WASHINGTON — The finance industry faces a steep, uphill battle in trying to convince the Consumer Financial Protection Bureau that its common use of arbitration agreements is beneficial for consumers.

The CFPB released a 728-page study on Tuesday showing that most consumers aren't aware they have agreed to binding arbitration when they sign financial contracts and that millions could be missing out on refunds from class action lawsuits because some of those agreements restrict a consumer from filing a claim in court. A few hours after the study was published, the CFPB held a field hearing in New Jersey on the topic, where consumer lawyers used the study as Exhibit A in their case against mandatory arbitration agreements.

"This study changes everything," said Paul Bland, executive director of Public Justice, who was a panelist at the CFPB field hearing. "It lays out an empirical record that shows that the bureau should and can use its authority to turn this all around and to fix this problem."

The CFPB has not said if it will seek to ban mandatory arbitration agreements, but consumer groups are strongly pushing the CFPB in that direction. At the very least, they want the CFPB to write new rules that will allow consumers to file a lawsuit or join a claim.

While financial groups argue that arbitration is faster and more efficient for both consumers and businesses than going through the court system, consumer advocates contend that banks are taking away a legal option from their customers.

"It makes total sense that if you prohibit consumers from banning together to bring their claims, companies are going to be able to violate the rights of thousands of consumers and never, ever face any liability. That's common sense," said Myriam Gilles, a law professor at the Cardozo School of Law at Yeshiva University, who spoke at the hearing. "The problem with common sense in today's political environment is that it is not good enough and when it's not good enough for making policy, you have to do something like what the bureau did. You have to muster incontrovertible, really strong irrefutable empirical evidence. And that's what the bureau has done with this study … this is the basis for responsible rulemaking and I encourage the bureau to ban arbitration clauses."

During remarks at the hearing, CFPB Director Richard Cordray noted how consumers lack a choice in agreeing to mandatory arbitration.

"It is important to bear in mind that when it comes to consumer finance, arbitration clauses are contained in standard-form contracts, where the terms are not subject to negotiation," he said. "Like the other terms of most contracts for consumer financial products or services, they are essentially 'take-it-or-leave-it' propositions. Consumers may open a new account or procure a new product without being aware of what the contract says or without fully understanding its implications."

The CFPB's study found that 75% of consumers surveyed were not aware of an arbitration clause and worse, only 7% of those knew there was a clause that restricted them from suing.

Industry panelists and at least one audience member agreed that the study clearly indicates there's a lack of education to the public on arbitration agreements.

"I think there is definitely an opportunity for additional education," said Dong Hong, vice president, regulatory counsel at the Consumer Bankers Association. "There might be an opportunity to work between CBA and CFPB to figure out ways to make arbitration even more convenient for consumers. Perhaps that's a way to address issues that might have gone unresolved in the past."

Industry groups said the CFPB's study could be flawed, suggesting that if most consumers surveyed by the CFPB did not know about arbitration clauses, they likely had no experience in dealing with arbitration. It's also difficult to know whether consumers are being hurt by such clauses because it's hard to know how the result would have differed if it was taken to court.

The CFPB reported that roughly 1,800 disputes were filed with the American Arbitration Association from 2010 to 2012 based on six product markets the agency reviewed. More than 3,500 individual consumer finance lawsuits were filed in federal court during the same period, which the CFPB says indicates consumers are more likely to file a lawsuit when given the chance.

But industry representatives challenged that conclusion.

"I'm not sure that the bureau wanted to hear positive things about arbitration. Compared to the court system, consumer arbitration is in its infancy," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr, and spoke at the hearing. "In my view, it's not really probative to say today that consumers must not like arbitration because there are relatively fewer arbitrations compared to the number of court cases because the benefits of arbitration are only beginning to be realized."

Cordray did note that "almost all of these disputes involved matters where more than $1,000 was at stake; that is, in this data consumers seem to be indicating that it rarely makes sense for them to bring an individual claim with only a small amount at stake."

But he also highlighted the billions of dollars in cash settlements that were given to consumers who filed class action lawsuits in federal court from 2008 to 2012.

"In other words, the total cash payout — excluding in-kind relief — was, at a minimum, in excess of $1.1 billion, or at least $200 million per year," Cordray said. "These payments were provided to a minimum of 34 million consumers, which works out to an average of 6.8 million consumers annually."

Those figures average out to roughly $32 per person, based on the $1.1 billion total in settlements, something industry representatives highlighted in their case for why arbitration clauses help consumers.

"If you looked at the average relief per person you'd find the amount to be a lot smaller; and even more smaller than that on an individual basis," said Benjamin Diehl, special counsel at the Stroock law firm in Los Angeles, practicing in the financial services/class action and government relations practice groups. "That's a concern that needs to be explored more fully in really u

Rachel Witkowski is a community banking reporter at American Banker.

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