Arbitration and class action waiver clauses in retail installment sales contracts (“RISCs”) are important to dealers to help protect them and their businesses.

If properly drafted, including citing the Federal Arbitration Act, these clauses waive a consumer’s right to file a lawsuit, and more importantly a class action, against the dealer, replacing it with arbitration. Arbitration is a less expensive, faster and fairer way to resolve a dispute with a consumer. In general, you are better off before an arbitrator than a judge and jury in court.

On March 10, 2015, the Consumer Financial Protection Bureau (“CFPB”) released a study of the effect of mandatory arbitration and class-action waiver clauses on consumers. The CFPB is taking a strong stance on this matter and dealers should be aware of it.

CFPB Study: A Dodd-Frank Act Requirement

The 2010 Dodd-Frank Act required the CFPB to conduct this study of the use of pre-dispute arbitration agreements “in connection with the offering or providing of consumer financial products or services.”

But it doesn’t stop there. The Dodd-Frank Act not only required the study, but also said that the CFPB can issue a regulation prohibiting or limiting the use of arbitration clauses if the CFPB finds that doing so “is in the public interest and for the protection of consumers” and its findings are “consistent with the study” performed by the CFPB. You can see where this one is going.

As you might expect, the CFPB said the arbitration clause study shows harm to consumer results from pre-dispute arbitration agreements in terms of what they allegedly recover.  According to the CFPB, the study finds that class actions resulted in the greatest recovery for consumer-plaintiffs – at least $220 million per year in settlement funds to consumers who brought actions in federal court over the five year period studied, although it did not indicate how much the average consumer class member received. The CFPB study found that lenders disproportionately invoke the arbitration clause to block class actions as opposed to individual lawsuits (65 percent of the time versus less than one percent of the time).  As a result, the total amount of relief obtained by consumers in arbitration was minimal when compared to class action recoveries. Or so said the CFPB.

However, upon closer inspection, the CFPB study appears to show the exact opposite—that consumers benefit from arbitrations and the only people who really wind up winning in class actions are plaintiffs’ lawyers.

Among other things, the CFPB study showed that arbitration is faster and less expensive for consumers to file and results in higher recoveries. The average arbitration settled in three to five months versus nearly two years for a class action. Consumers pay less to arbitrate than to file a lawsuit (AAA – $200 cap; federal court – $400 filing fee). A 2009 study found consumers won 53 percent of arbitrations that were not settled with an average recovery of 57 cents on the dollar. One can reasonably assume that is higher than individual class members received in the few class actions that were settled. Also, 60 percent of class actions either get dismissed or converted to individual lawsuits, so most potential class members get nothing.

The CFPB conveniently omitted what the average consumer received in the 15 percent of class actions that settled—often a check for a small amount or discount coupons.

So What’s Going to Happen Next and When?

The CFPB will propose regulations that severely limit, but probably will not absolutely prohibit mandatory arbitration clauses and class action waivers. Once it writes proposed regulations, the CFPB will have to put them out for public comment and there will be no shortage of comments that come in. The CFPB will have to review and summarize the comments in publishing the final regulations. They would also have to assess the effect on small businesses like many auto dealers and that will be a cumbersome process as well. All of this will take time… a lot of time.

Only after they complete that analysis and review the comments will they publish the final regulations. I doubt this will happen until sometime in late 2016 or early 2017. The regulations would not take effect under Dodd-Frank until 180 days after they are finalized. So we may be looking at close to 2018 before compliance becomes mandatory.

So What Can Dealers Do in Anticipation?

This would be a good time to set up a process to resolve customer disputes under a formal in-house program. The CFPB has expressed this to be an important part of a Compliance Management System. The program should enable a customer to assert their complaint to a disinterested officer of the dealership (not someone involved in the disputed process) and every effort should be made to satisfy the customer even if this occasionally involves giving windfalls to customers that you otherwise feel are not merited. Believe me, a consumer can do a lot more harm to your dealership by filing their dispute with the FTC, CFPB, or even the Better Business Bureau.

The CFPB has announced that it intends to publish consumer complaints filed with them verbatim, giving the creditor 60 days to pick from a pre-selected list of nine responses and publishing the complaint and response on the CFPB complaint webpage. While this does not apply to dealer complaints, it does apply to complaints against lenders that relate to automotive financing. This can bring in dealer issues through the back door. You absolutely want to avoid this type of adverse publicity, and if paying or giving services to a disgruntled customer will resolve the issue, that is money well spent.

The good news is that there is legislation pending in the Congress to reign in the CFPB. Many analysts believe the CFPB’s cumbersome mortgage regulations have caused a decline in the economy because banks are reluctant to issue mortgages. The arbitration issue could be another lynchpin for Congressional reform. And the courts are looking critically at the CFPB as well. One court recently held that the CFPB’s “abusive practices” authority does not entitle it to extend the one year statute of limitations for Truth in Lending violations. Other court cases are pending challenging the CFPB’s authority and even its constitutionality.

Until there is some action taken by Congress, the CFPB remains a powerful agency that dealers should keep an eye on. It is clear where the CFPB is going on prohibiting or limiting arbitration clauses, and dealers need to be prepared by instituting and refining their own company’s dispute resolution process to ensure that they don’t come under unfair scrutiny by regulators based on consumers filing complaints.

The agencies all talk to each other and a litany of complaints against a dealership could precipitate an enforcement action or at least a compliance audit by the FTC or your State Attorney General. That is not a result you want; so do what you can to resolve your customers’ complaints in-house as professionally and efficiently as possible.