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103 Lawmakers Call on CFPB to Eliminate Mandatory Arbitration


WASHINGTON, D.C. — On Wednesday, more than 100 members of Congress called on the Consumer Financial Protection Bureau (CFPB) to proceed with its effort to eliminate forced arbitration.

In two separate letters, 103 members of the House of Representatives and U.S. Senatepraised CFPB Director Richard Cordray for his agency’s proposed rule prohibiting mandatory arbitration clauses in finance contracts. They claim that eliminating such clauses will protect consumers from a process from which they rarely benefit.

“We wholeheartedly agree, and we offer our strong support for the CFPB’s proposal that rightfully recognizes the expansive harms of forced arbitration, prohibits the unfair use of class action waivers, and requires greater transparency concerning the arbitration of individual claims,” stated the letter signed by 38 U.S. Senators.

“The proposed rule is in the public interest and will protect consumers,” read the letter signed by 65 members of the House of Representatives. “As you know, Congress expressly granted authority to the bureau to research the impact of forced arbitration clauses in financial products and services, and based on this evidence, to promulgate a rule to prohibit or impose conditions on the use of forced arbitration if the bureau finds that it would be ‘in the public interest and for the protection of consumers.’ There is little doubt that the bureau’s proposed rule will serve these twin goals.”

The CFPB’s first proposed its rule on forced arbitration this past May, more than a year after the bureau issued its 728-page report on the use of pre-dispute arbitration clauses in consumer finance markets. The rule the bureau proposed stated that companies would be able to use arbitration clauses in finance contracts; however, use of such agreements could not bar consumers from being part of a class action lawsuit.

“There is overwhelming evidence that class-action waivers in financial products and services agreements undermine the public interest. Originally used primarily in commercial settings, forced arbitration clauses have proliferated in everyday contracts, and are now prevalent in financial services agreements,” stated the House letter. “By restricting class actions and class-wide arbitration in consumer contracts, these clauses enable corporations to avoid public scrutiny by precluding access to the courts.”

These waivers, the letter further stated, are particularly problematic in small, diffuse misconduct. These small claims are often the most harmful to consumers because they’re either too expensive for individuals to pursue or are so small consumers aren’t aware of the misconduct, lawmakers claimed.

“Forced arbitration shields corporations from accountability for abusive, anti-consumer practices, which only encourages unscrupulous business practices by allowing violations of the law to go unchecked. This comes at the expense of consumers, small businesses, and — just as importantly — law abiding businesses. Recognizing this, the CFPB has proposed a narrowly-tailored but important rule to restore access to our civil justice system and promote transparency within the forced arbitration system,” read the Senate’s letter.

But not all findings in the study support the lawmakers’ claims. For instance, the study showed that in many class action cases where the principal purpose of seeking class relief was to pressure a settlement, members of the class action got nothing or next to nothing. It also found that class action cases almost never make it to trial, while a significant percentage of arbitration proceedings actually resolve the disputes. The study also showed that arbitration is both faster and more economical than litigation.

“Late last year, the CFPB released a study on arbitration, which the bureau says shows that consumers are harmed by arbitration agreements as opposed to class action lawsuits. However, a careful review of the CFPB’s study demonstrates that the opposite is true …,” the American Financial Services Association wrote in a news brief published just prior to the CFPB issuing its proposed rule. “In 60% of class actions studied by the CFPB, consumers received no remuneration at all.

“In the 15% of cases where consumers received monetary compensation in class actions, they received an average of just $32.25, after waiting an average of 23 months,” the associated added. “In contrast, consumers who prevailed in arbitration agreements, on average, received $5,389. The real winners in class action lawsuits are plaintiff’s attorneys, who divided approximately $424 million in fees.”

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CFPB Issues Proposal to End Forced Arbitration


ALBUQUERQUE, N.M. — As expected, the Consumer Financial Protection Bureau used its 34th field hearing to issue its proposed rule prohibiting mandatory arbitration clauses in finance contracts. Companies will still be able to include such clauses in their contracts under the bureau’s proposal; they just won’t be able to use such agreements to stop consumers from being part of a class action in court.

Issued on May 5, the proposal comes more than a year after the bureau issued its 728-page report on the use of pre-dispute arbitration clauses in consumer finance markets. The study, which reviewed more than 1,800 consumer finance arbitration disputes filed over a three-year period beginning in 2010 and more than 3,400 individual federal lawsuits, found that consumers were awarded less than $175,000 in damages and less than $190,000 in debt forbearance in arbitration suits vs. just less than $1 million in federal lawsuits.

“Today, we are proposing a new regulation for public comment and further consideration. If finalized in its current form, the proposal would ban consumer financial companies from using mandatory pre-dispute arbitration clauses to deny their consumers the right to band together to seek justice and meaningful relief from wrongdoing,” said CFPB Director Richard Cordray at the hearing, held at the Albuquerque Convention Center. “This practice has evolved to the point where it effectively functions as a kind of legal lockout. Companies simply insert these clauses into their contracts for consumer financial products or services and literally, with the stroke of a pen, are able to block any group of consumer from filing joint lawsuits known as class actions.”

Through the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress asked the CFPB to study the use of mandatory arbitration clauses in consumer financial markets. Congress also gave the bureau the power to issue regulations that are “in the public interest, for the protection of consumers, and consistent with the study.”

Released in March 2015, the CFPB’s study concluded that very few consumers bring individual actions against their financial service provider, either in court or in arbitration. It also showed that at least 160 million class members were eligible for relief over the five-year period studied. Those settlements totaled $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses. In its press release announcing the proposed rule, the bureau said the study’s findings do not account for the “the potential value to consumers of class action settlements requiring companies to change their behavior.”

But not all findings in the study supported the elimination of mandatory arbitration clauses. For instance, the study showed that in many class action cases where the principal purpose of seeking class relief was to pressure a settlement, members of the class action got nothing or next to nothing. It also found that class action cases almost never make it to trial, while a significant percentage of arbitration proceedings actually resolve the disputes. The study also showed that arbitration is both faster and more economical than litigation.

“Late last year, the CFPB released a study on arbitration, which the bureau says shows that consumers are harmed by arbitration agreements as opposed to class action lawsuits. However, a careful review of the CFPB’s study demonstrates that the opposite is true …,” the American Financial Services Association wrote in a news brief issued last Thursday. “In 60% of class actions studied by the CFPB, consumers received no remuneration at all.

“In the 15% of cases where consumers received monetary compensation in class actions, they received an average of just $32.25, after waiting an average of 23 months,” the associated added. “In contrast, consumers who prevailed in arbitration agreements, on average, received $5,389. The real winners in class action lawsuits are plaintiff’s attorneys, who divided approximately $424 million in fees.”

The CFPB said its proposal, which will be open for public comment for the next three months, would open up the legal system to consumers so they can file or join a class action someone else files. And while companies will still be able to include arbitration clauses in their contracts under the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposal would also provide the specific language companies must use.

Additionally, the bureau’s proposal would require companies with arbitration clauses to submit to the CFPB claims, awards, and certain related materials that are filed in arbitration cases. This would allow the bureau to monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers. The bureau is also considering publishing information it would collect in some form so the public can monitor the arbitration process as well.

“If arbitration truly offers the benefits that its proponents claim, such as providing a less costly and more efficient means of dispute resolution, then it stands to reason that companies will continue to make it available,” Cordray said at the bureau’s hearing. “So the essence of the proposal issued today is that it would prevent mandatory arbitration clauses from imposing legal lockouts to deny groups of consumers the right to pursue justice and secure meaningful relief from wrongdoing.”

That’s not how the AFSA views the bureau’s proposal. “Despite a wealth of evidence suggesting that the bureau’s interpretation of its own study is flawed, today’s rule, in its present form, would have a negative impact on customers by taking away a valuable tool to resolve disputes,” the associated stated. “AFSA will comment on the proposed rule and will continuing its ongoing dialogue with the CFPB.”

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Members of Congress Call on CFPB to Eliminate Arbitration Agreements


SAINT PAUL, Minn. — More than 50 members of Congress, led by U.S. Sen. Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.), signed a letter asking the Consumer Financial Protection Bureau (CFPB) to issue new rules that would eliminate the use of forced arbitration clauses in consumer financial service contracts.

The letter, submitted to CFPB Director Richard Cordray on May 21, commends the bureau for its study of arbitration clauses, but asks the CFPB to take its work in that arena one step further. A similar appeal by more than 100 groups was made to the regulator in late March.

“In total, the study conducted by CFPB at Congress’s request roundly confirms that individuals unknowingly sign away their rights through forced arbitration agreements, which do not reduce consumer costs for financial services,” the letter read, in part. “Moreover, forced arbitration shields corporations from liability for abusive, anti-consumer practices, encouraging even more unscrupulous business conduct at the expense of individuals and law abiding businesses.

“Based on this substantial bedrock of evidence, we urge the CFPB to move forward quickly to use its authority under the Dodd-Frank Act to issue strong rules to prohibit the use of forced arbitration clauses in financial contracts and give consumers a meaningful choice after disputes arise.”

On March 10, the CFPB released the results of its study of pre-dispute arbitration clauses in consumer finance markets. It indicated that more than 75% of consumers don’t know whether they are subject to an arbitration clause in their agreements with their financial service providers. The report also concluded that it is common for arbitration clauses to be invoked to block class action lawsuits.

At a field hearing coinciding with the report’s release, Cordray told stakeholders that the results of the study would “provide the basis for important policy decisions that the Consumer Bureau will have to make in this area.”

But not everyone is taking these findings at face value. In an April article, F&I and Showroom legal columnist and Hudson Cook LLP Partner Tom Hudson criticized the CFPB’s report for its “gaping holes” — such as failing to address the growing consumer-friendless of arbitration clauses.

“In fact, it isn’t unusual to see clauses that provide for the payment by the creditor of some or all of the costs of arbitration,” Hudson wrote. “Creditors also frequently call attention to the presence of an arbitration agreement by using large type, separately boxing the clause or having it separately signed or initialed. The study offers no insight on whether these best practices might change any of its conclusions.

“There’s much to dislike about the CFPB’s work on arbitration,” Hudson added. “You’d think arbitration must have some things to recommend it, since Congress passed the Federal Arbitration Act and nearly all states have enacted laws permitting arbitration. But the bureau seems determined not to see any good in the process.”

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Suzuki Starts Arbitration to End Volkswagen Partnership, Buy Back Shares


Suzuki Motor Corp. said it started arbitration procedures aimed at ending its two-year-old partnership with Volkswagen AG and forcing the German carmaker to sell back its stake.

The arbitration will take place at an international court in London, Hamamatsu-based Suzuki said today in a statement to the Tokyo Stock Exchange. Volkswagen said the process can’t force it to sell its 19.9 percent stake in Suzuki, reported Bloomberg.

Each company has accused the other of breaching the cooperation agreement, which was meant to supply Suzuki with technology and provide VW with access to the Indian car market. The carmakers have been at odds since VW described Suzuki as an “associate” in its 2010 annual report. Suzuki said on Nov. 18 it had terminated the partnership with the Wolfsburg, Germany- based automaker, which failed to yield a single joint project.

Suzuki’s move “can be seen as a step toward reaching a conclusion on the partnership,” said Satoru Takada, an auto analyst at TIW Inc. in Tokyo. “If the arbitration process takes long, it may affect the relationships Suzuki and VW have with their other business partners.”

Suzuki rose 0.9 percent to 1,533 yen in Tokyo, compared with a 1.8 percent drop in the benchmark Nikkei 225 Stock Average.

VW has rejected allegations from Suzuki that it broke the cooperation agreement and sees “no legal basis” to return its holding, Eric Felber, a VW spokesman at Wolfsburg, said today in an e-mailed statement.

“We’re confident and look forward to this arbitration procedure with calm,” Felber said.

Suzuki is prepared for the arbitration process to take up to two years to complete, Executive Vice President Yasuhito Harayama said Nov. 18.
“While an arbitration will be legally binding, we think our relationship with Volkswagen may resolve in a friendly manner,” he said.

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Chrysler Offered Settlements Below $100k to Terminated Dealerships


WASHINGTON – Chrysler sought to cut expenses by paying an average settlement of “significantly below” $100,000 to terminated dealerships that filed arbitration claims, a company spokesman said in an e-mailed statement reported on by Automotive News.

The statement by Chrysler spokesman Michael Palese sought to correct a report in The New York Times last week that said the company’s settlements averaged about $500,000, citing “people with direct knowledge of the terms.”

Chrysler settled 151 of the 418 arbitration claims filed by dealerships closed as part of the company’s bankruptcy proceeding last year. “Many” of these settlements involved cash payments, Palese said.

“It makes good business sense anytime we can settle a case for an amount significantly below the cost of litigation,” he said in an e-mail today. “This enables Chrysler to focus more resources into what’s truly important — developing outstanding products.”

The figures would put Chrysler’s overall costs for settlement payments at “significantly below” $15 million. Palese declined to be more specific.

Dealer lawyers said Chrysler started making settlement offers in April, usually for $25,000.

Those offers increased somewhat as the arbitration process continued through July, though they never approached the typical size of General Motors’ offers, the lawyers said.

GM spokeswoman Ryndee Carney declined to disclose the company’s average settlement or total settlement payments.

Dealer lawyers said the differing settlement payments by the two companies, as well as what they described as GM’s more respectful overall treatment of arbitrating dealers, would have an impact going forward.

GM “was willing to settle for an amount more closely aligned with the value of the franchise being taken from the dealer,” said lawyer Richard Sox of Tallahassee, Fla., whose Bass Sox Mercer firm represented both Chrysler and GM dealerships.

He added: “Although both sets of dealers are approaching the relationship cautiously, our Chrysler dealers are much more wary of expending capital on their franchises as compared to our GM dealers.”

Chrysler’s Palese said the company’s dealers “are already enjoying increased profitability and are making significant investments in their dealerships.”

These investments are “on track with” the $500 million investment objective in Chrysler’s November business plan, he said.

Dealer lawyers said GM commonly offered settlements of two to three times the wind-down money it paid to dealerships to close by October.

Dealerships received as much as $1 million in wind-down money depending on their size, Jim Bunnell, GM’s general manager of dealer network support, said earlier this year.

That would mean some rejected GM dealerships received as much as $2 million in settlement payments, an amount consistent with reports by dealer lawyers.

GM reached individual “resolutions” with 408 of its 1,176 arbitrating dealerships. Most of these resolutions led to the store winding down in October, as originally planned. Carney declined to say how many of these resolutions involved settlement payments.

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GM Has 4,500 Stores After Winning 63% of Arbitration Cases


WASHINGTON – General Motors Co. prevailed in 39 of its arbitration cases and lost 23 to rejected dealerships as it scales down to about 4,500 stores by November, GM spokeswoman Ryndee Carney said.

GM announced final results of a process that began with enactment of a federal arbitration law in December and ended with final decisions handed down last month on claims by dealers tagged for elimination during the company’s restructuring, reported Automotive News.

Most of the 1,176 arbitration claims filed in January never reached a decision, the company said in a statement. GM offered letters of intent that spelled out conditions for reinstatement to 702 dealerships or 60 percent of those that filed claims.

With 23 dealerships prevailing in arbitration, GM offered letters of intent to a total of 725 stores, Carney said in an interview. That’s 62 percent of the dealerships filing claims.

Most if not all recipients of letters of intent have signed them, Carney said. These stores can start selling cars as soon as they meet the conditions in the letters.

“A strong, profitable dealer network selling and servicing the world’s best cars and trucks is a genuine market advantage,” GM North America President Mark Reuss said in the statement.

GM also said today that it had reached 408 individual resolutions with dealers that filed arbitration claims.

These resolutions consist of settlements, an undisclosed number of dealership continuations that will receive letters of intent, and claim withdrawals and dismissals, Carney said.

Most of the 408 resolutions involve dealer terminations, GM said.

Still, dealer lawyers have said GM paid cash settlements in dozens of these cases — sometimes as much as several million dollars.

During the summer of 2009, GM notified 2,064 dealerships of plans to terminate at least one of their franchises by October 2010. GM’s goal was to pare its dealer network from 6,049 stores to about 3,600.

That network is now likely to be about 25 percent larger than originally planned, with about 900 more stores — making a total of about 4,500.

While GM declined to give a dealership breakdown, Carney did provide a breakdown by franchise for the new network.

In November, there will be about 3,100 Chevrolet franchises, 2,100 Buick franchises, 1,750 GMC franchises and 925 Cadillac franchises, she said.

About 1,000 of the continuing stores are scheduled for “a major facilities upgrade” by the end of this year, the statement said. Included in the upgrades will be work areas with phone and laptop computer outlets, Wi-Fi and a cafe area with refreshments.

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