few arbitration agreements contained provisions that these commenters thought were unfair to consumers on their face, such as those that required arbitration to occur in an inconvenient forum or that required the consumer to pay for all arbitration fees if the consumer failed to win the claim. Commenters additionally asserted that the majority of arbitration agreements contain provisions intended to ensure fairness for consumers, citing provisions such as those fully disclosing the arbitration process, allowing consumers to opt out of the arbitration agreement, and allowing consumers to file claims that meet the relevant claims limits in small claims court rather than be subject to arbitration. One industry commenter went further and asserted that arbitration is in fact more fair than the alternatives because disputes can be reasonably aired, considered, and resolved.

Some industry and research center commenters asserted that individual arbitration is frequently and successfully used by both consumers and companies in other areas of the law, such as in employment, securities, and medical malpractice. They further contended that, given time, consumer finance arbitration can achieve the same levels of success.[658] They did not state how much time would be required nor what should happen to consumers bound by arbitration now until that threshold is crossed. One industry commenter asserted that consumers are more satisfied but did not provide evidence supporting this claim nor did it explain what consumers were more satisfied with—their provider or arbitration.

Several industry and research center commenters stated that the loss of individual arbitration as an option for consumers is particularly problematic because, in their view, most injuries suffered by consumers in consumer finance cases are individualized and therefore could not be remedied through class action lawsuits, which are the focus of the Bureau's class rule. These commenters cited, as examples, cases in which an individual consumer had a deposit not properly credited at an ATM machine, was improperly charged a fee, or had incorrect interest calculations on his or her account when other consumers did not. One of these commenters stated that, in its opinion, such individualized non-classable claims are a significant majority of all consumer claims. However, the commenters did not provide any empirical evidence for their assertions that most injuries to consumers occur because of unique or individualized harms.

Many of these same industry and research center commenters noted that without arbitration, many consumer finance claims may be filed in court. Specifically, they contended that small claims courts are not an adequate forum for these claims that would have been resolved in arbitration. While small claims courts ostensibly allow consumers to pursue low-value claims more simply than in State courts of general jurisdiction or in Federal court, these commenters cited evidence suggesting that small claims courts are overcrowded or closing as a result of budget cuts in some jurisdictions (citing examples in parts of California, Alabama, and Texas). The commenters further contended that to the extent that small claims courts are over-crowded (or non-existent), they are slow in providing relief to consumers who are injured or do not provide relief at all. These commenters also pointed out that small claims courts typically require consumers to appear in person during standard working hours, which can be difficult for many consumers who cannot take time off from their jobs.[659]

Some industry commenters stated their belief that arbitration was particularly useful, as compared to litigation, for claims concerning certain products or services. For example, a debt collection industry trade association stated that in debt collection disputes, consumers place a particularly high value on confidentiality, which it believed arbitration better preserves. It also stated that debt collection claims are simpler to adjudicate, and thus suited to a simpler process, which it believed arbitration offers.

On the other hand and as noted above in Part VI.B.2, consumer advocates, consumer lawyers, trade associations of consumer lawyers, public-interest consumer lawyers, consumer law firms, nonprofits, and many individual commenters commented at length as to why, in their view, litigation in court of individual disputes along with the availability of class actions was far preferable to pursuing the same claims in arbitration. Several of these commenters stated that industry preferred to funnel all disputes into individual arbitration not to benefit consumers but instead to insulate themselves from class actions and that they did not have consumers' best interest in mind when suggesting that arbitration was preferable.

As discussed above in Part VI.B.1, many of these commenters further stated that individual arbitration was so unfair relative to individual litigation that the Bureau should have protected individual consumers by banning outright the use of pre-dispute arbitration agreements. For example, some commenters argued that consumer arbitration outcomes cannot be consistently fair because arbitration naturally favors providers, as repeat players, over consumers, who may only face an arbitration once. One public-interest consumer lawyer commenter argued that individual arbitration is necessarily worse for consumers than litigation because consumers cannot find legal representation and few consumers file arbitrations in any case. Accordingly, these commenters did not agree that a loss of individual arbitration, if it occurred in response to the Bureau's rule, would negatively impact consumers. Instead, many of these commenters thought that consumers would be better off without it.

One industry commenter challenged an argument it believed was raised by some consumer advocates who it claims have asserted that the widespread Start Printed Page 33290removal of pre-dispute arbitration agreements would not harm consumers because both sides would mutually agree to “post-dispute arbitration” (i.e., a voluntary agreement to arbitrate reached after a dispute has arisen).[660] The commenter disagreed with this argument, asserting that parties are less likely to agree to post-dispute arbitration because they become invested in their positions and refuse to arbitrate and because attorneys discourage them from doing so in order to maximize attorney's fees in litigation. The commenter also asserted that post-dispute arbitration would be less attractive to consumers than pre-dispute arbitration because providers are unwilling to pay as many of the costs in such cases. In the commenter's view, post-dispute arbitration would therefore not replace pre-dispute arbitration, even where it is the most efficient option for both parties.

Response to Comments and Findings

The Bureau has carefully considered the comments received on these aspects of the proposal and further analyzed the issues raised in light of the Study and the Bureau's experience and expertise. Based on all of these sources and for the reasons discussed above in Part VI.B, in the proposal, and further below, the Bureau finds that precluding providers from blocking consumer class actions through the use of arbitration agreements would substantially strengthen the incentives for companies to avoid legally risky or potentially illegal activities, thereby reducing the likelihood that consumers would be subject to such practices in the first instance. To the extent that companies nonetheless engage in unlawful conduct, permitting class actions would also better enable consumers to enforce their rights under Federal and State consumer protection laws and the common law and obtain redress when their rights are violated. For these reasons and those discussed below, the Bureau finds that both of these results are for the protection of consumers.

Deterrence. With respect to commenters that contended that class actions do not deter wrongdoing because, in practice, companies face pressure to settle class actions whether or not they are meritorious, the Bureau does not agree that the conclusion follows from the premise. As discussed above in Part VI.B.3 and below in the Section 1022(b)(2) Analysis in Part VIII, the Bureau understands that there is some pressure to settle class action lawsuits given attorney's fees and the potential of a large verdict. At the same time, plaintiff's attorneys have an incentive to bring cases with the greatest likelihood of success since the amount they can secure in fees will be affected, at least in part, by the amount they are able to obtain for the class. Precisely because all that is true, companies that face the threat of class actions will have an incentive to avoid being sued and to reduce the expected value—and thus the likely settlement costs—of any suits that are filed. That, in turn, means that the potential for class action litigation creates an incentive for companies to rigorously adopt compliance measures and to avoid legally risky practices. While compliance with the law may not fully insulate a company from the threat of a class action lawsuit, failing to comply with the law would almost certainly increase the likelihood that company will be sued and the value of the claims asserted. Thus, because the Bureau believes that the likelihood of being sued in a class action and the expected value of class claims are inversely proportional to the efforts a company makes to assure compliance with the law, then it necessarily follows that an increased risk of class action litigation will incentivize companies to improve compliance efforts.

An example of this deterrent effect can be found in comments from a credit reporting agency that provides credit monitoring and a consumer data trade association representing providers of credit monitoring. These commenters contended that two Federal appellate courts have improperly interpreted CROA to apply to at least one credit monitoring product.[661] As discussed in more detail in the section-by-section analysis of § 1040.3(a)(4) below in Part VII, among the requirements that CROA imposes on credit monitoring are a disclosure to potential consumers, waiting three days before commencing the services with a right of cancelation for the consumer, and prohibiting pre-payment of fees.[662] CROA further provides for statutory damages for violations of the statute that amount to disgorgement of the fees paid for the product.[663] In the view of these commenters, if they were subject to CROA, they would face significant risk of class action exposure for what the commenters referred to as “technical” violations of CROA's requirements. These companies currently offer credit monitoring services that would not meet CROA's requirements if they were applied to them. They contend that they would be forced to increase their prices and there is a possibility they would not be able to offer credit monitoring services if they had to comply with CROA's requirements because doing so would be infeasible both practically and financially. Further, they believe they are able to offer these services without significant risk now because they include arbitration agreements in their consumer contracts, thus insulating them from class action liability. Setting aside, for the moment, the legal question of whether CROA does apply to credit monitoring and if it did, the policy question of whether these companies should be able to offer credit monitoring services to consumers without complying with CROA,[664] these comments suggested that the prospect of class action liability would alter how these companies approach providing their product. In other words, their ability to insulate themselves from CROA class action liability has caused them to offer a service that the companies fear courts could hold violates CROA. Were they to lose that insulation, they say they will be deterred from offering that service.

As another example, debt collector commenters noted that debt collectors do not underinvest in compliance because the presence of class action waivers does not provide enough certainty to them that they will be always able to minimize class action liability. The Bureau believes that one corollary of this argument is that some debt collectors could be encouraged to spend less on compliance if they had more certainty about their ability to block class actions. To the extent this is true, the Bureau believes that debt collectors would be less deterred if they were more certain that they could block class actions, and conversely would be more deterred if they knew with certainty that they could not block class actions.

As for the commenter that criticized the behavioral relief in the foreign currency fee litigation as worthless because disclosures provided about these fees are ineffective, the Bureau first notes that Congress believes in the importance of timely and understandable disclosures for Start Printed Page 33291consumers.[665] In addition, the Bureau notes that, following settlement of the foreign currency fee cases, the number of credit cards charging fees for foreign currency transactions decreased dramatically.[666] Based on the Bureau's understanding of this industry, it believes that had companies not agreed to disclose these fees, the competitive pressure to eliminate them would have been lower. In any event, the Bureau cited the foreign currency fee class action settlements in the proposal as evidence of deterrence because those settlements caused issuers to disclose their exchange fees. The fact that other companies changed their practices is evidence of the deterrent effect, even if some commenters disagreed that disclosure of such fees is beneficial. Along the same lines, in response to the commenter that claimed the overdraft settlements did not deter such behavior because a few banks have not changed their overdraft practices following the wave of class action litigation, the commenter itself admitted that the litigation has encouraged most banks to change their overdraft practices. This bolsters the Bureau's finding that those class actions deterred banks from further violations of the law with respect to their overdraft practices, even if there are some banks that did not change their practices. Indeed, perfect compliance with the law is unlikely to be achieved through any mechanism, whether agency enforcement or class action litigation.

With these examples, as well as the EFTA ATM “sticker” litigation example discussed in the proposal and above,[667] the Bureau disagrees with industry commenters that assessments as to the value to consumers of particular protections afforded by the law are relevant to the question of whether or not class actions have a deterrent effect.[668] Instead, these examples illustrate the broader principle that companies have altered or would alter their behavior in response to class action exposure. To the extent that the commenters were really trying to argue that the underlying laws provide no benefit to consumers, that argument is addressed separately below.

Indeed, the Bureau notes that while some industry commenters resisted the premise that potential class action liability produces deterrent effects, other industry, individual, and research center commenters agreed with the Bureau's finding and supplied additional evidence in support of it. One such individual commenter (who otherwise strongly opposed the proposal) agreed that class actions have the ability to “prompt `enterprise-wide change' ” in providers. Similarly, one of the studies cited by industry and research center commenters that analyzed the results of class action lawsuits included interviews of corporate representatives regarding class action liability in which those representatives acknowledged that “damage class action lawsuits have played a regulatory role by causing them to review their financial and employment practices.” [669] Furthermore, upon issuance of the Bureau's proposal, several law firms advised their clients to review their compliance given the possibility of the Bureau finalizing the proposal and the clients' subsequent increased risk of class actions.[670] As one firm advised:

Affected companies should use this time, before implementation, to mitigate class action claims that previously might have been subject to arbitration. Companies should consider a review of all consumer-facing documents to confirm language complies with applicable federal and state law. Additionally, internal policies and procedures must be reviewed to ensure that product origination and servicing is consistent with all legal requirements. Likewise, vendor agreements must be reviewed in relation to applicable law—including, most importantly, principal-agency theories. It is imperative that companies anticipate ways to limit liability and manage future class action risks now—as class action defense litigation spending is anticipated to surge in every consumer finance sector.[671]

One industry commenter asserted that class actions create over-deterrence because class settlements may encourage companies to avoid behavior that is legally ambiguous but not necessarily unlawful.[672] To the extent Start Printed Page 33292that the comment was referring to the “over-deterrent” effect as to a company that engaged in the legally ambiguous behavior and that was sued because of it, the Bureau notes that the company was not deterred by the threat of class action liability to the extent that it did, in fact, engage in the behavior that was the subject of the class complaint. Accordingly, a company that takes the risk of engaging in conduct that may violate an ambiguous or uncertain law was neither deterred nor “over-deterred.” To the extent that the comment was referring to an “over-deterrent” effect as to that same company once it chooses to stop engaging in the behavior that generated the class action settlement or as to other companies that become aware of the settlement and avoid similar behavior, the Bureau understands that the prospect of class action liability may, at the margins, deter some conduct that is legally ambiguous but not necessarily illegal. But, even if at the margins, the effect of the class rule would be to deter conduct that may be legal from occurring, the Bureau believes that, on balance, that would be a reasonable cost to achieve the benefits of the rule for the public and consumers. Moreover, the Bureau believes that most providers consult attorneys to assess the legal risk of engaging in particular conduct and that providers likely have different levels of tolerance for the legal risk that arises from engaging in conduct that is legally ambiguous.

Moreover, as discussed in more detail in Part VI.B.3 above, there is a relationship between the likelihood of success on class action claims and the amount of the settlement. For this reason, the Bureau believes, all else equal, that a class action that asserts legally ambiguous but not clearly unlawful claims is likely to result in a smaller settlement, if any, than a class action that asserts a clear violation of the law. As a result of a smaller settlement amount, the deterrent effect of a settlement with regard to a legally ambiguous or uncertain claim would be correspondingly smaller than the deterrent effect of a larger settlement. In other words, class action settlements involving ambiguous or uncertain violations of the law may deter some lawful conduct at the margins, but the Bureau does not believe this deterrent effect would be significant. And, even if there is some small impact from these settlements on legally ambiguous but not unlawful behavior, the Bureau believes that, on balance, that it would be a reasonable cost to achieve the benefits of the class rule for the public and for consumers.[673] As to the research center commenter that contended that bad actors are likely not deterred from violations of the law because they are judgment proof, the commenter offered no evidence to support that most or all providers that violate the law are judgment proof. In any event, the Bureau believes for all of the reasons stated above that the prospect of class action liability deters violations of the law for providers that are not judgment proof, regardless of whether some judgment proof defendants may not be deterred.

With respect to the industry commenters that contended that statutes providing for statutory damages or double and treble damages compound the pressures to settle and thus create a deterrent effect that is imprecise or inefficient, the Bureau does not dispute that the existence of statutory damages or attorney's fee provisions may encourage lawsuits under those statutes. Some commenters contended this is “imprecise” or “inefficient.” It is nevertheless a direct consequence of the statutory regime adopted by Congress and the States and, if anything, is evidence that lawmakers chose to emphasize the need for compliance with these laws. As for the commenter that suggested that class actions are an inefficient policymaking tool, the Bureau disagrees that class actions constitute policymaking themselves. Rather, the Bureau believes that class action settlements occur only because Federal and State legislatures had already adopted policy choices by enacting particular statutes or the common law had developed to reflect certain policy judgments. In response to the commenter that suggested that the Bureau should determine which conduct is unfair or deceptive because that would be more efficient than class actions, the Bureau's resources are limited, for all of the reasons discussed above in Part VI.B.5. For this reason, even if such a practice were more efficient than unfettered class actions, the Bureau has many competing priorities and likely would not be able to identify and communicate every type of unfair or deceptive practice for the many thousands of products or services within its jurisdiction.

As for commenters that contended that statutory damages were designed to incentivize individual claims and are misapplied when asserted in class actions, the Bureau does not agree that the class action liability that results under statutes that provide for statutory damages is unintended or accidental. Instead, and as discussed more fully in Part II.C, Congress has repeatedly enacted measures to address the interaction of statutory damages and the class action mechanism, as evidenced by its adoption of classwide damages caps for many statutes.[674] The statutory regimes enacted, including whether the statute allows for class action liability, reflect policy decisions by Congress. Commenters may disagree with those decisions, but it is Congress who makes them, not the Bureau. In any event, as discussed below in Part VI.C.2 and in the Study, most of the consumer credit protection statutes cap statutory damages.

Similarly, commenters that criticized the underlying statutes as incentivizing private lawsuits when the commenters claim there is “no harm to deter” are, in essence, either claiming that courts will allow the lawsuits to proceed despite the absence of an in injury-in-fact (which the Constitution requires for Federal court litigation [675] ) or are expressing concern about the measure of damages for injuries that these commenters asserted to be minor. As to the first, Federal courts have repeatedly considered what it means for a plaintiff to establish individual, concrete harm in order to have standing to assert a claim for statutory damages. Indeed, the Supreme Court recently addressed the issue.[676] The judicial system can and does address whether plaintiffs must suffer harm in order to allege the violation of a statute; the Bureau is not in the position to make such assessments in the context of this rulemaking. As to the second, these Start Printed Page 33293commenters may be disagreeing, to some extent, with Congressional decisions about the remedies for certain harms. For example, commenters cited many statutes that they believe create violations of law and large penalties without any corresponding harm to consumers. Those statutes include FACTA requirements for printing credit card numbers on receipts that apply to merchants, a now-repealed EFTA requirement concerning ATM fee notices, TCPA restrictions concerning unsolicited telephone calls, California disclosure requirements for automobile purchases, and CROA, which concerns credit repair products and provides for the remedy of disgorgement of fees paid. While commenters may disagree that unwanted telephone calls, the printing of credit card expiration dates on receipts, or the failure to disclose certain terms of automobile purchase transactions harm consumers, Congress and the State legislatures have the authority to make those judgments and set the remedies for the harms it chooses.

With respect to CROA, as discussed below, since 2005, there have been a number of efforts in Congress to determine whether CROA could be improved by clarifying the CROA credit monitoring coverage issue that commenters raised here. No consensus has been reached to date and the FTC has twice expressed concern about the difficulty in structuring a revision to CROA to address this concern. This history suggests that the author of CROA (Congress) and its enforcer (the FTC) are not certain CROA should be revised, or how. In any event, with respect to CROA and all statutes, it is Congress that sets the remedies and determines coverage for its statutory regimes. Further, though some providers may currently be able to block class actions under these statutes through their use of arbitration agreements, these statutes nevertheless govern providers' conduct and those providers who violate the law may be subject to individual claims. In short, to the extent that commenters believe class actions provide outsized liability under particular statutes without requiring proof of any real harm to consumers, courts, Congress, and State legislatures are presumptively the proper branches of government to address this concern.

Relatedly, one research center commenter cited the Overdraft MDL class settlements as examples of violations of the law where consumers were not harmed. In fact, in the commenter's view, consumers received a benefit from the violations, because the fees generated by those overdraft practices enabled the banks to offer free checking accounts to its customers. Whether those overdraft policies generated revenue from overdrafters that subsidized free checking accounts for consumers generally is beside the point; when companies violate the law, the consumers who are victims of the wrong are better protected and accountability is improved when there is an effective remedy, regardless of how the company may have invested the profits from those violations. If companies were excused from violating the law because doing so allowed them to charge lower prices, they could, for example, justify charging higher prices to a certain race or gender in order to subsidize lower prices to other groups. The Bureau does not believe such a result would protect consumers and likewise does not agree that the overdraft settlements harmed consumers in the way the commenter suggested. To the contrary, the Bureau believes that consumers benefitted from these aspects of the overdraft settlements, which resulted in more transparent upfront pricing that facilitates comparison shopping by consumers.

For all of the reasons stated, the Bureau finds that class action settlements are not wholly random and are sufficiently correlated to merit to deter wrongdoing. The Bureau also does not agree that the deterrence provided by class actions is limited to those cases that result in class settlements or even those that are filed at all. Mere exposure to the potential to be sued for a meritorious class action, in the Bureau's view, creates an incentive to refrain from the conduct that would give rise to that action. As one commenter noted, the exposure to potential liability based on cases filed against other companies often put upper management and boards of directors on notice of widespread misconduct in a way that individual cases are unlikely to do. To appreciate the potential for such a suit, it is not necessary for a company to be aware that another company engaged in the same conduct and was sued.[677] The Bureau therefore adopts its preliminary findings, as further elaborated here, with respect to the fact that class actions deter violation of the law.[678]

In response to commenters that contended that there is no need for the deterrence provided by class actions because companies are fully deterred from violating the law by the threat of public enforcement, the threat of individual litigation, the threat of consumers taking their business elsewhere, or by Tribal regulation and enforcement, the Bureau explained why each of these is insufficient in enforcing the law above in Part VI.B. To the extent these other mechanisms do not allow for sufficient enforcement of the law they also do not sufficiently deter companies from violating the law. As discussed there, the Bureau finds these avenues both individually and jointly insufficient to fully enforce the consumer protection laws.

Moreover, the Bureau has observed, through its experience and expertise that there is not full compliance with the law. Indeed, despite the Bureau's creation and subsequent work, it continues to receive thousands of complaints per month and regularly uncovers wrongdoing that has not been deterred simply by the existence of the Bureau or the threat of individual dispute resolution, whether formal or informal. Further, the Bureau does not believe that the wrongdoing it uncovers is the only wrongdoing that exists, in part because the markets for consumer financial products and services are numerous and often large, and the Bureau's work is necessarily limited by its resources. Thus, the Bureau finds that the commenters' assertion that all providers comply fully with all applicable laws to be unsupported.

As for those commenters that suggested that specific types of providers—such as debt collectors, credit unions, and community banks—have sufficient incentives because of the nature of their particular product or service to comply fully with the law, the Bureau does not find evidence that these entities are sufficiently deterred from violation in a way that warrants their exclusion from the class rule. With respect to debt collectors, commenters noted that whether debt collectors can rely on arbitration agreements is uncertain. This, they contend, means that they already sufficiently invest in compliance. Accordingly, while debt collectors may have more incentive to comply with the law than providers that are certain that they can block class actions, debt collectors still have less incentive to comply than providers that Start Printed Page 33294do not include arbitration agreements in their contracts at all. In other words, while the legal uncertainty with respect to the ability of debt collectors to rely on arbitration agreements to block class actions suggests they may be somewhat more deterred from violations of the law than providers who are certain that they can do so, the Bureau believes that debt collectors will be further deterred from violations of the law once the class rule takes effect and debt collectors are certain that they may not rely on arbitration agreements to block class actions. With respect to credit unions, the Bureau does not believe that member ownership is a sufficient compliance incentive to replace a right to enforce the relevant laws on a class basis, in part because the members of a credit union are not necessarily aware of legal harms and thus may be unable to use the membership structure to hold their credit union providers to account. Moreover, even when consumers are aware, credit union customers do not necessarily engage in active efforts to hold management of the credit union accountable, such as by attending annual meetings.[679] Just as an individual consumer is very unlikely to bring formal legal action over a small-dollar harm, a credit union customer is not necessarily likely to know about membership accountability mechanisms much less to spend the time and effort to coordinate a campaign to use them to hold a credit union accountable for small-dollar harms.[680] Further, even if credit union customers do participate in the accountability process, very few are likely to exercise their vote on this basis alone, particularly over small-dollar harms. Indeed, the Bureau has observed violations of the law by credit unions with respect to their members.[681] For similar reasons, the Bureau further believes that the presence of a financial institution in a community, with the interest of developing and retaining customers in that community, also is not a sufficient compliance incentive to replace a right to enforce relevant laws on a class basis.

Moreover, in the period since the Bureau released the proposal, several more large-scale violations of consumer finance law have become public. In one example discussed above, the Bureau fined a large bank $100 million for widespread illegal practices related to the opening of thousands of unauthorized accounts on behalf of its customers.[682] The Bureau's order in this case addressed unfair and deceptive conduct between 2011 and the date of the order. The existence of the Bureau and the threat of enforcement and supervisory actions evidently did not deter employees of the bank from routinely opening unauthorized accounts on behalf of its customers. Nor did the prospect of individual lawsuits or the threat of losing customers apparently deter the bank's employees from that conduct.

Another example involved a large money transmitter that recently agreed to a $586 million settlement with several public enforcement agencies, including the FTC and the Department of Justice. In that settlement, the money transmitter admitted to criminal and civil violations of the law involving aiding and abetting massive wire fraud by its agents.[683] As the complaint in this case demonstrates, the money transmitter not only failed to meet legal requirements to maintain an effective anti-money laundering program but also appeared to ignore ample evidence gathered through its complaint system (i.e., its mechanism for resolving informal disputes) that indicated the extent of the problem.[684]

In general, the Bureau disagrees with commenters that stated that the Bureau should have further studied current levels of compliance in the marketplace. The Bureau's supervision function has the purpose of assessing compliance and remedying non-compliance either through supervisory resolutions or through referral of cases for public enforcement actions. The Bureau's enforcement function investigates cases where there is reason to believe violations are occurring and pursues those where the evidence warrants doing so. It would not be practical to somehow study compliance levels independent of the work the Bureau does on an ongoing basis through supervision and enforcement, nor would the Bureau expect companies to be forthcoming with evidence of non-compliance were the Bureau to attempt such a study.

With respect to the Bureau's preliminary finding that precluding providers from using arbitration agreements to block class actions would better enable consumers to enforce their rights and obtain redress, some commenters suggested that the other means do sufficiently remedy all violations of law. Those comments are discussed in above in Part VI.B. Otherwise, no commenters disagreed with the Bureau's findings in this regard and the Bureau adopts these findings with respect to the final class rule.

Whether the rule will cause providers to remove arbitration agreements. The Bureau is not persuaded by the industry commenters' claims that, if the Bureau's rule goes into effect, providers inevitably would remove their pre-dispute arbitration agreements because they would be unwilling to subject themselves to the costs of arbitration while simultaneously being exposed to class action defense costs. Once the Bureau's rule goes into effect, class actions will become available to all consumers. Thus, the relevant question is whether, in a world where class actions are available, maintaining arbitration agreements would no longer be in the companies' interest, resulting in the loss of arbitration as a dispute resolution option for those consumers that would have elected to pursue it. If a company were to decide to remove Start Printed Page 33295individual arbitration agreements from their consumer contracts, the Bureau believes that these decisions would not be motivated by the costs associated with individual arbitrations because those costs are minimal. Instead, such a decision would suggest the company only viewed the agreement as useful for blocking class actions and no other significant purpose.

Insofar as the Bureau believes that the cost of individual arbitration is minimally different from litigation, it remains skeptical that this is the reason that will cause companies to remove arbitration agreements from their contracts. Specifically, the Bureau is unpersuaded that providers incur significant net costs in connection with maintaining pre-dispute arbitration agreements today. As the commenters indicated, providers generally pay the bulk of the filing fees, hearing fees, and arbitrator compensation in individual consumer financial arbitrations. In consumer arbitrations conducted by AAA, the provider is responsible for a filing fee of $1,700 to $2,200; a hearing fee of between $0 and $500; and arbitrator compensation of between $750 per case and $1,500 per day, depending on the type of arbitration.[685] However, the Bureau believes that, in many cases, these fees may be offset by savings from streamlined procedures, such as limited discovery in arbitration, fewer in-person hearings, reduced motions practice, and less need to hire local counsel, among others.[686] Indeed, one research center commenter that otherwise strongly opposed the rule stated its belief that arbitration saves money for both consumers and companies. Further, as noted above, while commenters asserted that they expend significant resources to “subsidize” arbitration, no commenter provided a specific accounting or any other concrete evidence to support this assertion.

The commenters' arguments that they incur significant net costs in connection with individual arbitration are further undermined by the fact that most providers face no arbitrations and those that do, face very few. The Study identified about 616 AAA consumer arbitrations per year for six large consumer financial markets, about 411 of which were filed by consumers.[687] Because individual providers face so few arbitrations, even if individual arbitration is marginally more expensive than defending the same claim in court (and the Bureau makes no determination on that issue), providers are unlikely to realize such dramatic cost savings by removing their arbitration agreements that it is inevitable that they will do so for cost savings reasons alone.

The Bureau also remains skeptical that providers would be unwilling to litigate individual disputes in both arbitration and court once the Bureau's rule goes into effect because providers already litigate disputes in both fora today. Providers with arbitration agreements also must litigate in State and Federal court to the extent they are sued by individuals with whom they do not have contractual relationships or to the extent that consumers sue them in Federal or State court and the provider does not move to compel arbitration (which the Study showed occurred in nearly all individual cases filed in Federal court).[688] While commenters cited several reasons why providers currently maintain two tracks of litigation, they did not challenge the Bureau's underlying assertion that providers indeed do so. With respect to the commenter that criticized the Bureau's sample of 140 individual Federal court cases against companies with arbitration agreements as too small to draw the conclusion that providers rarely invoke arbitration in individual cases, the Bureau disagrees because its analysis of individual Federal cases reviewed 1,205 cases and found invocation of arbitration was very rare.[689] More broadly, neither that commenter nor others cited specific evidence suggesting that the Study undercounted instances in which companies invoked arbitration clauses in individual cases.

With respect to some industry commenters' contention that anti-severability provisions in arbitration agreements show that providers would choose to remove arbitration agreements if this rule were finalized, the Bureau understands that providers have adopted anti-severability provisions for the purpose of preventing cases from proceeding as class arbitrations if a court were to find a no-class provision to be unenforceable in a particular case.[690] Because those provisions were created for a different purpose, the Bureau does not construe the clauses to reveal a preference against maintaining individual arbitration once this rule becomes effective.[691]

For the reasons described above, the Bureau does not believe that commenters set forth persuasive reasons for concluding that the costs of individual arbitration would cause them to remove their arbitration agreements once the class rule becomes effective.

Whether loss of individual arbitration harms consumers. The Bureau further believes that, even if providers do remove their arbitration agreements, harm to consumers would be negligible because so few consumers pursue arbitration today. The Study showed that very few individual consumers filed claims in arbitration about consumer financial products; as noted, there were just over 600 arbitration filings per year in the six product markets studied and just over 400 of those were filed by consumers. By contrast, more than 60 million consumers per year were eligible for either cash or in-kind relief from class actions in the five-year period covered by the Study. Indeed, more than 34 million of these consumers obtained cash relief over five years studied, or more than six million per year. Thus, the number of consumers who sought relief in arbitration pales in comparison to the number who actually obtained relief through class actions. The number of consumers who sought relief in arbitration also pales in comparison to the benefited to consumers from the deterrent effect of class actions, which is discussed above in this Part VI.C.1.

In any event, even if consumers do not have access to arbitration for individual claims those still can be filed in court, including small claims court. Start Printed Page 33296As is discussed above, the Bureau is not making a finding as to whether individual arbitration is superior to individual litigation for consumers; it finds that any such comparison is inconclusive. However, even assuming that arbitration is a better forum for resolution of individual disputes than the courts—and the Bureau does not have any basis to so assume—the few hundred consumers who would be forced to file in court rather than in arbitration if providers stopped using arbitration agreements would be harmed only to the extent that arbitration is worse for them than litigation. These consumers would not be left without a forum to prosecute their individual claims. Given the extremely low number of consumer-filed AAA and JAMS arbitrations, the Bureau believes that the magnitude of consumer benefit, if any, of individual arbitration over individual litigation would need to be implausibly large for the elimination of some, or even all, arbitration agreements to make a noticeable difference to consumers in the aggregate.

Because the Bureau believes that preserving consumers' right to participate in a class action is for the protection of consumers even if providers will no longer include arbitration agreements in their consumer contracts, it is not necessary to address each individual argument cited by commenters about why arbitration is a superior forum for dispute resolution than litigation. However, the Bureau notes that there is reason to be skeptical of those arguments. For example, while many industry commenters asserted that arbitration is less expensive for consumers to pursue than litigation because filing fees are generally less, the Bureau notes that one-third of the arbitration agreements analyzed in the Study required consumers to reimburse fees and expenses paid by the company if the consumer loses the arbitration.[692] Thus, while arbitrating a successful claim might cost less in fees than an individual litigation, arbitrating an unsuccessful claim could be quite expensive for a consumer, especially as compared to litigation where a consumer will not bear additional expenses if he or she loses a claim. Indeed, this risk may even deter consumers who are aware of these cost-shifting provisions from pursuing individual arbitration because a consumer who loses the case could end up worse off than if he or she had never filed a claim in the first place.

Moreover, some of the commenters that addressed the cost of arbitration only compared it to the cost of litigating in Federal court. The Bureau believes that many of the consumers who would otherwise choose arbitration will pursue their claims in small claims courts or courts of general jurisdiction if arbitration is not available going forward. Filing fees in these courts are frequently quite reasonable and almost always far lower than Federal court.[693]

As to the comments that noted that consumers often succeeded in arbitration claims without an attorney and thus did not need attorneys in arbitration, the Bureau notes that consumers likewise do not need attorneys to pursue claims in small claims court, which is the most apt comparison to arbitration because it offers streamlined procedures similar to those available in arbitration.[694] As to the comments that noted that arbitration can be conducted telephonically or online, the Bureau notes that this may save consumers some time compared to individual litigation which may be required to be filed and heard in-person. But this time savings alone does not make arbitration superior, given the other issues described above.

As for the commenters' assertion that most harms that are suffered by consumers are individualized and not classable, the Study showed that there are millions of consumers who suffer group harms, as reflected by the number of consumers who obtained relief in class actions (60 million per year), and the Bureau's experience and expertise in supervision and enforcement is consistent with this conclusion. Most consumer financial products and services involve products offered on the same terms to all customers, so it stands to reason that when these terms violate the law, they harm all consumers bound by them. While there was no dispute that some consumers suffered individualized harms, commenters did not put forth any data that both contradicted the Bureau's Study and supported commenters' assertion that most harms were individualized and not classable.[695]

Some industry commenters have argued that more consumers would use arbitration if only they understood the process more, if arbitration agreements were drafted more clearly, or if consumers were properly educated to the benefits of arbitration (whether by the Bureau or by providers or both), thereby reducing the disparity between the number of consumers who use arbitration and the number who obtain relief in class actions. The Bureau is not persuaded that the presence of education or promotional materials would, for dispute resolution, materially alter the dynamics that result in so few individual arbitrations for all of the reasons discussed above at Part VI.B.2. The alternatives offered by commenters are addressed in detail in the Section 1022(b)(2) Analysis below at Part VIII.G.

2. By Enhancing Compliance With the Law and Improving Consumer Remuneration and Company Accountability, the Class Rule Is in the Public Interest

In the proposal, the Bureau also preliminarily found that the class rule would be in the public interest. This preliminary finding was based upon several considerations which individually and collectively supported that finding. First, as discussed extensively above, the Bureau believed that its preliminary finding that the class proposal would protect consumers also contributed to a finding that the class proposal would be in the public interest.

Second, the Bureau preliminarily found that the proposal was in the public interest because of the effect it would have on leveling the playing field in markets for consumer financial products and services. The Bureau preliminarily found that the class proposal would create a more level playing field between providers that concentrate on compliance and providers that choose to adopt arbitration agreements to insulate themselves from being held to account by the vast majority of their customers and, as the Study showed, from virtually any private liability. Start Printed Page 33297Specifically, the Bureau stated in the proposal that it believed that companies that adopt arbitration agreements with class action prohibitions to manage their liability may possess certain advantages over companies that instead make greater investments in compliance to manage their liability, both in their ability to minimize costs and to profit from the provision of potentially illegal consumer financial products and services. The Bureau does not expect that eliminating the advantages enjoyed by companies with arbitration agreements that have class action prohibitions would necessarily shift market share to companies that eschew such arbitration agreements (and instead focus on upfront compliance) because the competitive balance between companies would continue to depend on many additional factors. It thus did not count the effects of this factor as a major element of the Section 1022(b)(2) Analysis. However, the Bureau preliminarily found that eliminating this type of arbitrage as a potential source of competition would be in the public interest.[696]

Third, the Bureau preliminarily found that the class proposal was in the public interest because it would have the effect of achieving greater compliance with the law which creates additional benefits beyond those noted above with respect to the protection of individual consumers and impacts on responsible providers. Federal and State laws that protect consumers were developed and adopted because many companies, unrestrained by a need to comply with such laws, would engage in conduct that is profit-maximizing but that lawmakers have determined disserves the public good by distorting the efficient functioning of these markets. These Federal and State laws, among other things, allow consumer financial markets to operate more transparently and to operate with less invidious discrimination, and for consumers to make more informed choices in their selection of financial products and services. Thus, the Bureau believed that by creating enhanced incentives and remedial mechanisms to enforce compliance, the class proposal could improve the functioning of consumer financial markets as a whole. First, enhanced compliance would, over the long term, create a more predictable, efficient, and robust regime. Second, the Bureau also believed enhanced compliance and more effective remedies could also reduce the risk that consumer confidence in these markets would erode over time as individuals, faced with the non-uniform application of the law and left without effective remedies for unlawful conduct, may be less willing to participate in certain sections of the consumer financial markets. For all of these reasons, the Bureau stated in the proposal that it believed that promoting the rule of law—in the form of accountability under transparent application of the law by providers of consumer financial products or services—would be in the public interest.

In the proposal, the Bureau also addressed several reasons stakeholders had given during both the SBREFA process and ongoing outreach to support their belief that the class rule was not in the public interest. These stakeholders had expressed concern that the class rule would, among other things, cause providers to remove arbitration agreements from their contracts thereby negatively impacting the means available to consumers to resolve individual disputes formally and informally, impose costs on providers that would be passed through to consumers, and reduce incentives for innovation in markets for consumer financial products and services. In the proposal, the Bureau addressed concerns regarding whether the class rule would cause providers to remove arbitration agreements from their contracts in the context of its public interest finding; however, for this final rule, the Bureau addresses those comments above in Part VI.C.1 in connection with its finding that the class rule is for the protection of consumers. The Bureau does so because many commenters contended that the loss of individual arbitration would harm concerns because arbitration is a superior form of dispute resolution than individual litigation. The Bureau notes, however, that if providers choose to remove arbitration agreements from their contracts, that the loss of individual arbitration as a form of dispute resolution arguably impacts both providers and the public interest. Accordingly, the Bureau incorporates that discussion with respect to its public interest findings as well.

With respect to pass-through costs, the Bureau preliminarily found that the class rule would still be in the public interest, even if some costs of the rule may be passed through to customers. First, the Bureau stated in the proposal its belief that compliance, litigation, and remediation costs generally are a necessary component of the broader private enforcement scheme, and that certain costs are vital to uphold a system that vindicates actions brought through the class mechanism. Thus, the Bureau preliminarily found that the specific marginal costs that would be attributable to the class rule are similarly justified, even if some of those costs are passed through to consumers. Second, the Bureau preliminarily found that given hundreds of millions of accounts across affected providers, the hundreds or thousands of competitors in most markets, and the numerical estimates of costs as specified in the Section 1022(b)(2) Analysis, the Bureau did not believe that the expenses due to the additional class settlements that would result from the class rule would result in a noticeable impact on access to consumer financial products or services. Similarly, the Bureau preliminarily found that the potential cost impacts on small providers, and individual providers more generally are not as large as some stakeholders have suggested based on the detailed analysis in the Section 1022(b)(2) Analysis that factors in the likelihood of litigation, recovery rates, and other considerations.

With respect to innovation, the Bureau noted that some stakeholders suggested that the class rule would discourage innovation in that providers would refrain from developing or offering products and services that benefit consumers and are lawful due to concerns that the products may pose legal risk, for instance because they are novel. The Bureau preliminarily found that some innovation can disserve the public and that deterring such innovation would actually be in the public interest. The Bureau noted examples of such innovation in the mortgage market that were a major cause of the financial crisis and led to the introduction of a set of high-risk Start Printed Page 33298products and underwriting practices.[697] Similarly, the Bureau noted that Congress enacted the CARD Act in response to “innovation” in the credit card marketplace—such as the practice of triggering interest rate hikes based on “universal default”—that made the pricing of credit cards more opaque and unpredictable for consumers and distorted what was then the second largest consumer credit market.[698]

Conversely, the Bureau preliminarily found that some innovation is designed to mitigate risk. For example, many banks and credit unions are experimenting with “safe” checking accounts (accounts that do not allow consumers to overdraft) and these products are designed to reduce overdraft risks to consumers. Similarly, some credit card issuers have experimented with products with fewer or no penalty fees as a means of reducing risk to consumers. The Bureau believed that to this extent the class proposal would affect positive innovations of this type—it would tend to facilitate them. The Bureau further preliminarily found that even if the class rule deterred some positive innovation on the margins, the benefits of the class proposal justified any such impact on innovation.[699] Thus, the Bureau preliminarily found that the class rule would still be in the public interest, notwithstanding its impact on innovation in the consumer financial marketplace.

Comments Received

The Bureau preliminarily found that the class proposal would protect consumers for all of the reasons described above in Part VI.C.1, level the playing field in the market for consumer financial products and services, and that compliance with the law generally benefits the public interest. Commenters that opposed this preliminary finding on the public interest generally did not dispute the affirmative points made by the Bureau in the proposal, but rather cited several reasons that the commenters believed led to the conclusion that the class proposal was not in the public interest (at least some of which the Bureau had preliminarily addressed in the proposal). These arguments are discussed in detail below. Many consumer advocate and individual commenters agreed with the Bureau's preliminary findings that the class proposal is in the public interest because it would level the playing field between providers and produce other benefits through enhanced compliance with the law. For example, a consumer advocate commenter agreed with the Bureau's preliminary finding that pre-dispute arbitration agreements harm competition and put providers that do follow the law at a competitive disadvantage. An individual commenter that was formerly the FINRA Director of Arbitration also agreed that the rule was in the public interest and cited the long-term success of FINRA's similar rule as applied to broker-dealers and their customers.[700]

Pass-through costs. Numerous individual commenters expressed a general concern about the possibility of higher prices for their products as a result of the proposal. These comments urged the Bureau not to adopt the proposal but did not elaborate on their pricing concerns.[701] Numerous industry, research center, and State regulator commenters also asserted that the potential for pass through of costs of the rule to consumers and related effects on consumers should invalidate the Bureau's preliminary finding that the class proposal was in the public interest. These commenters contended that an increase in defense costs for companies will force them to raise prices for consumers, decrease their services or slow innovation, none of which are in the public interest. For example, a comment from trade associations representing depository institutions cited law and economics research—some of which relied in part on empirical studies outside of the consumer finance context and one of which made claims about the lack of consumer benefit achieved by statutory claims—as support for its conclusion that the cost of class actions are passed through to consumers and that consumers gain little benefit in return. To support this point, another industry trade association cited to a law review article discussing economic principles. That industry commenter also asserted that the Bureau's preliminary findings largely rejected the notion that businesses pass on the cost savings of arbitration to consumers.

In contrast, some commenters were supportive of the Bureau's preliminary finding acknowledging that some costs of the rule may be passed on to consumers, but concluded that this effect did not negate the impacts of the rule that advanced the public interest. For example, two commenters questioned whether providers would in fact pass through costs to consumers. A public-interest consumer lawyer stated that, in its view, assertions of pass-through costs have not been supported by credible economic data or studies. Similarly, a research center stated that the Bureau's Study supported the conclusion that any cost savings from arbitration agreements are not, in fact, passed on to consumers. A few consumer advocate commenters and a public-interest consumer lawyer commenter stated their belief that there is no evidence that companies pass- through savings from pre-dispute arbitration agreements to customers and thus conversely no evidence that the class rule would increase costs for consumers.

An individual commenter contended that higher prices passed on to consumers may force some consumers out of particular credit markets that the consumers could have afforded if the Bureau's proposal were not finalized. Several automobile dealers commented that the class rule will raise the price of automobile loans significantly, even pricing some credit-challenged customers out of automobiles, although the commenters provided no specific calculations or details. A group of automobile dealers also asserted that the cost of a motor vehicle could increase. Several other automobile dealers further asserted that costs may be passed on by the indirect automobile lenders to the dealers through indemnification obligations. An individual commenter further noted that, although Section 10 of the Study found no statistically significant increase in the total cost of credit (whether for consumers overall or any sub-segment) in analyzing credit card pricing patterns after some issuers temporarily dropped their arbitration agreements, the Study found an increase in Annual Percentage Rate (APR) for consumers with lower credit scores and an increase in annual fees for all customers. In the view of this commenter, this data suggests that the card issuers' goal was not necessarily to Start Printed Page 33299pass on new costs to their customers, but instead to adjust certain pricing components that tended to make cards appear less attractive for riskier customers. That is, this commenter believed card issuers sought to “screen out” lower-value customers in particular due to the increased probability that amounts would be refunded in class actions, which rendered such customers particularly less profitable to the card issuer.[702]

An industry association representing small-dollar lenders and a commenter in this industry asserted that because many States limit not only the interest rates but also the fees that small-dollar lenders can charge consumers, those lenders may not be able pass through such costs onto consumers. These commenters contended that the class rule would therefore pose a particular threat to the business model for small-dollar lenders, who are lenders of last resort for consumers. The commenters predicted that the class rule could force consumers to resort to unlawful lenders if the rule forced small-dollar lenders out of business. Similarly, a Tribe that operates a small-dollar lender stated that the class rule would harm the underbanked in particular. Several credit union and credit union trade association commenters noted that credit unions are member-owned and thus the cost on providers to defend additional class actions is passed on to their members directly even in the absence of higher fees. A credit union trade association also cited a survey of its members as indicating that almost half expected to need to raise the cost of credit as a result of the class rule.[703] As discussed above in Part III.D.9, automobile dealer commenters and others also criticized the Bureau's Study of pricing by credit card issuers that had removed arbitration agreements from their consumer contracts as the result of litigation and raised a number of criticisms of the methodology and analysis of that Study. A Congressional commenter stated his view that the class rule would likely cause financial institutions to increase the cash reserves they hold to mitigate litigation risk. The commenter stated that this increase in cash reserves could, in turn, reduce the amount of cash that institutions have available to lend to consumers and small businesses, or to invest in technology upgrades and employee retention. The commenter referred to this effect as creating “dead capital.”

Innovation and availability of products. Several industry commenters, a research center, and a group of State attorneys general contended that the class rule as proposed is not in the public interest because it would deter innovation. In general, these comments were very high-level and did not offer specific data or examples of how this would happen. A group of State attorneys general, who described the rule as paternalistic, asserted in their comment that the class proposal would limit competition among providers and that competition benefits consumers because it generally produces lower prices and better products. An association of State regulators asserted that the rule will deter innovation, which would harm consumers and the public interest. An industry commenter asserted that the class rule is not in the public interest because it would deter innovation without producing a corresponding benefit to consumers or the public.

Generally, comments about the impacts on innovation did not touch on particular products. The Bureau did receive comments from a credit reporting agency and an industry trade association that raised concerns regarding the impact the class rule could have on their ability to offer credit monitoring and related credit education products they may develop due to potential for new exposure to CROA class actions, as discussed more fully above in Part VI.C.1 above. The Bureau explains below in the section-by-section analysis of § 1040.3(a)(4) in Part VII why it finds an exemption for these products not to be in the public interest. A research center commenter also stated its belief that the rule would have a devastating effect on peer-to-peer lending and financial technology products because individuals lending money through these platforms may no longer be able to do so if they are subject to class action lawsuits and have to bear that risk.

One industry commenter appeared to agree with the Bureau's preliminary finding that some types of innovation can harm consumers and the public interest while noting that some types of innovation fall in a “gray area” between benefitting and harming the public interest. A consumer advocate commenter agreed with the Bureau's preliminary finding, asserting that valuing unbridled innovation over compliance with the law is inappropriate.

Payments to plaintiff's attorneys. Many Congressional, industry and individual commenters and a research center criticized the Bureau's preliminary finding that class actions are in the public interest because they believe the Bureau failed to adequately consider the costs of class actions that settle, both to consumers and to industry. Many industry and individual commenters stated their view that class actions are not in the public interest because a disproportionate share of class action settlement proceeds go to plaintiff's attorneys rather than to consumers. According to many of these commenters, the amounts that plaintiff's attorneys receive from class actions are relevant to determining whether class actions are in the public interest because attorney's fees are often deducted from settlement amounts that would otherwise go to consumers. For example, one industry commenter noted that the Study showed that plaintiff's attorneys received, on average, more than $1 million in fees from each class settlement. As a percentage of the total settlement amount, the commenter further noted that the attorney's fees were 41 percent of each settlement, on average, with a median of 46 percent.[704] Another commenter cited examples from an external study of class actions in which class members received small payouts while attorneys received large fee awards.[705]

Relatedly, many industry commenters criticized the Study for reporting on the percentage of attorney's fees compared to the total settlement amount available to consumers, rather than compared to the amount actually paid to consumers. These commenters stated that this was misleading because consumers in class settlements often do not file claims in those cases that require it and thus consumers rarely receive the full settlement amount. Accordingly, these commenters believe that the proportion of the settlement payments that are paid to attorneys is significantly higher than reflected in the Study. One research center commenter suggested that the Bureau should have considered whether the total amount of money paid to plaintiff's attorneys from class action settlements analyzed in the Study—$424,495,451—is an acceptable cost. This commenter also noted that the Study showed that attorney's fees were a significantly higher proportion of smaller class action settlements than of larger settlements. For example, the commenter noted that attorney's fees Start Printed Page 33300were 56 percent of the total relief in settlements of less than $100,000.

Some industry commenters questioned the accuracy of the Bureau's Study with respect to the amounts paid to plaintiff's attorneys from class action settlements because those amounts were lower than found in other studies. For example, whereas the Bureau's Study found that the combined plaintiff's attorney fees over all of the 419 class action settlements analyzed were 16 percent of gross relief made available, and 21 percent of the combined payments made to consumers, one research center commenter cited a study of class action settlements in cases filed in one Federal district court concerning both consumer financial and other products under a limited number of Federal statutes that found plaintiff's attorney fees were rarely less than 75 percent of the total amount paid to the class.[706] Similarly, another industry commenter cited a 1999 study of class action settlements that found that in three out of 10 cases studied, involving a range of consumer markets not limited to consumer finance, plaintiff's attorneys received more in fees than consumers received in compensation.[707] Another industry commenter criticized the efficiency and fairness of class action settlements that provide significant plaintiff's attorney fees but provide only cy pres relief to consumers.[708]

Several consumer advocate commenters explained that in many cases attorney's fees are awarded after a settlement is reached and that, therefore, they do not impact consumers' recovery; one commenter also provided several examples. A consumer advocate commenter explained that courts typically calculate fees as a reasonable percentage of the value of the settlement and, therefore, attorneys receive fees only when they have created value for class members. This commenter noted that Federal Rule 23(h) empowers judges to determine reasonable compensation for attorneys in class actions. Several commenters noted that various factors, including results achieved, risk, and the age and difficulty of the case may impact a court's fee award. A letter from a coalition of consumer advocates further disputed claims that attorney's fees are excessive in class actions. Several comments cited to the Study and noted that fees were a reasonable 21 percent of cash compensation paid to consumers and only 16 percent of all relief awarded. One of these commenters cited to another study that showed that attorney's fees may be even lower than found in the Study—only 15 percent of awards in an analysis of 688 Federal class actions.[709] A public-interest consumer lawyer commenter further disputed the relative impact of attorney's fees by noting its agreement with the Bureau that mechanisms exist to curtail frivolous litigation. A comment from a consumer lawyer explained that attorney's fees provide motivation to private attorneys to act as a market check on bad actors and bad practices. One consumer advocate commenter noted that the cost of class action settlements, including the cost of settlements themselves and defense costs, is likely lower than the cost of litigating each class member's claims in a separate case. Another consumer lawyer acknowledged that some lawsuits are frivolous but stated that the court system does a good job at weeding them out.

Several industry commenters criticized the Bureau's preliminary finding that class actions are in the public interest because they contend that the class action mechanism primarily benefits plaintiff's attorneys who abuse the mechanism for their own financial gain. One such industry commenter contends that attorneys file putative class claims out of self-interest, rather than to benefit consumers. That same industry commenter cited instances from the mid-2000s where courts or prosecutors found plaintiff's attorneys had made improper payments to individuals to recruit potential plaintiffs. The commenter further contended that class action settlements are typically structured to benefit the plaintiff's attorneys rather than the absent plaintiffs because the named plaintiffs have almost no involvement in the case. Indeed, the commenter argued that because plaintiff's attorney fees are based on the total amount of the settlement, attorneys have an incentive to negotiate a high settlement amount, but have no incentive to structure the settlement such that absent class members actually receive that amount. This commenter further asserted that plaintiff's attorneys often enter into “clear sailing” agreements with defense counsel in class cases, through which defendants agree not to object to awards of attorney's fees below a certain amount. In the commenter's view, these agreements benefit plaintiff's attorneys at the expense of absent class members because the plaintiff's attorneys have no incentive to negotiate for better compensation for class members when they know that they will receive high fees through the settlement. One industry commenter added together the amounts awarded to plaintiff's attorneys in the Study and the Bureau's estimate of costs to defend class actions from the Section 1022(b)(2) Analysis below in Part VIII and contends that the combined totals indicate that attorneys (whether plaintiff's attorneys or defense attorneys) benefit more from the rule than do consumers.[710]

The same industry commenter further contended that courts do not adequately supervise class action settlements to ensure that they are fair to absent class members, notwithstanding the court's obligation to do so under the Federal Rules of Civil Procedure and analogous State rules. The commenter, citing a law review article that refers to the legislative history leading to the adoption of CAFA, asserted its belief that courts face pressure to approve settlements in class action cases to clear their dockets and thus do not adequately supervise settlements.[711] A research center commenter cited a study for the proposition that judges are more likely to approve class settlements in cases where the claims are weak because of the high cost of litigating the case on the merits.[712]

A consumer advocate commenter disputed the relevance of attorney's fees, noting that they often come from a common fund, meaning that the cost of litigation is paid out of the common fund created by the settlement, and that attorneys only receive fees when they have created value for class members. Other commenters, including consumer advocates, consumer law firms, law Start Printed Page 33301academics and others emphasized that attorneys should be compensated for their time. One of these commenters explained that attorneys litigate class actions at considerable risk to themselves. In addition to paying all costs upfront, they do not get paid for their time unless they prevail or settle the case.

Strain on the court system. Several industry commenters, a group of State attorneys general, and a group of Congressional commenters contended the class proposal is not in the public interest because it would increase the number of class action lawsuits filed and therefore create a strain on the Federal and State court systems, which the commenters believe are already overburdened. These commenters asserted that an increase in class action lawsuits will cause delays in judicial administration and increased costs to Federal and State courts. One commenter pointed out that even an unmeritorious class action lawsuit creates a burden on the court system because a court must use its resources to determine whether it should be dismissed. Several industry commenters cited reports and statistics for both State and Federal courts supporting this overcrowding and showing that the number of cases filed have increased significantly since 2013.[713] One industry commenter referred to the class proposal as an “unfunded mandate” that the Bureau is imposing on the courts. In contrast, a consumer commenter expressed an opinion that strain on the courts should be minimal because parties pay their own court costs (as opposed to taxpayers funding additional public enforcement).

Harm to relationships between customers and providers. Another industry commenter criticized the proposal as not in the public interest because the commenter predicted that it would harm the relationships between consumers and their financial institutions. The commenter stated its belief that the availability of class actions discourages consumers and financial institutions from informal resolution of disputes.

Federalism concerns. An individual commenter contended that the class rule is not in the public interest because the commenter predicted that it would encourage companies to change their behavior nationwide in response to class actions brought under a single State's consumer protection laws, which could lead to that one State's consumer protection laws trumping Federal laws and other States' laws. This phenomenon was described by the commenter as “inverse federalism,” which the commenter viewed as problematic because it contended that certain State legislatures are captured by the plaintiff's bar and thus pass statutes that are not in the public interest. An industry commenter expressed a similar federalism concern. Similarly, an industry commenter contended that Gutierrez v. Wells Fargo,[714] the overdraft case discussed above in Part VI.B.3 is an example of such inverse federalism in that the case was based on State contract law, rather than Federal law, but nonetheless generated nationwide changes in behavior with regard to bank overdraft practices.

Impairment of freedom of contract. A group of State attorneys general commented that the class proposal is not in the public interest because they believed that it would impair the freedom of contract by preventing consumers and financial institutions from agreeing to certain forms of arbitration. In these commenters' view, there is significant benefit to empowering consumers and companies to contract freely in part because doing so creates prosperity and political freedom. Similarly, one industry commenter suggested that the class rule would deprive consumers of the ability to choose a consumer financial product or service with an arbitration agreement that blocks class actions in order that the consumers could avoid being part of a class action or potentially having contact with plaintiff's attorneys. A research center commenter and a comment from several State attorneys general asserted that because arbitration agreements are not universal in consumer finance contracts, they do not pose substantial problems for consumers because consumers can therefore choose products without them.

In contrast to these comments, a consumer advocate commenter stated its belief that arbitration agreements in consumer contracts are contracts of adhesion because consumers lack bargaining power with their providers and do not negotiate the contracts. An individual commenter asserted that this rule does not implicate freedom of contract because consumers are powerless to refuse terms imposed upon them.

Public policy concerning arbitration and legal uncertainty. Many industry commenters contended that public policy strongly favors arbitration, as exemplified by the Supreme Court's decision in AT&T v. Concepcion.[715] In Concepcion, the Court held that the FAA preempted a California law that would have prohibited the enforcement of a consumer arbitration clause that disallowed participation in class actions. The commenters noted that, in doing so, the majority opinion had referenced “a liberal Federal policy favoring arbitration.” [716] In these commenters' view, the class rule would override both the FAA and the Supreme Court precedent upholding arbitration agreements and is thus against this public policy. These commenters believed that the authority provided to the Bureau under Dodd-Frank section 1028 is insufficient to supplant this longstanding policy in the absence of clear evidence from the Study, which these commenters asserted the Study did not provide.

A group of State regulators contended that the class rule will harm the public interest because they predicted that the rule would create legal uncertainty in various ways, thereby amplifying the risk of litigation exposure for consumer financial service providers. For example, the commenter asserted that it is unclear how a class rule would affect future cases following Concepcion and other case law regarding preemption of State law under the Federal Arbitration Act. The commenter asserted that there was uncertainty with respect to whether proposed § 1040.4(a)(2) would apply to class actions under consumer finance laws only or to all State and Federal class actions. The commenter asserted there was also uncertainty concerning whether Congress's delegation of authority to the Bureau under section 1028 was proper.

Impact on certain State laws. An industry commenter contended that the proposal was not in the public interest (or for the protection of consumers) because of the effect it may have on certain State laws. The comment specifically referred to a Utah statute which authorizes creditors to include class-action waivers in bold type and all capital letters in consumer contracts for closed end credit.[717] The commenter believed that this law would be preempted by the Bureau's proposal and asserted that such a result would not be in the public interest (or for the Start Printed Page 33302protection of consumers) because it would contradict the determination of the Utah legislature.[718]

Response to Comments and Findings

The Bureau has carefully considered the comments received on the proposal and further analyzed the issues raised in light of the Study and the Bureau's experience and expertise. Based on all of these sources, the Bureau reaffirms its preliminary findings that the class rule is in the public interest because it will benefit consumers (for the reasons discussed above at Part VI.C.1), will level the playing field in the market for consumer financial products and services, and will promote the rule of law—in the form of accountability under and transparent application of the law to providers of consumer financial products or services. As noted, no commenters disagreed with the Bureau's findings with respect to leveling the playing field in the market or promoting the rule of the law. The Bureau addresses commenters' other arguments challenging the Bureau's public interest finding below.

Pass-through costs. With respect to commenters that asserted that the class rule is not in the public interest because providers will pass through increased costs of compliance activities or litigation to consumers, the Bureau disagrees that the risk of a pass-through impact on consumers negates a finding that the rule is in the public interest. The Bureau acknowledged in the proposal and acknowledges again here that there is a risk that some or potentially even all such costs will be passed through to consumers.[719] Commenters have been unable to identify empirical sources that would permit an estimate of the extent of any pass-through effect in consumer financial products and services as a whole or for specific markets.[720] However, despite the lack of conclusive quantifiable data on this issue, the Bureau has carefully analyzed it at each stage of the rulemaking process as detailed in the Study, the proposal, this public interest finding, and the Section 1022(b)(2) Analysis below in Part VIII. The Bureau finds that the risk of pass-through impacts is real, but believes that even if all costs of the rule are passed through to consumers that the overall impact would be relatively modest on any per-consumer basis. Indeed, the Section 1022(b)(2) Analysis finds that the pass-through costs would be, on average, less than one dollar per account per year. The Bureau further finds that these impacts do not negate the conclusion that the class rule is in the public interest.

Furthermore, the Bureau disagrees that the general risk of pass-through costs necessitates a conclusion that the class rule is not in the public interest. Rather, the Bureau believes, as it stated in the proposal, that complying with laws has costs, because exposure to class litigation deters non-compliance (or incentivizes compliance), these additional costs are justified. To incentivize such compliance there must be meaningful consequences for non-compliance. Given the Bureau's findings, as discussed above, that few consumers will invoke individual remedies (either through litigation or arbitration) and that public enforcement is not sufficient to enforce the relevant laws in light of the size of these markets and the limitations on public resources, exposure to class action litigation will serve as an effective compliance incentive. Accordingly, litigation and remediation costs generally are a necessary component of the success of the broader private enforcement scheme.

Thus, in the Bureau's view, the specific marginal costs that are attributable to the class rule are justified and in the public interest because of the resulting benefits in the form of protection of consumers (chiefly deterrence, and where non-compliance has not been deterred, remediation of consumer harm along with a more level playing field). The Bureau finds that the class rule would bring about better compliance and make more remedies for non-compliance available to consumers. Both of these may result in increased costs, but the Bureau finds that the costs are necessary to make covered products generally safer and fairer for consumers.[721]

It is possible that, in certain markets, a particular provider may increase its pricing so as to make its products unaffordable for persons of more limited means, or otherwise change its pricing structure to attract fewer of these customers. Commenters raised concerns along these lines related to certain credit and deposit products, for example. However, the Bureau does not believe that overall pricing across providers in these markets would be so affected as to limit access to products or services. In several of the markets covered by the Bureau's Study, the Bureau found that many providers do not use arbitration agreements today. As demonstrated by the information gathered to estimate prevalence in those markets for the Bureau's impacts analysis in Part VIII below, the Bureau believes the same is likely to be true of many other markets covered by the rule but outside the scope of the Study. In all of these markets, the pricing of providers who do not use arbitration agreements would be unaffected by the rule.

Moreover, even in markets where arbitration agreements are ubiquitous, the Bureau does not believe that to the extent providers pass through costs, they will do so in a way that materially Start Printed Page 33303shrinks their customer base. For example, in the automobile market, the Section 1022(b)(2) Analysis below in Part VIII estimates that the overall annual increase in costs to the average firm is $17,049, and the Bureau does not expect any resulting price increase for automobile loans to be significant enough to price a substantial number of consumers out of that market. As for the commenter that suggested that the pass-through costs from the class rule will cause providers to stop offering products to lower-value customers, the Bureau does not believe that the costs as estimated in the Section 1022(b)(2) Analysis are large enough to cause this to occur at an industry-wide level (though it could, however, occur for certain individual providers).

To the extent that commenters such as small-dollar lenders asserted that their industry's profit margins are so thin that their products cannot be offered in a legally compliant manner (including by complying with State usury and other pricing limitations), the Bureau believes that such arguments essentially assert that those products do not currently comply with the law and thus the providers would likely be sued in class actions if their arbitration agreements did not block class actions. To the extent that is the case, the Bureau believes that protecting consumers against products and services that do not comply with the law both benefits consumers for the reasons explained above in Part VI.C.1 and advances the public interest.

To the extent that commenters asserted that the possibility of a differential impact on other particular types of providers or their customers negates a finding that the class rule is in the public interest, the Bureau disagrees.[722] With regard to the particular economic structure of credit unions, as further discussed in the section-by-section analysis of § 1040.3 in Part VII and in the Section 1022(b)(2) Analysis below in Part VIII, the Bureau recognizes that to the extent credit unions absorb increased costs as a result of the class rule, at least some of those costs may be passed on to credit union members in the form of lower dividends. It is also true, of course, that the credit union members will benefit from those costs to the extent they reflect increased levels of compliance or redress for wrongful or legally risky conduct. In any event, the Study indicated, and credit union industry commenters acknowledged, that credit unions do not rely heavily on arbitration agreements. Furthermore, even for the small percentage of credit unions that do employ arbitration agreements, the fact that credit unions are member-owned—and the fact that most credit unions are small institutions—suggests that credit unions are unlikely to face a significant increase in the frequency of class actions and thus unlikely to incur a significant cost increase.[723] . Similarly, to the extent that creditors hold extra cash reserves or are unable to pass through costs and therefore reduce lending, the Bureau believes that this effect would be relatively modest and does not alter the conclusion that the class rule is in the public interest.

The Bureau also has considered the comments that expressed concern that rather than raising prices, companies could instead be forced out of business as a result of the class proposal. To the extent these commenters were concerned that a class action settlement could put a provider out of business, the Bureau believes that risk is low.[724] If paying full relief to consumers in a class settlement would threaten a provider's financial condition, that institution may have leverage to negotiate a settlement that provides less than full relief. In particular, Federal courts have broad discretion to consider the financial condition of the defendant as a factor when determining whether a proposed class action settlement is fair, reasonable, and adequate, as is required by Rule 23 of the Federal Rules of Civil Procedure.[725] Courts have exercised that discretion to approve class settlements that provide considerably less relief to consumers than may have been available if the case proceeded to trial and consumers prevailed.[726] And on the rare occasion that a class action does proceed to trial, the trial court must take into account due process considerations when determining or reviewing damage awards, which naturally leads to a review of the defendant's financial condition.[727]

Innovation and availability of products. In response to commenters that contended that the class rule would deter innovation, the Bureau notes that the implicit premise of this argument is that innovators will be prepared to engage in more legally risky behavior in a regime in which they are exposed only to the risk of individual arbitration or litigation than in a regime in which they Start Printed Page 33304face potential class action exposure. That is at the heart of why the Bureau believes that, on balance, the rule is in the public interest. As the Bureau noted in its proposal, not all forms of innovation necessarily benefit consumers. No commenters disagreed with the Bureau's preliminary findings noting that there are some types of innovation that disserve consumers and the public and the Bureau reaffirms its preliminary findings in this regard. To the extent innovations of these types would be discouraged, the Bureau believes such a result would be in the public interest.[728]

Conversely, the Bureau notes, as it stated in the proposal, that some innovation is designed to mitigate risk and that to the extent that the class rule would affect positive innovations of this type, it would tend to facilitate them. No commenters disagreed with the Bureau's preliminary findings in this regard and the Bureau reaffirms them here.

The Bureau recognizes that there may be some innovation that is designed to serve the needs of consumers but that leverages new technologies or approaches to consumer finance in ways that raise novel legal questions and, in that sense, carries legal risk. The Bureau believes that these innovators who create such products, in general, consider a variety of concerns when bringing their ideas to market and doubts that the innovators would be deterred from launching a new product they would otherwise choose to launch because of the risk of class action exposure. But, even if at the margins, the effect of the class rule would be to deter certain innovations from occurring or to reduce the availability of certain products, the Bureau believes that, on balance, that would be a reasonable cost to achieve the benefits of the rule for the public and consumers. The Bureau believes that, in general, in a well-functioning regulatory regime, entities must balance their desire to profit, such as through innovation, with the need to comply with laws designed to protect consumers.[729] With respect to the commenter that particularly focused on the effect of the rule on peer-to-peer lending, without taking a position on the liability of such peer lenders, the Bureau notes that the pre-dispute arbitration agreements of online lending platforms, generally reference and protect only the platform, not the individual lenders.

In response to commenters that asserted that the proposal would chill innovation without providing any corresponding benefit, the Bureau finds that the class rule would produce significant benefits, as noted throughout the Section 1022(b)(2) Analysis, such as relief provided to consumers through class action settlements and deterring companies from future violations of the law. The Bureau thus finds that the impact of the class proposal on innovation and the availability of products supports, rather than refutes, a finding that the class proposal would be in the public interest because it would incentivize providers to reach the right balance between innovation in the marketplace and consumer protection as well as to encourage innovation leading to more efficient compliance. For all of these reasons, the Bureau reaffirms its preliminary findings, as elaborated here, that the class rule is in the public interest both because of and notwithstanding its impact on innovation or the availability of products in the marketplace for consumer financial products and services.

Payments to plaintiff's attorneys. Many commenters, including those from Congress, industry nonprofits, and individuals also criticized the class rule as not being in the public interest because a substantial portion of class action settlement funds goes to plaintiff's attorneys instead of to consumers. As commenters noted and the Study reflected, the amounts paid to plaintiff's attorneys from class action settlements are substantial—a total of $424,495,451—for the 419 class settlements analyzed in a five-year period, for an average of more than $1 million per settlement.[730] This amounts to 16 percent of gross relief awarded to consumers, and 21 percent of the amounts actually paid to consumers, and are the averages more likely applicable to consumers. And while one commenter emphasized per-settlement attorney's fees percentages from the Study—with a mean of 41 percent and median of 46 percent—such data is less relevant to the average consumer. This per-settlement data reflects the high number of settlements involving claims under statutes that cap the amount of recovery in a class action (such as those involving debt collection under the FDCPA), which necessarily result in lower gross relief to the class and proportionally higher attorney's fee awards, as discussed in detail below in this Part VI.C.2. Indeed, the Study broke out the attorney's fee percentages by class size, which showed that as the size of the class settlement decreases, the proportion of the attorney's fees relative to the total relief awarded consumers increases.[731]

The Bureau does not believe that these data suggest that plaintiff's attorneys are being unjustly enriched, let alone call into question the overall efficacy or value of class actions to the public interest. Commenters did not dispute that it is time-intensive and expensive to litigate large-scale consumer class actions and that most plaintiff's attorneys would not take on such cases if they did not expect to be paid for successful cases. In the typical individual case, an attorney will request a 33 percent or higher contingency from any funds that their client might receive.[732] Indeed, and as is discussed above, the class action procedure was designed to make it economical to pursue small claims en masse. Further, no commenters suggested that class actions could be prosecuted on a pro se basis especially given Federal Rule 23's requirement that representation be adequate in order for a class to be certified, and the Bureau found no support for this notion in the Study either. Thus, for class actions to make it economical to pursue small claims en masse, they would need to provide fee awards to attorneys, in part, to incentivize attorneys to invest time and resources to litigate class actions on behalf of individual consumers who rationally do not litigate small claims.[733] Under this system, there is no Start Printed Page 33305guarantee that plaintiff's attorneys who invest their time and money in such cases will receive any fee at all. In addition, as described in the summary of the comments above, many plaintiff's attorneys commented in support of the class rule and explained the role that fee awards play in allowing them to pursue class action relief on behalf of consumers that they would not rationally pursue (and thus typically do not pursue) on an individual basis.

With respect to commenters that criticized the fact that plaintiff's attorney fees are deducted from the settlement amounts intended for consumers, the Bureau notes that legal representation has a cost and this cost must be paid so that consumers can achieve class relief. To the extent the fees of plaintiff's attorneys are paid by the beneficiaries of their services (and diminish the beneficiaries' net recovery) that is not, in the Bureau's view, an inappropriate allocation of costs. Indeed, legal representation, like any other service, has a cost and is how most plaintiff's attorneys—class or otherwise—are compensated. The Bureau also notes that deduction of plaintiff's attorney fees from consumer recoveries does not occur in all class actions. Plaintiff's attorney fees in class action settlements can be based on recovery from the “common fund” (in which case the fees are subtracted from the amount agreed to be paid to consumers) or they can be awarded separate from the fund in cases where the underlying statute under which claims were asserted provides for attorney's fees.[734] Some commenters suggested that even when attorney's fees are awarded separate from the fund, the company still has an incentive to reduce the amount of the fund in order to make room for the attorney's fees. Assuming this is true, as noted above, this is the cost of litigating class actions and it is reasonable for that cost to be paid (even by consumers) when benefits are achieved in a class settlement.

Similarly, some commenters criticized plaintiff's attorney fee awards because they are based on the amount available to be paid to the class, rather than the amounts that end up being paid out after consumers make claims. As discussed above in Part VI.B.3, however, a significant number of consumer finance class actions settlements provide for automatic payments. With respect to all class settlements, including claims-made settlements, courts oversee the fairness and adequacy of fee awards in accordance with case law. Pursuant to these precedents, courts are required to find that fee awards in settled class action cases are fair.[735] As part of that review, the courts also examine consumer notice procedures and can consider potential claims rates. Further, in cases in which attorney's fee awards are statutory, courts typically award the fees based on a reasonable number of hours expended working on the case, multiplied by a reasonable rate and by a factor to compensate the plaintiff's attorneys for the risk they took (the “lodestar” method).[736] Even in common fund cases, courts typically require plaintiff's attorneys to justify their request for fees by submitting records of the number of hours that they worked on the case, so that the court can ensure that the fee award is reasonable.[737] Thus, it is not surprising that the Study found that the overall attorney's fee percentages did not increase significantly when calculated as a percentage of amounts actually paid (21 percent) as compared to when calculated as a percentage of the gross relief awarded to consumers (16 percent).

As to the commenters that noted that plaintiff's attorney fees are proportionately higher in smaller settlements than in larger settlements, the Bureau believes that this likely reflects that there are certain minimum “fixed costs” to litigating a class action, which courts recognize as reasonable to recover, and also that a number of Federal consumer laws cap the amount available for recovery in a class action. When these costs occur in a case that ultimately provides smaller amounts of relief to consumers, the percentage of attorney's fees will necessarily be higher.[738] In terms of hours, as noted above, courts often take into account the number of hours an attorney worked on a class action case in awarding attorney's fees. The Bureau does not agree that the potential for consumer finance cases in which plaintiff's attorney fees are high relative to the settlement amount or even more than the settlement amount compels a finding that those class actions do not protect consumers or are not in the public interest. The Bureau finds that such an outcome is uncommon, and notes that courts scrutinize these settlements like any other, rejecting them when they are not fair and reasonable or approving them when they are.[739] These cases still provide Start Printed Page 33306benefits to consumers, whether in the form of injunctive relief or more limited compensation, and deter companies from violating the law, as discussed above in Part VI.C.1. Indeed, the prospect that a company might be forced to pay attorney's fees in a class action settlement deters violations of the law just as much as the prospect that a company might be forced to provide relief to consumers. Given the limited resources of public enforcers, it is less likely that public enforcement would devote resources to cases involving harms totaling relatively small amounts; thereby making private enforcement more important for such cases.

Further, certain statutes cap the total amount of relief that can be awarded in a class action under that statute. For consumer finance laws, these include the Expedited Funds Availability Act (EFAA), EFTA, FDCPA, TILA (including the Consumer Leasing Act and the Fair Credit Billing Act), and ECOA, which provides for punitive and actual damages but not statutory damages.[740] Given the fixed costs of litigating, it is therefore more likely that cases asserting claims under such capped statutes would result in attorney's fee awards that are higher in relation to the amount of monetary relief awarded to the class than awards in cases asserting claims under uncapped statutes or under common law theories. The Bureau does not believe that the existence of these damages caps or the resulting relationship between attorney's fees and consumer relief suggests that class actions for violations of these statutes are not in the public interest. The Bureau finds no evidence to suggest that class actions with lower recovery amounts (and potentially relatively higher attorney's fees) do not benefit consumers in part because, as discussed above in Part VI.C.1, the Bureau believes such class actions, like all class actions, have a deterrent effect.[741]

With respect to commenters that questioned the accuracy of the Study's data as it pertained to attorney's fees in class action settlements, the Bureau points out that the two competing studies cited by commenters covered many cases that would not be covered by this rule and were not covered in the Study. For example, the RAND study cited by one commenter was a 1999 case study of 10 cases that pre-dated CAFA, and only four of the cases studied were consumer finance cases.[742] For comparison, the Bureau's Study analyzed 419 class action settlements, all of them concerning consumer financial products or services.[743] Moreover, while one commenter cited the RAND study for the proposition that attorney's fees were higher than relief provided to consumers in three out of 10 cases, two of those cases were small settlements (each just under $300,000), which as discussed above are more likely to lead to situations in which attorney's fees are higher than consumer payout. Further, that study's authors ultimately did not agree with the conclusion that class actions produce large payouts for the attorneys at the expense of plaintiffs and consumers. Instead, the authors opined that “[t]he wide range of outcomes that we found in the lawsuits contradicts the view that damage class actions invariably produce little for class members, and that class action attorneys routinely garner the lion's share of settlements.” [744]

With respect to a paper cited by several commenters as supporting the conclusion that attorney's fees are higher than shown by the Bureau's Study and “rarely less than 75 percent of the amount actually paid to consumers,” the paper does not appear to have reported the overall mean for attorney's fees of all the cases analyzed as a percentage of payments.[745] Instead, the attorney's fee data in that paper was reported for “claim types” that were subsets of claims under particular statutes.[746] The data was not reported for cases under each statute as a whole. Thus, the 75 percent figure appears to be an estimate of the various percentages data that were reported for each claim type within the various statutes.[747] The paper analyzed a set of class actions from a single Federal district court concerning claims under the FDCPA, TCPA, FCRA, and EFTA. As noted above in Part VI.B.3 in a discussion of a separate study cited by commenters,[748] many of those statutes cover activity that extends beyond consumer financial services, to include nonfinancial goods or services that were neither included in the Study nor are subject to the final rule.[749] Indeed, of those cases analyzed in the paper, only the FDCPA cases and a few of the TCPA debt call cases would likely involve consumer financial products and services covered by this rule. For those cases, the relative proportion of attorney's fees to consumer payout does not appear inconsistent with what was found in the Study for cases with smaller class settlements.

Specifically, the paper analyzed 26 FDCPA class action settlements and found the proportion of attorney's fees to cash relief to be between 62 percent and 84 percent and the proportion of attorney's fees to cash payments to be 64 percent to 100 percent.[750] Accordingly, the ratio of attorney's fees to nominal Start Printed Page 33307relief is consistent with that reported in the Study for settlements of $100,000 or less which showed that the proportion of attorney's fees to gross relief for such cases averaged 55.9 percent.[751] The Study did not disaggregate the data with respect to fee awards in relation to cash payout by size of settlement or type of claim, but the ratios likely would have been similar to what the paper found for settlements of that size given the data reported in the Study on the attorney's fees by size of settlement.[752] As for comments that criticized high attorney's fees in settlements that provided for cy pres relief, the Study's analysis of cash payments to consumers did not include any additional value of cy pres relief. Indeed, the Study found relatively few consumer finance settlements providing for cy pres relief without also providing relief directly to consumers—28 out of 419 analyzed. Had the Bureau included cy pres in its analyses, the attorney's fees ratios would have been even lower. For these reasons, the Bureau finds that the attorney's fees awarded in cy pres cases, when they occur, do not undermine the findings that class actions are in the public interest insofar as cy pres payouts are above and beyond the amounts reported by the Study.[753]

Many of the commenters criticized the role of plaintiff's attorneys in class action settlements, asserting that they often have improper conflicts of interest with absent class members. However, judicial review of class action settlements, including the portion of any settlement allocated to the attorneys, is required in part because of the potential for such conflicts. Indeed, the Federal Judicial Center Manual notes, with respect to class action settlements, that “the parties or the attorneys often have conflicts of interest . . .” and instructs courts on how to manage those conflicts.[754] In other words, while the commenters are correct that class actions can pose potential conflicts of interest between plaintiff's attorneys and absent class members, courts are explicitly aware of these conflicts and, for those reasons among others, have procedures in place to review class action settlements. While many commenters expressed their belief that courts do not adequately review class action settlements for fairness or reasonableness, there are numerous examples of courts that, in exercising their power to review class action settlements, found certain aspects of settlements to be unfair or unreasonable.[755] Commenters and commentators may debate whether an attorney's fee award in a particular case is appropriate, but commenters have not put forth evidence to suggest that courts cannot and do not effectively supervise class action settlements or attorney's fee awards or that they fail to do so in such a way that the entire class action process is rendered faulty.[756]

Similarly, some industry commenters put forward examples, prior to the period analyzed in the Study, of plaintiff's attorneys who engaged in unlawful practices such as paying individuals to serve as lead plaintiffs or recruiting professional plaintiffs to serve as lead plaintiffs in multiple cases. However, no commenters submitted evidence to support that such abuses are widespread, nor is the Bureau aware of support for that view. Further, the nature of the examples submitted indicates that prosecutors and the courts have uncovered and remedied such abuses when they occurred. Indeed, in the example cited by one commenter that involved plaintiff's attorneys who paid people to be lead plaintiffs, those attorneys were criminally charged with racketeering, mail fraud, and bribery and pleaded guilty to numerous charges.[757]

As to commenters that criticized plaintiff's attorneys as “self-interested” in choosing to bring class action cases that might benefit them personally through generation of large fee awards, the Bureau recognizes that plaintiff's attorneys are unlikely to be motivated purely by altruism and may, indeed, factor the potential to earn a fee into their decisions about whether to pursue a case. The Bureau does not agree that the pecuniary motives of the plaintiff's attorney in pursuing a class action on behalf of absent class members determine whether a case ultimately provides relief to consumers or is in the public interest, much like the Bureau would not consider a provider's profit motive as evidence of whether the provider's product or service complies with the law.

In any event, plaintiff's attorneys are incentivized by the prospect of fee awards to pursue relief on behalf of consumers in cases where individual recoveries would be small and thus both individual consumers and individual attorneys would not have a financial motivation to proceed. By design, the class vehicle groups individual claims and thereby provides the plaintiff's attorney with the incentive to bring them.[758] The fact that a plaintiff's attorney was motivated to bring a class action case by the potential to earn a profit does not undermine the validity of the case. Indeed, individual consumers are not generally qualified to represent themselves in filing a class action, so someone else must bring it for them. As long as courts continue to Start Printed Page 33308review settlements and attorney's fee awards for reasonableness and fairness, there is a check on the self-interest of plaintiff's attorneys to ensure that it does not prevent consumers from benefitting from the class action procedure.

Strain on the courts. A few commenters stated that the rule would encourage class action litigation and therefore strain the resources of the court system. As noted above in Part VI.A, for the public interest standard, the Bureau considers benefits and costs to consumers and firms, including more direct consumer protection factors, and general or systemic concerns with respect to the functioning of markets for consumer financial products or services, the broader economy, and the promotion of the rule of law and accountability.[759] The Bureau does not believe that the impact of the rule on the resources of the court system per se or to the extent it impacts non-consumer product and service-related litigation is appropriately considered under this standard; this impact does not fall under the Bureau's purposes and objectives.[760] To the extent any strain on the court system could impact consumers bringing claims related to consumer financial products and services by, for example, increasing court costs as well as the waiting time for court dates or decisions, the Bureau has considered this impact in its public interest analysis. The Bureau has also considered impacts on providers in their claims related to consumer financial products or services. In any event, the Bureau does not believe that strain on the court system to be a likely or significant outcome of its rule.

The Bureau does estimate that there will be some increased class action litigation as a result of the class rule. Indeed, the Section 1022(b)(2) Analysis below in Part VIII estimates that there will be 3,021 additional Federal court class actions over a five-year period, or 604 Federal cases per year. The Bureau does not agree, however, that this increase in class action cases will overburden the Federal court system. In the most recent year for which data is available, there were 673 authorized district court judgeships.[761] Accordingly, the class rule would likely increase the case load of each Federal district judge by slightly less than one case per year, which the Bureau believes would be a minimal impact. Similarly, there are approximately 11,800 State court judges of general jurisdiction.[762] Assuming the same number of additional class actions are filed in State courts as in Federal courts as a result of the class rule [763] and that class actions can be heard by these judges, each State court judge would face an additional 0.05 cases per year, or one case per judge over the course of 20 years. The Bureau finds that these increases per judge are so small that the increase in the number of class cases caused by the class rule would not significantly impact the costs or efficiency of administration of the Federal and State court system. However, even if the entirety of the strain on the court system fell upon consumers and providers, as explained below, the Bureau finds that the relatively small impact in the form of additional class action cases is preferable to class action cases that could have provided relief to consumers from violations of the law being blocked by arbitration agreements or never filed at all.

To the extent that this small impact on the court system occurs, the Bureau finds that resolution of the additional class cases will provide relief for consumers and the threat of liability in those cases will deter providers from violating the law and therefore that the impact on the court system is justified. In other words, the Bureau finds that a relatively small impact on the court system in the form of additional class action cases is preferable to class action cases that could have provided relief to consumers from violations of the law being blocked by arbitration agreements or never filed at all. Accordingly, the impact on the court system from the class rule does not detract the Bureau's finding that the class rule is in the public interest.

Harm to relationships between customers and providers. As to commenters that contended that the class rule is not in the public interest because it would harm relationships between consumers and their financial institutions because the availability of class actions discourages informal resolution of disputes, the Bureau does not agree. The Bureau does not believe that the mere possibility of obtaining relief through a class action, or the pendency of a putative class action, will materially affect the number of consumers who seek to resolve complaints informally. Nor does the Bureau believe that class action exposure or the pendency of a class action will reduce the frequency with which providers will agree to informal resolution. If anything, the Bureau believes the reverse to be true as companies may be more likely to resolve complaints informally to reduce the risk that a consumer initiates a class action and, if a putative class action is pending, to reduce the likely class recovery as the class action settlement may deduct the amount of the company's informal relief provided to customers when calculating damages.[764]

Federalism concerns. In response to the research center commenter that contended that the class rule will encourage “inverse federalism,” the Bureau notes that this argument rests on the premise that providers that face only exposure to individual arbitrations or litigation will not deem it necessary to conform to the most protective State laws, whereas the availability of class relief will result in compliance with such laws and have spillover effects on other States. Thus, like the objection based on the impact of the rule on innovation, this comment conceded the key predicates on which the class rule rests—that class actions deter violations of the law.

The Bureau does not agree that to the extent the class rule increases compliance with the most protective State laws and has spillover effects in other States such a result would represent federalism in reverse. Companies that operate in multiple States have a choice of either acting differently in different States depending upon the permissiveness of State law or acting uniformly in a manner consistent with the most consumer-protective State law. The Federal system does not presuppose that a company may choose to so cabin its exposure in certain States (e.g., by entering into arbitration agreements) so as to enable it to ignore the laws of more protective States. Thus, if the result of the class rule is to cause companies to comply with protective State laws—and if, as a result, those companies choose to adopt the same Start Printed Page 33309practices in States with fewer restrictions—such an outcome would be entirely consistent with the Federal system.

Impairment of freedom of contract. In response to a group of State attorneys general that contended that the class rule harms the public interest because it reduces parties' freedom of contract, the Bureau notes that consumer finance contracts are not negotiated; they are almost always standard-form contracts that consumers may either choose to sign in order to obtain the product or not. Further, the Study's consumer survey of credit card customers found that consumers did not mention dispute resolution features as relevant to them when shopping for credit cards and chose dispute resolution last on a list of nine features that influenced their decision of whether to choose a particular credit card.[765] These findings suggest that consumers do not consider dispute resolution when obtaining consumer financial products.[766] The survey further found that consumers generally do not understand the consequences of entering into a contract that includes an arbitration agreement.[767] Thus, while it is true that in certain covered markets the rule will eliminate the option for consumers to choose a contract on the basis of its dispute resolution procedures, the Bureau does not view that as negatively impacting consumers' freedom of contract, in practice. Furthermore, to the extent that the class rule affects the providers' freedom of contract, the Bureau notes that there are any number of laws and regulations that take precedence over the unfettered freedom of contract in consumer finance. For example, State usury laws limit the interest than can be charged to consumers who borrow money,[768] State and Federal consumer protection laws establish certain minimum standards which cannot be varied by contract, and State common law typically does not permit enforcement of contractual terms that are unconscionable.[769] The Bureau therefore finds that, to the extent the class rule has any impact on the freedom of contract, that limited impact to consumers and providers' freedom of contract is justified by the consumer protection and other public interest benefits of the class rule, discussed herein. Put another way, the commenters did not explain why consumers' freedom to contract (for products with form contracts) should take precedence over their liberty to engage with providers more likely to comply with consumer protection laws. Similarly, the Bureau believes that any limited impact the class rule may have on consumers' freedom of contract and, in turn, consumers ability to avoid contact with plaintiff's attorneys, is justified for all the reasons discussed herein.

Public policy concerning arbitration and legal uncertainty. Lastly, with respect to commenters' assertion that the class rule contravenes public policy and Supreme Court precedent culminating in AT&T v. Concepcion, the Bureau notes that this assertion stems from the general public policy established by Congress in passing the Federal Arbitration Act. But the Supreme Court has also acknowledged that this general “ `liberal federal policy favoring arbitration agreements' ” may be overridden in specific instances where “Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.” [770] The Bureau further notes that section 1028 of the Dodd-Frank Act provides the Bureau with authority to regulate arbitration agreements.[771] To do so, the Bureau must find, consistent with the Study, that doing so is in the public interest and for the protection of consumers. For all of the reasons discussed herein, the Bureau finds that class rule meets the standard for the Bureau to exercise its section 1028 authority.

In response to commenters' concerns regarding the legal uncertainty that may follow from the class rule that may create potential liability for covered providers, the Bureau does not believe that the rule creates any uncertainty as to the type of actions to which it would apply. Rather, the Bureau believes that the regulation text is clear that the final class rule applies to all State and Federal class actions, as discussed more fully in the section-by-section analysis to § 1040.4(a)(2) below in Part VII. To address any potential confusion, the Bureau intends to develop a suite of compliance materials for new part 1040, just as it has done with the other regulations it has issued. Nor does the Bureau believe that the rule creates any uncertainty as to the scope of preemption under the Federal Arbitration Act, since the Supreme Court has been quite clear that Congress can authorize exceptions to the FAA by statute as Congress did in section 1028.

Moreover, to the extent that covered entities have the ability to challenge legislation or rulemaking through the litigation process or otherwise, there is always some degree of uncertainty with respect to any statute or rulemaking. If the potential for that type of legal uncertainty discouraged the adoption of new legislation or regulations, new legislation or regulations would rarely occur. For this reason, the Bureau finds that the potential for legal uncertainty, if any, does not undermine a finding that the class rule is in the public interest.

Impact on certain State laws. The Bureau disagrees with industry commenter that asserted that the proposal was not in the public interest because of its potential effect on Utah's law authorizing class-action waivers in closed-end consumer credit contracts.[772] As relevant here, the Bureau has found that certain limitations on the use of pre-dispute arbitration agreements related to class waivers are in the public interest and for Start Printed Page 33310the protection of consumers. As noted above, the Bureau has determined that eliminating class actions reduces and weakens consumer protections because the remaining forms of dispute resolution are insufficient. In addition, as discussed in the Section 1022(b)(2) Analysis, the Bureau does not believe that a disclosure-focused regulation would address the market failure the Bureau has identified in this rule.[773] Accordingly, these findings are equally applicable where a State law authorizes the use of class waivers in arbitration agreements that apply to consumer financial products and services covered by this final rule, such as the Utah law does with respect to consumer credit contracts.[774] Based on the Bureau's findings, even if such a law would conflict with the class rule to the extent it allows providers to rely on class waivers in arbitration clauses in the absence of the class rule, the class rule is in the public interest and for the protection of consumers and affords consumers greater protections than such a State law. The Bureau also believes that a uniform approach to the conduct covered by this rule across the States is consistent with the goal of promoting consistency in compliance and a level playing field across the providers covered by the rule.[775]

It also bears noting that, as described in Part VI.A above, a group of State-legislator commenters argued that the proposed class rule was in the public interest precisely because Federal law currently undermines States' ability to pass laws that will be privately enforced, measure the efficacy of those laws, or observe their development.

D. The Bureau Finds That the Monitoring Rule Is in the Public Interest and for the Protection of Consumers

As described above, in the proposal, the Bureau preliminarily found—in light of the Study, the Bureau's experience and expertise, and the Bureau's analysis—that a comparison of the relative fairness and efficiency of individual arbitration and individual litigation was inconclusive and thus that a complete prohibition on the use of pre-dispute arbitration agreements in consumer finance contracts was not warranted. Accordingly, the class proposal would not have prohibited covered entities from continuing to include arbitration agreements in consumer financial contracts generally; providers would still have been able to include them in consumer contracts and invoke them to compel arbitration in court cases that were not filed as class actions. In addition, the class proposal would not have foreclosed class arbitration; it would be available when the consumer chooses arbitration as the forum in which he or she pursues the class claims and the applicable arbitration agreement permits class arbitration.

However, in light of historical evidence that there have been serious concerns about the fairness of thousands of past arbitration proceedings, and that the Study identified some fairness concerns about certain current arbitration agreement provisions and practices, the Bureau believed that it was appropriate to propose a system to facilitate monitoring and public transparency regarding the conduct of arbitrations concerning covered consumer financial products and services going forward. Specifically, the Bureau proposed § 1040.4(b), which would have required providers to submit certain arbitral records to the Bureau that the Bureau would then further redact, if necessary, and publish. The Bureau preliminarily found this part of the proposal to be consistent with the Bureau's authority under section 1028(b) including finding that this part was in the public interest and for the protection of consumers. The Bureau made this preliminary finding after considering such countervailing considerations as the costs and burdens to providers.

This section discusses the bases for the preliminary findings, comments received, and the Bureau's further analyses and final findings pertaining to the monitoring rule. Similar to the Bureau's analysis of the statutory elements pertaining to the class rule, this discussion first addresses whether the monitoring rule is for the protection of consumers, and then addresses whether the rule is in the public interest. As discussed briefly in the findings and in the section-by-section analysis of § 1040.4(b) below, the Bureau is expanding the list of records that must be reported to the Bureau as urged by some commenters in order to better promote both statutory objectives. The Bureau is also finalizing its proposal to publish the reported records, with appropriate redactions, on the Bureau's Web site.

1. The Monitoring Rule Is for the Protection of Consumers

In the proposal, the evidence before the Bureau, including the Study, was inconclusive as to the relative fairness and efficacy of individual arbitration compared to individual litigation. The Bureau remained concerned, however, that the historical record demonstrated the potential for consumer harm in the use of arbitration agreements in the resolution of individual disputes. Among these concerns is that arbitrations could be administered by biased administrators (as was alleged in the case of NAF), that harmful arbitration provisions could be enforced, or that individual arbitrations could otherwise be conducted in an unfair manner.

The Bureau preliminarily found, consistent with the Study, that the monitoring proposal would have positive outcomes that would be for the protection of consumers. Specifically, the Bureau preliminarily found that the collection of arbitration documents would help the Bureau monitor how arbitration proceedings and agreements evolve and to see if they evolve in ways that harm consumers.[776] The collection of arbitration claims would provide transparency regarding the types of claims consumers and providers are bringing to arbitration and would allow the Bureau to monitor the raw number of arbitrations.

While the Study data identified only hundreds of arbitrations per year filed with the AAA in selected markets, in the period before the Study, there were tens of thousands of arbitrations per year, largely filed by providers. For instance, a large increase in the volume of provider-filed claims identified by the Bureau under the monitoring rule could suggest a need to monitor for potential fairness issues associated with large-scale debt collection arbitrations, such as those historically filed by providers before NAF and the AAA. The collection of awards would provide Start Printed Page 33311insights into the types of claims that reach the point of adjudication and the way in which arbitrators resolve these claims. The collection of correspondence on nonpayment of fees and non-compliance with due process principles would allow the Bureau insight into whether, and to what extent, providers fail to meet the arbitral administrators' standards or otherwise act in ways that prevent consumers from accessing dispute resolution.

The Bureau also stated in the proposal that, more generally, the collection of these documents would help the Bureau monitor consumer finance markets for risks to consumers, potentially providing the Bureau and the public with additional information about the types of potential violations of consumer finance or other laws alleged in arbitration, and whether any particular providers are facing repeat claims or have engaged in potentially illegal practices, and the extent to which providers may have adopted one-sided agreements in an attempt to avoid liability altogether by discouraging consumers from seeking resolution of claims in arbitration. Finally, monitoring would allow the Bureau to take action against providers that harm consumers.[777]

Comments Received

Some commenters opposed the monitoring proposal, though they were split on whether it was inadequate to protect consumers in light of concerns about the fairness of arbitration or whether action by the Bureau was not warranted at all.

On one side, a consumer advocate commenter suggested that the Bureau adopt what it deemed a stronger alternative to the monitoring proposal [778] in which it would identify and ban a number of specific practices in arbitration agreements and proceedings, such as fee-shifting provisions requiring the losing party in the arbitration to pay the fees of the winning party. The same commenter expressed the concern that fee-shifting could harm consumers because the major arbitration administrators currently do not have any in forma pauperis provisions (which allow impoverished consumers to file arbitrations without paying filing fees). Another consumer advocate commenter contended that the proposal did not go far enough, asserting that law-breaking companies are unlikely to provide documents to the Bureau pursuant to the proposed monitoring rule, and thus the rule might not accomplish the Bureau's goals.

On the other side, some industry commenters wrote in general opposition to the Bureau's monitoring proposal, asserting that the record before the Bureau did not warrant taking action with regard to the fairness of arbitration proceedings. One industry commenter made several arguments in opposition to the monitoring proposal generally. First, the commenter asserted that the Study found no evidence of harm in arbitrations that warranted the Bureau's intervention. Next, the commenter asserted that the Bureau did not meet its burden to show that monitoring and publication were in the public interest and for the protection of consumers because the Study's assessment of AAA arbitrations did not show that arbitration was unfair to consumers. Finally, the commenter asserted that this must be so because the Bureau did not propose to also regulate post-dispute arbitration agreements. Another industry commenter asserted that, based upon its review of the Bureau's consumer complaints database, consumers are not experiencing unfairness in arbitration that warranted the proposed monitoring rule. An industry trade association commenter criticized the Bureau's citation of NAF as an example of the risks posed by individual arbitration to consumers as a red herring on the grounds that NAF is no longer an active risk to consumers as very few agreements currently specify NAF as an administrator, and that consumers are free to seek a different administrator even if NAF is specified in the agreement.

By contrast, many commenters supported the Bureau's preliminary finding that monitoring would have positive outcomes for consumers and for the public. A group of State attorneys general, nonprofit, individual, Congressional, consumer advocate, academic, industry, consumer law firm, and individual commenters wrote in general support of the Bureau's monitoring proposal. More specifically, the group of State attorneys general and nonprofit commenters supported the Bureau's preliminary finding that the collection and publication of documents would be valuable because it would help the Bureau and the public better understand arbitration generally. The academic commenters observed that the past existence of NAF provided a case study on the need for the transparency that the Bureau's monitoring proposal would provide. The academic commenters also suggested that NAF may have stopped certain practices sooner had more information about the outcomes of its arbitration proceedings been publicly available earlier.

Responses to Comments and Final Findings

The Bureau has carefully considered the comments received on the monitoring proposal and further analyzed the issues raised in light of the Study and the Bureau's experience and expertise. Based on all of these sources and for the reasons discussed above, in the proposal, and further below, the Bureau finds that requiring providers to submit specified, redacted arbitral records and then publishing redacted versions of these records will be for the protection of consumers by helping the Bureau and the public monitor for the risks to consumers in the underlying consumer finance markets.

The Bureau believes that such monitoring is important to this ongoing risk assessment because the kinds of fairness concerns that have been raised about some arbitration proceedings historically could prevent consumers from obtaining redress for legal violations and expose them to harmful practices in arbitrations filed against them. While the Bureau expects that the number of consumer-filed individual arbitrations will remain low for the reasons discussed above, to the extent that arbitrations occur (and consumers are precluded from proceeding in court), it is in their interest that the proceeding be fair. The Bureau believes that the monitoring rule is for the protection of consumers because the awareness that certain basic information about disputes filed in arbitration will be available to the public will tend to discourage unfair and unlawful conduct by provides of both consumer financial products and services and arbitral services. In the event that transparency alone is not sufficient, the monitoring rule will also facilitate appropriate follow-up actions by the Bureau and others to protect consumers.Start Printed Page 33312

Specifically, the Bureau finds that the monitoring rule is for the protection of consumers for several reasons. It would deter potential wrongdoers who would know that their practices, with respect to both their use of arbitration proceedings and to their provision of consumer financial products and services, will be made public and would facilitate redress for related harms to consumers. Additionally, the Bureau finds that the rule will allow the Bureau and the public to better understand arbitrations that occur under arbitration agreements entered into after the compliance date and to determine whether further action is needed to ensure that consumers are being protected. The materials the Bureau is requiring providers to submit in redacted form—similar to the AAA materials the Bureau reviewed in the Study—will allow the Bureau to more broadly monitor how arbitration proceedings are conducted, what provisions are contained in the underlying arbitration agreements, and whether providers are taking steps to prevent consumers from being able to seek relief in arbitration.

In particular, the Bureau finds, consistent with the Study, that the documents the Bureau collects will provide the Bureau with different and useful insights relevant to the above-mentioned assessment of risks to the consumers. The collection of arbitration claims will provide transparency regarding the types of claims consumers and providers are bringing to arbitration and the number of arbitrations filed,[779] and the collection of awards will provide insights into the types of claims that reach the point of adjudication and the way in which arbitrators resolve these claims. The collection of arbitration agreements, when considered with other arbitral documents, will allow the Bureau to monitor the impact that particular clauses in arbitration agreements have on consumers and providers, the resolution of those claims, and how arbitration agreements evolve. Finally, as noted before, the collection of correspondence regarding nonpayment of fees and non-compliance with due process principles will allow the Bureau to understand the extent to which providers do not meet the arbitral administrators' fairness standards and to identify when consumers are harmed by providers' nonpayment of fees.

The Bureau notes that the two categories of documents it is adding to what it had proposed will protect consumers by providing the Bureau and the public further insights into the risks that the use of arbitration agreements may pose for consumers in the covered consumer finance markets. The collection of answers to arbitral claims, required by new § 1040.4(b)(1)(i)(B), will supplement the Bureau's collection of claims and awards and will provide additional insights by providing a more balanced understanding of the facts (or disputes regarding the facts) in an arbitration proceeding, especially in cases where no award is issued. The collection of provider-filed motions in litigation in which they rely on arbitration agreements (and the collection of the underlying arbitration agreements that are invoked in such proceedings), as required by new § 1040.4(b)(1)(iii), will aid the Bureau in determining the frequency with which providers compel arbitration in response to individual litigation claims as well as to monitor the content of arbitration agreements for reasons similar to those described above. The Bureau also finds that this collection, in conjunction with the other arbitral records it will receive, will over time help track whether such claims are ultimately heard in arbitration rather than being dropped entirely, which could in turn shed more light on the extent to which consumers are deterred from pursuing individual claims more generally because of arbitration agreements.[780]

The Bureau further finds that the collection of these documents will enhance the Bureau's ability to protect consumers by monitoring consumer finance markets for risks to consumers. The collection of these documents will provide another source of information to help the Bureau and others understand the markets in which claims are brought more broadly and how consumers and providers interact. For example, the collection of claims and awards will provide additional information about the types of issues that consumers and providers face that are not or cannot be resolved informally, including those issues that appear to give rise to repeat claims. This monitoring may facilitate the ability of the Bureau and other actors to address emerging market concerns for the protection of consumers.

As described above in Part VI.B.2, the Bureau believes that the number of consumer-filed individual arbitrations is likely always to be too low to provide optimal levels of deterrence and redress for legal violations affecting groups of consumers, and thus that greater advancements to the protection of consumers and public interest derive from the class rule. Nevertheless, the Bureau notes, as described further below, that some commenters expressed concern that the records from individual arbitrations would trigger increased scrutiny by regulators and increased litigation risk with regard to the disputed conduct by the affected financial services providers. The Bureau agrees with these commenters' underlying assumption that the monitoring rule would tend to increase deterrence and redress for legal violations but sees this as a positive impact. This is, in fact, one of the purposes of the rule.

In addition, if sunlight is not a sufficient disinfectant to discourage unfair practices in connection with arbitration proceedings,[781] the monitoring rule will better position the Bureau to address conduct or practices that impede consumers' ability to bring claims against their providers, for instance, if a particular company was routinely not paying arbitration fees and thus preventing arbitrations against it from proceeding.[782]

As noted in the proposal and above, the Bureau intends to draw upon all of its statutorily authorized tools to address conduct that harms consumers that may occur in connection with providers' use of arbitration agreements. For example, the Bureau intends to continue to use its supervisory and enforcement authority, as appropriate, to evaluate whether specific practices in relation to arbitration—such as the use of particular provisions in agreements or Start Printed Page 33313particular arbitral procedures—constitute unfair, deceptive, or abusive acts and practices pursuant to Dodd-Frank section 1031. The Bureau expects to pay particular attention to any provisions in arbitration agreements that might function in such a way as to deprive consumers of their ability to meaningfully pursue their claims.

With regard to commenters that generally opposed the monitoring proposal, the Bureau disagrees with comments suggesting that the Study provided no basis for the monitoring proposal or that no consumer harm has been shown. As noted above in Parts II and III, the Study identified evidence of multiple historical problems with the conduct of arbitration, including potential conflicts of interest involving a major arbitration administrator, general fairness concerns about the filing of thousands of debt-collection arbitrations across multiple administrators, failure to pay fees by some individual financial services providers, and at least sporadic use of particular clauses in arbitration agreements that raise fairness concerns.[783] Additionally, the Study's analysis of pre-dispute arbitration agreements identified the prevalence of some provisions that may make arbitration proceedings more difficult for consumers.[784] Further, the Study showed that, in the markets covered by the Study, an overwhelming majority of arbitration agreements specified AAA or JAMS as an administrator (or both), and both administrators have created consumer arbitration protocols that contain procedural and substantive safeguards designed to ensure a fair process.[785] While the Bureau believes that these safeguards currently apply to the vast majority of consumer finance arbitrations being conducted, this could change over time. Administrators, including potentially new ones, may decline to adopt or change the safeguards in ways that could harm consumers, companies may (and currently do) select other arbitrators or arbitration administrators that adopt different standards of conduct or operate with no standards at all (e.g., a company may choose an individual as an arbitrator who conducts the arbitration according to his or her own rules), arbitration agreements may contain provisions that could harm consumers, or the use of arbitration agreements may evolve in other ways that the Bureau cannot foresee, particularly as the markets reacts to the adoption of the class rule. Finally, in response to the commenter that asserted that the Bureau's citation of NAF was a red herring, the Bureau's citation of NAF was illustrative of what could occur and not intended to suggest that NAF was still a problem. The commenter did not dispute the Bureau's finding that NAF's past practices were problematic, that other administrators such as AAA may have identified problematic practices such that they also altered their policies in response to NAF's settlement with the Minnesota Attorney General, and that a new administrator may replace NAF in the future or current administrators may change their standards.

In addition, as noted by other commenters, State monitoring and publication laws have helped identify and stop potentially problematic practices. As set out in Part II.C, the California law requiring the reporting of arbitration statistics led to the investigations of arbitral administrators by city and State regulators,[786] caused NAF to stop administering consumer arbitrations, and may have led to additional changes, such as the AAA's voluntary moratorium on debt collection arbitrations and JAMS's adoption of fairness standards.[787] The Bureau believes that the facts set out above point to the importance of collecting arbitration records and publishing them. Based on the above, the Bureau finds, as it set out in the proposal, that it is in the public interest and for the protection of consumers for the Bureau to monitor providers' use of arbitration agreements and arbitration proceedings to determine if there are any changes in the overall volume in arbitrations, in the types of arbitrations filed, in the outcome of arbitrations, or in the prevalence of certain harmful clauses in arbitration agreements.

In response to a commenter's assertion that the Study's analysis of AAA arbitrations did not demonstrate that arbitration was unfair to consumers, the Bureau disagrees that the monitoring rule must only be based upon demonstrated unfairness in the status quo. As set out in Part VI.B, the Bureau notes that the AAA data merely showed that (1) there were very few arbitrations, and (2) the data were inconclusive as to whether individual arbitration proceedings lead to better outcomes than individual litigation. This data alone does not support a finding that individual arbitration is fair, ipso facto. Indeed, as discussed above, other AAA data and Study analyses as well as broader historical information suggested that continued monitoring is warranted because consumer finance arbitration is dynamic and continues to pose a potential ongoing risk to consumers.[788]

With regard to the commenter that suggested that, because the Bureau's proposal did not address post-dispute arbitration, the Bureau must have regarded arbitration as fair overall, the Bureau observes that section 1028 only authorizes the Bureau to study and regulate the use of pre-dispute arbitration agreements.[789] The Bureau therefore did not analyze the use of post-dispute agreements and takes no position on their fairness but notes that proceedings pursuant to an agreement between parties who are aware of a specific present conflict and jointly agree to resolve it through arbitration rather than litigation may be different in nature than proceedings subject to pre-dispute arbitration agreements, which are typically entered into by parties not necessarily anticipating future conflict and, in the context of consumer finance, are often included in a larger form contract rather than being the subject of negotiations between the parties. As such, the fact that the Study and proposal did not mention post-dispute arbitration does not alter the Bureau's Start Printed Page 33314overall findings on the fairness of pre-dispute arbitration.

With regard to the comment that the data in the Bureau's consumer complaint database proves that arbitration is not unfair, the Bureau notes that its complaints function takes in informal complaints before the start of formal dispute resolution such as arbitration. The Bureau believes that a low volume of complaints about arbitration in the consumer complaint database is not dispositive of the fairness of arbitration. Moreover, the monitoring rule does not rest on a finding that arbitration as it is occurring today is unfair but rather that there is a significant risk that arbitration could operate in the future in ways that are injurious to consumers and that monitoring will enable the Bureau to mitigate that risk and to address it should it occur.

With regard to the comment that law-breaking providers might not submit documents to the Bureau pursuant to the proposed monitoring rule, the Bureau agrees that there is some risk of non-compliance, but notes that this is true of any regulation that the Bureau implements. The Bureau has no reason to believe that any substantial number of providers will not comply, such that the Bureau should not implement the monitoring rule. Further, the Bureau does not at this time believe that the risk of underreporting by providers is likely to be severe enough that a different type of intervention is warranted, such as a total ban on the use of pre-dispute arbitration agreements or standards for arbitration proceedings. As set out in Part VI.B, the Bureau is not adopting either intervention instead of monitoring. Nevertheless, the Bureau will monitor efforts to comply with the reporting requirements of providers over which it has enforcement or supervisory authority.

2. The Monitoring Rule Is in the Public Interest

In the proposal, the Bureau also preliminarily found that the monitoring proposal would be in the public interest. This preliminary finding was based upon several considerations, including the considerations pertaining to the protection of consumers set out above. The Bureau also considered potential benefits stemming from the other public interest factors.

Consistent with the legal standard outlined above, in making its preliminary findings, the Bureau also analyzed potential tradeoffs under the public interest factors such as the monitoring proposal's potential compliance burden on providers, the potential confidentiality concerns of providers, and the potential privacy considerations affecting consumers and providers.

The Bureau summarizes comments on these preliminary findings and sets out final findings in response to these comments below.

Comments Received

The Bureau received three general categories of comments in response to the public interest factors addressing (1) consistent enforcement of consumer laws; (2) issues relating to whether the publication component of the monitoring rule in particular was in the public interest; and (3) privacy, redaction, and related issues associated with the proposal.

Consistent enforcement of consumer laws. One consumer advocate commenter agreed generally that the monitoring proposal was likely to provide policymakers, including the Bureau, with additional information that would enable it to develop better substantive policies for the consumer finance markets. No commenter opposed to the intervention commented on this aspect of the Bureau's preliminary public interest findings.

Publication. Several comments addressed whether publication in particular was in the public interest. One set of academic commenters, State attorneys general, and nonprofit commenters wrote in support of the monitoring proposal on the grounds that it would improve transparency in consumer finance markets. In addition, a group of State attorneys general noted in their comment that publication of arbitral records would assist the Bureau and other regulators with analyzing arbitration outcomes and would help regulators determine if additional regulation of arbitration was necessary. Academic commenters noted that, with the exception of California's arbitration disclosure law, researchers only have access to those case-level data and documents on arbitration proceedings that arbitral administrators permit non-parties to see. These commenters noted that access to more comprehensive arbitration data would aid their work.

Another set of commenters asserted that making arbitral decision-making more transparent to the general public would have such negative impacts as to negate a finding that publication is in the public interest. One industry commenter argued that the Bureau should not publish awards because transparency in the decision-making of arbitrators would be detrimental to arbitrators and providers. That is, according to the commenter, arbitrators would face disincentives to make explicit findings, publication would put the onus on arbitrators to keep arbitration fair, and providers would be subject to further Bureau scrutiny. By contrast, other commenters argued that such transparency was beneficial, for many of these same reasons. For instance, academic commenters identified NAF as a case study on the importance of making arbitration records transparent, noting that NAF kept its arbitration files private until the Minnesota Attorney General's office obtained documents, and speculated that NAF may have been less likely to enter questionable agreements with certain debt collectors had it known its files would be made publicly available. A trade association of lawyers representing investors asserted that the public has an interest in accessing arbitral records and data. A nonprofit commenter suggested that there was a public interest in analyzing potential issues with individual arbitration, citing as examples secrecy, limited discovery, and arbitrator bias.

Another set of comments offered differing views on the attention that publication would draw to the underlying substantive claims, and the providers associated with them, set out in arbitration records. Some commenters believed this added attention—to business practices and particular providers—was unwarranted. Several industry commenters asserted that publication, and the accompanying publicity as to business practices identified in arbitration records would lead plaintiff's attorneys to bring more frivolous litigation generally, including additional class action lawsuits and follow-on individual arbitrations. One industry commenter expressed concern that the publication of records would subject providers to class actions concerning non-compliance with the monitoring rule if providers made errors in redacting arbitration documents or if pre-dispute arbitration agreements did not comply with the requirements of proposed § 1040.4(a)(2)(i). Other industry commenters suggested that providers would remove pre-dispute arbitration agreements from contracts with consumers to avoid the increased exposure to litigation risk associated with publication. A commenter that is an association of State regulators suggested that the publication would lead to more class action litigation, which it contended would exacerbate the difficulties State bank examiners face in assessing the risks associated with such class actions in their examinations. An industry commenter Start Printed Page 33315argued that the Bureau should not publish arbitration records because the Bureau's consumer complaint database already exists and serves the same function in alerting the public to potentially objectionable business practices. Another industry commenter suggested that important or relevant information in arbitration records should be pursued by the Bureau itself, not published for others to see and exploit.

Another group of commenters focused on other negative impacts on financial services providers besides increased litigation risk, emphasizing that they viewed arbitral confidentiality as one of the main benefits of the process that would be harmed by the proposal. Some commenters were concerned that, without confidentiality, providers would be subject to reputational risks if arbitrations filed against them were public. Some credit union and trade association commenters opposed the publication proposal on the grounds that it would expose credit unions and their members to reputational risk, especially because allegations made in arbitral filings could be taken as fact. Other industry commenters further complained that consumer data was to be redacted but not information on providers and their employees, potentially compromising the privacy of the provider's employees. Other industry commenters opposed the Bureau's monitoring proposal on the grounds that confidentiality was standard or customary in arbitration, and that the Bureau's publication proposal would undermine that. A commenter that is an association of State regulators also opposed the publication rule on the grounds that it may conflict with State laws on the confidentiality of arbitral records.

Other commenters contended that providers should not be able to maintain secrecy about their disputes with customers. A trade association of lawyers representing investors contended that the public has an interest in accessing arbitral records and data. Some academic and nonprofit commenters referenced other types of arbitrations where they asserted that results are published with no ill effects (e.g., FINRA, labor arbitration, and internet domain name disputes before the Internet Corporation for Assigned Names and Numbers, known as ICANN). These commenters stated that publication would not deter or impede the use of arbitration as a dispute settlement mechanism; instead, they asserted that the willingness of these administrators to publish arbitration records shows the value of transparency in arbitration proceedings.

Several commenters also argued that the publication of claims and awards could help to facilitate the development of consumer protection law. A consumer advocate commenter argued that the publication of arbitration records is likely to help industry understand what actions might violate the law. Several consumer advocate commenters argued that the publication of arbitration records is likely to help consumer advocates and others advising consumers directly know what issues to pursue, in particular when they advocate on behalf of or advise low-income consumers. A consumer advocate commenter also argued that the publication of arbitration records collected from providers would permit consumers themselves to avoid harm by becoming aware of certain business practices.

Privacy, redaction, and related issues. Several commenters focused on the proposal's provisions concerning redaction of certain consumer information prior to submission of arbitral records. For example, some asserted that the proposal's redaction provisions would be more burdensome to providers than the Bureau estimated. An industry commenter asserted that the redaction of arbitration documents, as required by proposed § 1040.4(b)(3), would be costly for credit unions, taking time and money that they could otherwise use to serve their members. Relatedly, a credit union industry commenter requested an exemption for credit unions from this requirement because of the burdens the monitoring proposal would impose on them. The commenter stated that the estimate of $400 per institution to redact documents in the proposal's Section 1022(b)(2) Analysis underestimated the cost of a program to redact and submit documents to the Bureau.

In contrast, other commenters agreed with the Bureau's assessment of the burden of complying with the proposal as being relatively low, but for different reasons. A consumer advocate commenter observed that the burden under the monitoring proposal would be minimal. An industry commenter argued that the burden would be low because it predicted that providers would drop their arbitration agreements in response to the risk of increased litigation exposure arising from publication and thus few would have to comply with the substantive requirements of this rule.

Second, several industry commenters asserted that the collection of both public and non-public information by financial regulators poses a threat to consumer privacy. One of these industry commenters asserted that the collection of even redacted information could be combined with public information to re-identify consumers. Other industry commenters expressed concerns that monitoring and publication would expose consumers to a risk of privacy and data security violations. Another industry commenter suggested that the proposal would force consumers to expose their private data without consent. One trade association commenter asserted that consumers in debt collection cases may not wish to have their personal finances publicly disclosed. (The trade association made this comment in the context of opposing the class rule, but the Bureau construes this as a comment on privacy concerns pertaining to publication). Finally, another industry commenter expressed skepticism about permitting government regulators to collect data because of a lack of security at regulators, citing examples such as a recent Office of the Inspector General report on the security of the Bureau's consumer complaint database and issues affecting other Federal regulators.[790]

Finally, several comments focused on the impact that the publication proposal would have on arbitral confidentiality. Some commenters were concerned that, without confidentiality, providers would be subject to reputational risks if arbitrations filed against them were public. Some credit union and trade association commenters opposed the publication proposal on the grounds that it would expose credit unions and their members to reputational risk, especially because allegations made in arbitral filings could be taken as fact. Other industry commenters raised a further concern that consumer data was to be redacted but not information on providers and their employees, potentially compromising the privacy of the provider's employees. Other industry commenters opposed publication on the grounds that confidentiality was standard or customary in arbitration, and that the Bureau's publication proposal would undermine that. A commenter that is an association of State regulators opposed the publication rule on the grounds that it may conflict with State laws on the confidentiality of arbitral records.

Other commenters agreed with the Bureau that providers should not be able to maintain secrecy about their Start Printed Page 33316disputes with customers in arbitration. A trade association of lawyers representing investors contended that the public has an interest in accessing arbitral records and data. Some academic and nonprofit commenters referenced other types of arbitrations where results are published with no ill effects (e.g., FINRA, labor arbitration, and internet domain name disputes before the Internet Corporation for Assigned Names and Numbers, known as ICANN). Thus, these commenters stated that publication would not deter or impede the use of arbitration as a dispute settlement mechanism; instead, the willingness of these administrators to publish arbitration records shows the value of transparency in arbitration proceedings.

Responses to Comments and Final Findings

The Bureau has carefully considered the comments received on the monitoring proposal and further analyzed the issues raised in light of the Study and the Bureau's experience and expertise. Based on all of these sources, the Bureau finds that requiring providers to submit redacted arbitral records and publishing them in redacted form is in the public interest. The Bureau finds that the monitoring rule is in the public interest because, along with creating deterrence and facilitating redress, as described above, it will allow the Bureau to better evaluate whether the Federal consumer finance laws are being enforced consistently; promote confidence in a fair and efficient arbitration system; and facilitate transparency and accountability in the broader markets for consumer financial products and services. The Bureau also finds that the potential costs and burdens of the monitoring rule identified by commenters—including the cost of compliance and potential privacy and confidentiality issues—are modest and do not overshadow the rule's benefits to the public interest.

Consistent enforcement of consumer laws. The Bureau finds that the monitoring rule is in the public interest because it will allow the Bureau to better evaluate whether the Federal consumer finance laws are being enforced consistently. The public interest analysis is informed by one of the purposes of the Bureau, which is to “enforce Federal consumer financial law consistently.” [791] As a consumer advocate commenter pointed out, with the insight garnered from a fuller collection of arbitral records, the Bureau will be better able to know whether arbitral decisions are applying the laws consistently on an ongoing basis and whether any consumer protection issues arise in those cases that may warrant further action by the Bureau. The Bureau's experience with the Study showed how the analysis of arbitral records is likely to provide useful information to policymakers and insights into particular consumer financial products and services.

Publication. The Bureau finds that the publication rule will tend to promote confidence in the fairness of the arbitration system for covered markets and in the functioning of the markets themselves by promoting transparency and accountability generally, beyond the specific benefits discussed above for any individual consumers who are victims of legal violations or unfair proceedings. While the impact will not be as substantial as the class rule given the relatively small number of individual arbitrations currently, the logic is related in that the Bureau believes that the availability of fair remedial mechanisms to enforce compliance with the law will tend to create a more predictable, efficient, and robust regulatory regime for all participants. Thus, the Bureau believes that the way that publication promotes the rule of law—in the form of accountability through transparent application of the law to providers of consumer financial products or services—contributes to the conclusion that the rule is in the public interest.

The Bureau finds that the publication requirement is in the public interest because, as commenters observed, it will promote transparency and insight into the conduct of arbitration proceedings. The Bureau believes that creating a transparent system of accountability is an important part of any dispute resolution system for formally adjudicating legal claims. By allowing the public access to redacted documents about the conduct of arbitrations, the public will be able to learn of and assess consumer allegations that providers have violated the law and, more generally, assess the degree to which arbitrations may proceed in a fair and efficient manner. By publishing the materials, the rule will also promote greater transparency among consumers and other members of the public. The Bureau also believes that providers may find the increased transparency arising from the Bureau's publication of records helpful to monitor best practices and avoid potentially unfair conduct or arbitration administrators.

The Bureau agrees with commenters that noted that publication would assist the members of the public and other regulators with analyzing arbitration outcomes and would help regulators determine if additional regulation of arbitration is warranted. Just as Dodd-Frank section 1028 called upon the Bureau to publish a report on arbitration to Congress, the Bureau finds it is in the public interest to permit anyone to review records of arbitration proceedings to better understand the workings of arbitration and its impact on consumers. The Bureau believes that the publication of claims will lead to transparency by revealing to the public the types of claims filed in arbitration and whether consumers or providers are filing them. The publication of answers will shed some light on the potential merits of these claims. The publication of awards will lead to increased transparency by revealing how different arbitrators decide cases. The Bureau believes that publishing redacted awards may generate public confidence in the arbitrators selected for a specific case as well as the arbitration system, at least for administrators whose awards tend to demonstrate fairness and impartiality. Publication of all of these arbitral records collectively could help educate the public and demonstrate the extent to which arbitration results in fair processes and outcomes for consumers. In particular, the Bureau agrees with the commenter that suggested that there is a public interest in analyzing potential issues with individual arbitration, such as limited discovery and arbitrator bias.

The publication of redacted awards will also signal to attorneys for consumers and providers which sorts of cases favor and do not favor consumers, thereby potentially facilitating better pre-arbitration case assessment and resolution of more disputes informally.[792] Publication may also help develop a more general understanding among consumers of the facts and law at issue in consumer financial arbitrations.

The Bureau believes that publication will assist academic researchers with analyzing consumer arbitration. To date, Start Printed Page 33317academic studies of arbitration [793] and the Study were made possible only by the voluntary participation of the AAA. Such analyses will likely be made easier, and more widespread, if more data were available on a regular basis, in a standard form, and regardless of the arbitral forum.

The Bureau also finds that the publication of records would lead to greater transparency of the operation of the markets for consumer financial products and services. As noted by commenters, the publication of records under the monitoring rule will permit consumers, regulators, consumer attorneys, and providers to identify trends that warrant further action. These groups routinely use public databases, such as online court records, decision databases, and government complaint databases (e.g., the Bureau's complaint database, various States' arbitration disclosure requirements, and the FTC's Consumer Sentinel database [794] ) today in conducting their work.

The Bureau agrees with commenters that asserted that the publication requirement would help consumer advocates identify issues to pursue in assisting consumers, and may help consumers themselves to avoid harm by becoming aware of certain business practices. In these ways, the Bureau believes that the monitoring rule will improve the ability of a broad range of stakeholders to understand whether markets for consumer financial products and services are operating in a fair and transparent manner.

The Bureau further finds that the publication of arbitral records will help draw attention to certain business practices by providers. This is beneficial because it will help not just consumers but also providers understand what actions might violate the law. While not binding precedent, arbitral awards in consumer finance cases (not currently available to non-parties in most cases) may provide an analysis of relevant law and facts that can assist others. Making awards available may help consumers identify potentially harmful practices by providers and may create incentives for providers to identify potentially safer practices. The Bureau agrees with commenters that this will assist the development of persuasive reasoning, including arbitration and litigation disputes, on issues of consumer financial protection.

While one commenter suggested the publication of awards would act as a disincentive for arbitrators to make explicit findings, no evidence was presented of this phenomenon. If this were true, it would generally only be known as a result of analyzing awards that have actually been published. Yet the Bureau is not aware of evidence of such a disincentive reflected in arbitration awards made public by FINRA and the AAA. The Bureau does agree with the commenter that publication will further incentivize arbitrators to keep arbitration fair. Arbitrators may feel more pressure knowing that their decisions are more likely to be scrutinized, and the Bureau believes that this awareness will have a salutary effect on arbitrator decisions, making them more likely to be fair.

With regard to the commenters concerned that providers would be subject to reputational risks unless arbitrations were kept confidential, the Bureau acknowledges the concern that publication may expose providers to reputational risk to the extent that mere allegations made in arbitral statements of claim would be taken as fact. In response, the Bureau has drafted, as set out below in the section-by-section analysis of § 1040.4(b)(1)(i)(B), a provision requiring providers to submit answers as well as arbitral counterclaims to balance out one-sided accounts and mitigate any perceived reputational risk. In any case, as is noted above, relatively few providers may be subject to any form of reputational risk according to the Bureau's estimate of the number of providers likely to submit records to the Bureau. In addition, in the Bureau's experience with publishing consumer complaints, reputational risk is not necessarily significant when there are low numbers of complaints; and the Bureau does not estimate that any one provider is likely to have a significant number of arbitrations with public records. The reputational risk associated with arbitration is not unique—providers are already exposed to reputational risk when complaints are filed in litigation, given that such records are public by default. Further, the Bureau believes that the potential benefits of transparency to consumers and the public at large outweigh any potential reputational risk to providers. The Bureau further agrees with commenters, as is noted above, that NAF is a key case study demonstrating the importance of transparency and how arbitral records can produce private and public responses to potentially problematic practices, and notes that the default for individual litigation is that records, absent compelling reasons, are available to the public.[795] This is also the case with the practice of many arbitral administrators, including FINRA and the AAA (for certain types of cases).

While one commenter expressed the concern that providers that lose in arbitration proceedings in which they are accused of violations of consumer protection law may face more scrutiny from the Bureau than others, the Bureau finds that the loss of a single dispute with one consumer does not necessarily trigger such scrutiny, but to the extent this occurs it will benefit the public interest. The Bureau believes that any risk of added scrutiny could result in more relief for consumers and better business practices by providers deterred by the prospect of additional public enforcement or litigation in response to arbitral awards identifying certain illegal business practices.

The Bureau also believes that the publication portion of the rule is in the public interest because it will increase transparency and accountability with regard to conduct in the underlying consumer financial services markets. In contrast to commenters that viewed the possibility of increased scrutiny by regulators or plaintiff's attorneys as a negative outcome from the monitoring rule, the Bureau believes that the increased transparency will tend to increase consumers' ability to seek redress for legal violations, providers' incentives for compliance, and general public confidence in the orderly operation of the markets. While these impacts are likely to be modest compared to the class rule given that the number of consumer-filed individual arbitrations is so low, the Bureau still views them as supporting the adoption of the publication portion of the rule.

While some commenters were concerned that the publication of arbitral records may permit plaintiff's attorneys to identify potentially classable claims or claims that could be brought in individual arbitrations or litigations, the Bureau does not find this is necessarily a frequent result of publication. As discussed in Part VI.B.3 Start Printed Page 33318above, class actions are more likely to serve as a vehicle for adjudicating small-dollar claims affecting large groups of consumers than are individual arbitrations. The Bureau also notes, as discussed above in Parts III and VI.B.3, that there are many differences between the few claims consumers bring in arbitration and those brought in class actions. To the extent that individual arbitrations do lead to class claims, however, the Bureau finds no evidence that such suits would necessarily be frivolous or meritless insofar as attorneys are prohibited by ethics and court rules from bringing such cases. For example, the Study identified several arbitrations in which consumers were awarded relief by the arbitrators and many more that may have settled on terms favorable to the consumers.[796] Nor is there evidence that any significant number of arbitrations involve consumers succeeding on claims that are frivolous or meritless.

With regard to the industry commenter's concern that the publication requirement would subject providers to class actions concerning provider compliance with the monitoring rule itself, the Bureau will review records received from providers to ensure compliance with § 1040.4(b)(3) before publishing them, and pursuant to new § 1040.4(b)(5) the Bureau will further redact the records to reduce re-identification risk. The Bureau notes that, in any case, this rule does not permit private claims for non-compliance with § 1040.4(b)(3). The Bureau also believes that, given the low number of arbitrations identified by the Bureau in the Study, it is unlikely that any given provider would make enough redactions (let alone redaction mistakes) to face class liability. As to the concern that noncompliance of pre-dispute arbitration agreements with § 1040.4(a)(2)(i) may result in class action liability, the Bureau notes that there is no private right of action for non-compliance when this rule does not give rise to a private right of action.

With regard to the comment that providers would remove pre-dispute arbitration agreements from contracts with consumers because the publication of awards favoring consumers would increase provider exposure to litigation risk, the Bureau believes it unlikely that the publication requirement will cause providers to remove pre-dispute arbitration agreements above and beyond those that would do so because of the class rule. As explained further in the Section 1022(b)(2) Analysis, the odds that any one provider will be required to comply with the reporting and redaction requirements in a given year are quite low; out of the approximately 50,000 providers covered by the rule, the Bureau expects that each year less than 1,000 or so providers will be involved in arbitration proceedings or litigation motions relying on pre-dispute arbitration agreements such that they would be required to submit records to the Bureau. Moreover, the Study indicated that awards favoring consumers in individual arbitration are uncommon.[797] Given these small odds and the modest burdens involved, the Bureau is skeptical that the monitoring rule would be the decisive factor in a provider's dropping of arbitration agreements. In any case, to the extent that any providers would drop their pre-dispute arbitration agreements due to the publication requirement, the Bureau concludes that the publication requirement is still in the public interest. In particular, the Bureau believes that transparency from the publication regime for those arbitrations subject to it will provide benefits described above that will more than offset the possible loss of access to arbitration under pre-dispute arbitration agreements that some consumers may experience if any providers chose to remove their arbitration agreements. In other words, the Bureau believes that the public interest favors a more transparent system, even at the potential cost of forgoing some non-transparent arbitration. Indeed, to the extent that consumers who would have brought claims in individual arbitrations must bring them in court instead, where litigation documents are made public by default, transparency would be advanced.

With regard to the commenter concerned that publication would make the work of State bank examiners more complicated, the Bureau disagrees that this is a reason not to publish arbitral records, as discussed above. In any event, for the reasons discussed above in connection with the class rule, the Bureau believes that investment in compliance activities is the best way to reduce class action risk; State bank examiners are well positioned to evaluate such compliance activities and encourage providers to take additional mitigation actions where warranted. The Bureau also believes that ease of forecasting class action risk does not outweigh the benefits to consumers and the public described above in connection with the monitoring rule, including the expressed interests of other State government commenters in using published arbitration data to protect consumers. As noted above, if there is additional class action litigation resulting from the publication of arbitral awards, the Bureau believes that such activity may benefit consumers and the public interest.

With regard to the comment that suggested that the existence of the Bureau's consumer complaint database obviated the need for the publication of arbitral records, the Bureau disagrees that the complaint database serves the same function. As discussed above, the consumer complaints database lists complaints that typically occur prior to a consumer's engagement with a formal dispute mechanism such as arbitration. The Bureau's consumer complaint function exists to ensure that “consumers can be heard by financial companies, get help with their own issues, and help others avoid similar ones.” [798] Any resolution of complaints through the service is informal and does not serve as precedent for future disputes or as guidance for like situations. By contrast, Bureau-published arbitration records may contain awards that could serve as useful guidance. And, as set out below in the Bureau's Section 1022(b)(2) Analysis, unlike the complaint database, the publication of arbitration records will make public binding decisions on the merits of a case by a third party that can serve as a means by which the public can better understand potential areas of non-compliance.

With regard to the comment that important information derived from arbitration records should be pursued by the Bureau itself, not published for others to see and exploit, the Bureau disagrees because it has, as is set out in Part VI.B, limited enforcement and supervisory resources and does not have the ability or authority to pursue every potential violation of law. Other State and Federal regulators, or private attorneys, may be able to further Start Printed Page 33319investigate and pursue trends that they discover in the arbitration records on the Bureau's Web site.[799]

Privacy, redaction, and related issues. The Bureau finds that the potential costs and burdens on providers of the monitoring rule will be sufficiently low such that they are not a significant factor weighing against the rule being in the public interest. As discussed in greater detail in the Section 1022(b)(2) Analysis below, the Bureau expects that, unless the use of arbitration changes dramatically, the number of arbitrations subject to this part of the monitoring proposal would remain low. As noted above, most providers will have no obligations under the monitoring proposal in any given year because most providers do not face even one consumer arbitration in a year and motions to compel arbitration in individual litigation are rare as the Study indicated.[800] In any event, the burden of redacting and submitting materials for any given provider will be relatively low when they did have an arbitration. While a few commenters suggested the Bureau's estimates were too low, they neither offered alternative estimates nor identified items left out of the Bureau's estimates.

With regard to the comment that the cost of complying with the rule would be low because providers would drop their arbitration agreements in response to the publication requirement, the Bureau disagrees that this is because the publication requirement will induce providers to drop their arbitration clauses. As set out above, the cost to providers is likely to be low because relatively few will face individual arbitrations and be required to submit documents to the Bureau. The Bureau believes that the publication requirement is unlikely to be a decisive factor in convincing providers to drop their clauses.

The Bureau finds that the monitoring rule will minimize any adverse impact to consumer privacy. The key potential concern identified by commenters is that consumers may fear that, by engaging in arbitration, the Bureau's requirements may cause information about them to be divulged. The Bureau does not believe that these concerns will materialize because the final rules set out below require providers to redact information that identifies consumers, and also requires the Bureau to redact additional information (as well as any private information the providers may have inadvertently left unredacted) before publishing any records to further reduce the risk that consumers are identified.

The Bureau acknowledges the concern expressed by commenters that even redacted information could be combined with publicly available information to re-identify specific consumers, but the Bureau believes that the redactions required of providers under § 1040.4(b)(3) will substantially reduce the availability of personal and financial information. Further, to address these concerns, the Bureau is adopting § 1040.4(b)(5), which was not in the proposal and which requires the Bureau to further redact other information to reduce even further any risk of re-identification before it publishes the materials.

With regard to the comment that the publication proposal will result in the exposure of private consumer data without consumer consent, § 1040.4(b)(3) requires the redaction of information identifying individual consumers, and new § 1040.4(b)(5) requires the redaction of additional data that could be used to re-identify individuals. The Bureau also notes that no consumer or consumer advocates submitted comments that suggested that the monitoring proposal created a concern with the disclosure of private consumer data. As to the comment that consumers in debt collection cases may not wish to have their personal finances publicly disclosed, the Bureau reiterates its belief that the redactions it requires of providers, along with the additional redactions to be made by the Bureau, will sufficiently reduce re-identification risk.

With regard to the comment that expressed skepticism about allowing government regulators to collect private data, the Bureau notes that the information it will receive from providers will generally be devoid of personal information to begin with, and the information the Bureau publishes will be redacted even further. While data breaches are a general concern for any public institution, the data that the Bureau will keep and publish will be redacted to reduce re-identification risk. The Bureau will also employ the same data security measures that it employs for other sensitive data that it currently maintains.

With regard to the comments that suggested that the Bureau exclude credit unions from the Bureau's monitoring requirement because of the burdens it would impose on credit unions, the Bureau declines to do so for several reasons. Most imp