Both sides ready for fight on new bank policy
GOP senator trying to kill rule that bans mandatory arbitration
The lucrative and costly business of class-action lawsuits has been turned upside down by a new federal rule. And the fight to save or kill it has just begun.
After years of review on the subject, the Consumer Financial Protection Bureau, an independent federal watchdog agency, declared a new rule Monday that bans banks, credit-card companies, payday lenders and other financial firms from requiring consumers to settle group disputes through arbitration. These mandatory arbitration clauses, found in many credit-card and bank account contracts, have effectively killed class-action lawsuits.
With the rule in place, consumers can now freely band together to fight back what they consider to be illegal or fraudulent products or practices, and more class-action lawsuits are inevitable. It will also force financial firms to proactively monitor their own practices, its advocates say.
“The biggest step has been taken. This is a huge victory for consumers,” said Amanda Werner, campaign manager at Americans for Financial Reform and Public Citizen. “We expect a lot of mis- conduct is going to be rooted out sooner.”
Wells Fargo’s much-maligned fake-account scandal, revealed in 2013 by a Los Angeles Times report, would have been more widely known sooner if the arbitration clause hadn’t been in its contracts, she says. Consumers have repeatedly sought to sue the bank for years for the bank’s practice of creating unauthorized checking and credit-card accounts. “But their case has been kicked out over and over again” because of the arbitration requirement, Werner said.
Wells eventually agreed to pay $185 million in penalties and $5 million in customer reimbursement for opening as many as 2 million accounts without customers’ authorization.
Odds are stacked against consumers when it comes to arbitration. They lack the institutional knowledge of banks whose legal teams are familiar with arbitrators. And that’s partly why there are so few arbitration cases. Only about 400 consumers file arbitration per year against financial companies.
The likelihood of consumers winning in arbitration is also low. Only 9% of consumers win in arbitration against financial companies, the consumer bureau said in a report.
Compared to lawsuit outcomes, arbitration also leads to smaller payouts for consumers. In studying the five-year period from 2008 to 2012, the consumer bureau said more than 34 million harmed consumers received payments of about $1 billion that were ordered by judges or juries in lawsuits. But in about 1,000 cases in the two years that the bureu studied, arbitrators awarded about $360,000 to 78 consumers.
Bankers counter that the average per-individual payout is higher in arbitration.
“The CFPB’s own study shows the average consumer receives $5,400 in cash relief when using arbitration and just $32 through a class-action suit,” said Richard Hunt, CEO of Consumer Bankers Association.
For banks, the possibility of facing more class-action lawsuits will likely drive them to store more funds in their reserves and possibly pass on costs to consumers in fees, Hunt said.
But there’s no evidence to the assumption that banks will raise fees, Werner said. Bank of America and Capital One have already dropped the arbitration clause for group disputes. And they haven’t raised their fees as a result, she said.
Still, banks aren’t whimpering away. Hunt said he’d “leave no stone unturned” in his fight to quash the rule. And industryfriendly lawmakers also promised to carry on the fight to retain banks’ right to mandate arbitration. Financial firms will lobby to kill the rule in Congress.
And if that fails, there likely will be lawsuits.
Sen. Tom Cotton, R-Ark., heeded the industry’s call, announcing Tuesday he has started a process to kill the rule using a law called the Congressional Review Act. The law allows Congress to kill an agency rule within 60 legislative days with simple majority votes in both chambers.
Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, also called for the rule to be killed.
Both sides expressed confidence that they will prevail. The rule has wide populist appeal, and despite their majority, Republican lawmakers could find it difficult amass enough votes, Werner said. Last year, a poll by Pew Charitable Trusts found that 95% of Americans support financial consumers’ right to be heard in court. “This is big-guy vs. little-guy.”
If there’s no legislative fix in their favor, financial firms will sue, and they likely will seek an injunction to block the rule from going into effect while litigation is pending, said Quyen Truong, an attorney at Strook, Strook & Lavan and former deputy general counsel for litigation, enforcement and oversight at the Consumer Financial Protection Bureau.
Leadership changes at the bureau could also play a role in how the rule is enforced. Richard Cordray, the Obama administration appointee who runs the agency as its director, is scheduled to step down next year and be replaced by a Trump appointee.