Auto Dealer Monthly, May 2015

LEGAL A BIASED REPORT There is much to dislike about the CFPBs 728 page report on pre dispute arbitration clauses nd the study had some gaping holes as well Th ere was no discussion about creditor arbitration best practices Arbitration clauses used by creditors have grown more consumer friendly over time It isnt unusual now to see clauses that have the creditor paying for some or all of the arbitration MAY 2015 AUTODEALERMONTHLY COM 27 Th e Dodd Frank Act directed Consumer Financial Protection Bureau to study the use of dispute arbitration clauses consumer fi nancial markets gave the CFPB the power prohibit or regulate the use of such clauses depending on its fi ndings Th e CFPB conducted a 2012 study and released some preliminary research in December 2013 Th e industry has been waiting since then for the other shoe to drop Did anyone just hear a big kerplop If so it was probably a copy of the Bureaus mind numbing 728 page report hitting the industrys doorstep Th e report was accompanied by a press release trumpeting the Bureaus interpretations of the study According to the Bureaus release the report indicates that Tens of millions of consumers are covered by arbitration clauses Consumers fi led roughly 600 arbitration cases and 1200 individual federal lawsuits per year in the markets studied Roughly 32 million consumers are eligible for relief through consumer fi nance class action settlements each year it is not clear how this relates to arbitration Arbitration clauses can bar class actions youve really got to love this one the main reason creditors use arbitration clauses is for the protection they give against class action lawyers its nice for the CFPB to point out the obvious Th e Bureau found no evidence of arbitration clauses leading to lower consumer prices and Th ree out of four consumers surveyed did not know if they were subject to an arbitration clause the report didnt indicate whether this was because the consumers were generally unaware of the contract terms or whether they understood everything in the contract except for the clause Th e press release authors cherry picked the study to support an anti arbitration title for their release which did not bother to mention that the report shows that In many class actions where the principal purpose of seeking class relief is to pressure a settlement class members got nothing or next to nothing Class action cases almost never make it to a trial on the merits while a signifi cant percent of arbitration proceedings resolve the parties disputes and Arbitration is both faster and more economical than litigation A costs that permit the consumer to pick the arbitration organization that provide a carve out for small claims court actions and that even let the consumer opt out of arbitration by notice Creditors now frequently highlight the presence of an arbitration agreement with big type borders shading or coloring or by having it separately signed or initialed or adding With Arbitration Agreement to a credit documents title Th e study off ers no insight on whether such best practices forms might change any of the studys conclusions Th e study was not limited to auto fi nancing In fact most of the report dealt with other sorts of consumer fi nancial services credit cards checking accounts student loans and the like Th e parts of the report dealing with auto credit are nearly useless because auto credit isnt like other consumer fi nancial services When it addressed auto credit the CFPB predictably called the transactions loans Now perhaps the transactions the Bureau studied were loans but I strongly suspect that they were retail installment contracts typically used in dealer fi nancing If Im right about that much of the study quickly gets really murky Why you ask Heres why A retail installment contract is used in the simultaneous sale and fi nancing of a vehicle Disputes involving these transactions can be credit related the creditor incorrectly charges fi nance charges but they can also be car related the transmission fails Th e type of dispute will affect the amount of the claim an engine repair is expensive the likelihood that a claim would be appropriate for class relief a claim of fraud in the sales process is unlikely to get class treatment because individualized proof is required the likelihood that a claim will be brought by a consumer larger claims are less likely to be abandoned Th e study ignores any distinctions regarding credit related and carrelated disputes So theres much to dislike about the Bureaus work so far on arbitration Youd think that arbitration must have some things to recommend it since Congress passed the Federal Arbitration Act and all or nearly all the states have enacted laws permitting arbitration Th e Bureau seems determined not to see any good in the process My prediction Th e Bureau is staunchly anti arbitration and has determined to prohibit its use in consumer fi nancial transactions D ThThTh the Co tion B ti pre di pr in con and ga an to pro Thomas B Hudson is a partner in the firm of Hudson Cook LLP and the author of several widely read compliance manuals CounselorLibrary com 2015 all rights reserved Based on an article from Spot Delivery Single print publication rights only to Auto Dealer Monthly HC 4847 6510 6978 3 15 THudson@ AutoDealerMonthly com By Tom Hudson