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CFPB Seeks Comment On Revised Credit Card Arbitration Survey
On May 29, the CFPB published a notice and request for comment on an updated plan to conduct a credit card arbitration survey. The following day, the OMB made available the documents submitted by the CFPB in support of the survey.
The amended survey notice follows an initial notice last year that the CFPB planned to conduct a telephone survey of 1,000 credit cardholders to assess (i) the extent of their awareness of dispute resolution provisions in their credit card agreements and (ii) the cardholders’ “assessments of such provisions.” At the time, the CFPB released draft survey questions as part of its information collection request supporting statements. The initial public comment period closed August 6, 2013. During the comment period, banking trade groups objected to the survey and suggested the CFPB instead pursue peer-reviewed research that compares consumer dispute resolution methods.
In its latest notice, the CFPB states that the survey “will explore (a) the role of dispute resolution provisions in consumer card acquisition decisions and (b) consumers’ default assumptions (meaning consumers’ awareness, understanding, or knowledge without supplementation from external sources) regarding their dispute resolution rights vis-a-vis their credit card issuers, including their awareness of their ability, where applicable, to opt-out of mandatory pre-dispute arbitration agreements.”
The supporting statements and attachments thereto detail the CFPB’s rationale for conducting the survey. Appendix A provides the final survey questions, and Appendix B provides the justification for the questions
The public comment period on the notice and supporting materials closes June 30, 2014.
Tenth Circuit Holds FAA Preempts New Mexico Law On Unenforceability Of Unconscionable Arbitration Provisions
On January 28, the U.S. Court of Appeals for the Tenth Circuit held that the Federal Arbitration Act (FAA) preempts New Mexico common law that a compulsory-arbitration provision in a contract may be unconscionable and therefore unenforceable. THI of New Mexico at Hobbs Center, LCC v. Patton, No. 13-2012, 2014 WL 292660. (10th Cir. Jan. 28, 2014). In this case, a nursing home operator filed suit in federal district court to compel arbitration of claims brought by the widow of a former nursing home resident. The district court initially ruled that the arbitration agreement in the governing contract was not unconscionable and ordered arbitration. After a New Mexico appeals court came to the opposite conclusion, the district court reversed itself and further held that the FAA does not preempt state law because the state appeals court “applied . . . generally applicable unconscionability law against grossly unreasonable one-sided contracts.” On appeal the Tenth Circuit explained that “just as the FAA preempts a state statute that is predicated on the view that arbitration is an inferior means of vindicating rights, it also preempts state common law—including the law regarding unconscionability—that bars an arbitration agreement because of the same view.” Accordingly, the court rejected the state court’s view that the FAA does not limit their ability to hold an arbitration agreement unconscionable provided they are applying a general unconscionability doctrine, explaining that under such reasoning any statute preempted by the FAA could be enforced by applying the “public policy” of the statute under a common-law doctrine such as unconscionability. The court thus held that the FAA preempts the New Mexico common law on unenforceability based on unconscionability and held the operator is entitled to compel arbitration.
CFPB Releases Preliminary Results Of Ongoing Arbitration Study
On December 12, the CFPB published the preliminary results of its ongoing study of arbitration agreements in consumer finance contracts. Section 1028(a) of the Dodd-Frank Act directs the CFPB to study the use of pre-dispute arbitration contract provisions, and preconditions the CFPB’s exercise of rulemaking authority regarding arbitration agreements on a finding that the regulation is “in the public interest and for the protection of consumers.” The CFPB commenced its arbitration study in early 2012, and expanded its review this year with a proposal to survey credit card holders, and by exercising its authority under Dodd-Frank Act Section 1022 to order some companies to provide template consumer credit agreements, as Director Cordray indicated during a September House Financial Services hearing.
The CFPB reports the following preliminary results, among others:
- Larger banks are more likely to include arbitration clauses in their credit card contracts and checking account contracts than smaller banks and credit unions.
- Just over 50% of credit card loans outstanding are subject to arbitration clauses, while 8% of banks, covering 44% of insured deposits, include arbitration clauses in their checking account contracts.
- Arbitration clauses are prevalent across the general purpose reloadable (GPR) prepaid card market, with arbitration clauses appearing in the cardholder contracts for 81% of GPR prepaid cards studied by the CFPB.
- Class action waivers are ubiquitous, appearing in approximately 90% of arbitration provisions.
- A minuscule number of consumers exercise contract carve-outs permitting disputes to be pursued in small claims courts, while credit card issuers are “significantly more likely” to sue consumers in small claims court.
The CFPB did not consider specific policy options at this stage. However, the report outlines numerous additional steps the CFPB plans to take as part of its arbitration study, which may expand to include other financial product markets. For example, in response to stakeholder comments, the CFPB is revising a prior proposal to conduct a survey of consumers that addresses consumer awareness of arbitration clauses and consumer perceptions of and expectations about formal dispute resolution. The CFPB also intends to assess the possible impact of arbitration clauses on the price of consumer financial products. Finally, the CFPB is examining the interrelationship between public enforcement and private aggregate enforcement (i.e., class actions) by conducting an empirical analysis of the types of cases brought by public and private actors, and the relationship between any actions against the same defendants or challenging similar conduct. The report does not provide anticipated timelines for these or any of the other future steps the Bureau describes.
Federal District Court Holds Evidence Of Online Notice Regarding Arbitration Policy Change Alone Insufficient To Support Arbitration Demand
On December 2, the U.S. District Court for the Northern District of California denied a bank’s motion to compel arbitration, in part because the bank failed to provide evidence that its customer received an online notice of a contract change that added the arbitration clause. Martin v. Wells Fargo Bank, N.A., No. 12-6030, slip op. (N.D. Cal. Dec. 2, 2013). In this case, a bank customer filed suit alleging the bank violated the Telephone Consumer Protection Act and the state’s Unfair Competition Law. The bank moved to compel arbitration, claiming that it properly amended the controlling customer agreement to include the arbitration clause at issue by providing written notice in a billing insert, and by providing the same notice online to customers who logged into their account. The court held that the bank failed to demonstrate the customer logged on to her online account and received the notice at issue. Similarly, the court explained that the bank’s supporting declaration only stated that the customer’s account was “targeted to receive” the written notice, but the bank did not state the customer actually was provided with the notice. The court also questioned whether the amendment adding the arbitration clause was fair, explaining that the original customer agreement allowed the bank to amend “charges, fees, or other information contained in the disclosure” and suggested that the original agreement’s terms did not indicate the addition of an arbitration agreement was an anticipated modification.
CFPB Announces Arbitration Field Hearing
On December 2, the CFPB announced a field hearing on arbitration to be held in Dallas, Texas on Thursday, December 12. The event, which is open to members of the public who RSVP, will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups and industry representatives.
The CFPB has made policy announcements in connection with field hearings in the past and may release findings related to the arbitration study it commenced in early 2012. The CFPB expanded its arbitration review this year with a proposal to survey credit card holders and by exercising its authority under Dodd-Frank Act Section 1022 to order some companies to provide template consumer credit agreements.
Under Section 1028 of the Dodd-Frank Act, any exercise of rulemaking authority regarding arbitration agreements must be based on a finding—consistent with the study conducted—that the regulation is “in the public interest and for the protection of consumers.” While the CFPB may not yet be prepared to conduct a rulemaking on the use of such agreements, it is expected to begin releasing at least some results of its ongoing study.
California Supreme Court Clarifies Application Of Supreme Court Arbitration Holdings on State Law
On October 17, the Supreme Court of California held that, while the Federal Arbitration Act (FAA) preempts a California state-law rule categorically prohibiting waiver of state pre-arbitration protections in arbitration agreements, state courts may “continue to enforce unconscionability rules that do not ‘interfere[] with fundamental attributes of arbitration’” when determining whether an arbitration agreement is enforceable. Sonic-Calabasas A v. Moreno, No. S174475, 2013 WL 5645378 (Cal. Oct. 17, 2013) (citing AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011)). In light of the Supreme Court’s rulings in Concepcion and American Express v. Italian Colors, the Supreme Court of California reversed its previous ruling in Sonic-Calabasas A, Inc. v. Moreno, 51 Cal.4th 659 (2011) (Sonic I) with regard to the impact of the FAA on the waiver of state pre-arbitration proceedings and remanded the case to the trial court to determine whether the arbitration agreement in question was unconscionable on other grounds. In response to claims that the state pre-arbitration proceedings present no obstacle to accomplishing the objectives of arbitration, the court explained that the FAA does not “permit[] additional delay…from an administrative scheme [designed] to effectuate state policies unrelated to the agreement’s enforceability,” and that “[w]here a state-law rule interferes with fundamental attributes of arbitration, the FAA preempts the state-law rule.” However, while abrogating the categorical rule from Sonic I, the court held that “when faced with an unconscionability claim arising from an adhesive employment contract requiring the waiver of [the state’s pre-arbitration protections] in their entirety, [courts] must still determine whether the overall bargain was unreasonably one-sided.”
FTC Files Amicus Brief in Tribal Payday Lending Case
On September 26, the FTC announced that it had filed an amicus brief in the U.S. Court of Appeals for the Seventh Circuit in a class action suit against a Native American payday lender. In that case, the putative class is challenging a payday lender’s practice of requiring borrowers to submit to arbitration at a Native American reservation in South Dakota. The FTC notes that it is pursuing its own action against the same lender, challenging its jurisdiction over borrowers who do not belong to the tribe and who do not reside on the reservation or in South Dakota. In its Seventh Circuit filing, the FTC argues that Native American tribes and tribal courts have legal authority over their own members and not over non-members, unless non-members conduct activities inside the reservation or enter into a commercial relationship with the tribe or a member of the tribe. The FTC claims that borrowers who take out payday loans from these companies via the Internet do not conduct business on the reservation and should not be subject to arbitration there.
Next CFPB Field Hearing to Focus on Credit Cards
On September 16, the CFPB announced a field hearing on credit cards to be held on October 2, in Chicago, IL. The event, which is open to members of the public who RSVP, will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups and industry representatives.
In the past, the CFPB has made policy announcements in connection with field hearings. In this case, the hearing could be related to the CFPB’s study of credit card issues, as required by the 2009 Credit CARD Act. Section 502 of that act requires the CFPB to prepare a study every two years on: (i) the terms of credit card agreements and the practices of credit card issuers; (ii) the effectiveness of disclosure of terms, fees, and other expenses of credit card plans; (iii) the adequacy of protections against unfair or deceptive acts or practices relating to credit card plans; and (iv) whether or not, and to what extent, the implementation of the act has affected cost and availability of credit, the safety and soundness of credit card issuers, the use of risk-based pricing, or credit card product innovation.
The hearing also could relate to the CFPB’s ongoing arbitration agreement study. Director Cordray testified last week that, in connection with that study, the CFPB “very recently” exercised its authority under Dodd-Frank Act Sec. 1022 to order “a number of companies” to provide template consumer credit agreements.
Tenth Circuit Asks Oklahoma Supreme Court to Decide Application of Internet Based Terms to Written Contract
On August 15, the U.S. Court of Appeals for the Tenth Circuit asked the Oklahoma Supreme Court to decide whether a written consumer contract for the sale of goods incorporates by reference a separate document entitled “Terms of Sale” available on the seller’s website, when the contract states that it is “subject to” the seller’s “Terms of Sale” but does not specifically reference the website. Walker v. BuildDirect.com Techs., Inc., No. 12-6261, slip op. (10th Cir. Aug. 15, 2013). In this case, the plaintiffs filed a putative class action over allegedly defective home building products they ordered from the seller by telephone and subsequently agreed to purchase by written contract. The seller moved to compel arbitration, arguing that the written contract for the sale of goods incorporated by reference the Terms of Sale provided on the seller’s website, which included an arbitration clause. The district court denied the motion to compel, holding that the contract was ambiguous and that it could not determine as a matter of law that the contract incorporated the Internet-based terms. On appeal, the court noted that, although Oklahoma courts have held that a written contract can incorporate an extrinsic document by reference, the state’s highest court has not set standards for incorporation by reference that would resolve this case, nor has it addressed a case similar to this one. Finding no precedent in Oklahoma state law, and that the question can be resolved on the undisputed facts presented, the appeals court certified the question to the Oklahoma Supreme Court.
Banking Industry Trade Groups Oppose CFPB Credit Card Arbitration Survey
On August 6, three banking industry trade groups submitted a joint comment letter pursuant to a proposal by the CFPB to conduct a survey of credit card holders in connection with its ongoing study of arbitration agreements. The survey — intended to evaluate “consumer awareness of dispute resolution provisions in their agreements with credit card providers” — will compile information relating to card holders’ perceptions and valuations of arbitration and litigation, but will not solicit impressions of such proceedings themselves. In the comment letter, the trade groups suggest that the survey’s design “is inconsistent with the Consumer Financial Protection Act (CFPA) mandate and is flawed in concept and execution.”
Section 1028 of the CFPA authorizes the Bureau to study, and potentially regulate, arbitration agreements. Any exercise of rulemaking authority under Section 1028 must be based on a finding —consistent with the study conducted — that the regulation is “in the public interest and for the protection of consumers.” The trade groups express concern that the proposed survey will not produce “meaningful” information about what regulation will best serve the public and protect consumers because complex questions about consumers’ “limited and uninformed assessments and preferences” will fail to offer useful information to evaluate the arbitration process. The trade groups suggest that, instead, the CFPB should pursue peer-reviewed research that compares various methods of consumer dispute resolution, such as litigation and arbitration, to meet its obligations under the CFPA.