Let consumers sue banks that engage in rip-offs
In a dispute with your bank or credit card issuer, don’t assume you can join other aggrieved customers in a class action lawsuit. You probably surrendered your right to join a group suit when you signed up for your bank account or credit card, though you might not even know it.
Many of the biggest financial institutions bury a clause in the fine print of agreements requiring a customer to use private arbitration. Why? Because they can. Most people never read the lengthy contracts that come with their accounts. And financial institutions love arbitration.
The private system, originally meant for business vs. business disputes, shields financial institutions from class action lawsuits that can unleash embarrassing publicity about unfair practices, force them to stop such rip-offs, and require them to pay millions of dollars to injured customers.
This month, the Consumer Financial Protection Bureau issued a rule that would prohibit banks, credit card issuers and others from robbing customers of their right to join class actions.
But Republican lawmakers are vowing to kill the rule. At a news conference last week, several spouted the same line bankers, corporate lawyers and other special interests are using: Arbitration is a big boon to consumers.
If that were true, banks would make arbitration an option, rather than forcing consumers into it. And even if the new rule goes through, consumers could still opt to arbitrate a claim.
In a 2015 study, the CFPB was able to peek behind the curtain shrouding arbitration. It found that customers are less likely to get relief for harms suffered than in a class action lawsuit. Blocking the courthouse door can save financial institutions a fortune.
Critics of class actions point out that the payouts to individual consumers are generally small, averaging $32 a person. And the lawyers make a bundle. Both true.
But if not for class actions, the vast majority of wronged bank and credit card customers — whose claims could involve an overdraft fee or a small overcharge — would get nothing. As a federal appeals judge put it, “Only a lunatic or a fanatic sues for $30.”
Ultimately, the payoff from class action lawsuits is not the small check an individual may get, but the revelations of the ripoffs and the pressure they place on companies to stop cheating consumers.
A decade ago, many of the biggest banks charged excessive overdraft fees, as much as $35 a pop, under overdraft protection that was automatic, even for customers who didn’t request it. Some banks also added a little trick: They processed the highest-dollar transactions first, emptying accounts faster. A few small purchases could end up costing a customer multiple overdraft fees in one day.
Class actions helped publicize and end this manipulative practice at some banks. Wells Fargo, however, is still claiming that it can’t be sued because of an arbitration clause, even though a federal judge in Florida rejected that defense. The bank has dragged customers through federal courts for years.
The CFPB’s new rule would prevent this kind of mistreatment and offer consumers some recourse against powerful financial institutions. It should be allowed to stand.