Banks: Arbitration rarely used
New federal law would give bank customers a way to participate in classaction lawsuits.
A new federal rule that would give bank customers greater ability to participate in class-action lawsuits drew criticism from the industry, but local community banks aren’t much worried.
Small bank officials say their scale and more folksy approach keeps them out of court more effectively than crimping the rights of their customers in small print.
The Consumer Financial Protection Bureau wants to restore banking customers’ rights to participate in classaction lawsuits by ending a common banking practice of using binding arbitration, a clause tucked into fine print on loans, credit cards and other financial products, in a way to prevent class-action lawsuits.
Most consumers don’t bother to read through such agreements and often don’t know they’ve signed away their right to sue their bank.
The new rule prohibiting arbitration clauses from barring class-action suits could go into effect by next year.
Major financial industry lobbying groups have criticized the move, saying it could cost financial service providers billions of dollars. But small bank groups, such
Local community bank officials weren’t even sure if binding arbitration was included on basic financial products, such as checking and savings
as the Independent Community Bankers of America, don’t have a position yet and had to survey members to get an idea how many use the arbitration clause or see it as valuable.
When asked, local community bank officials weren’t even sure if binding arbitration was included on basic financial products, such as checking and savings. With the exception of boilerplate credit and debit card contracts and commercial financial products, which are not affected by the new regulations, retail banking customers getting basic financial services are not signing away their right to sue the bank.
But to be sure, bank customers should scrutinize their applications and contracts or ask a banking officer if they have an arbitration requirement.
“This rule will affect the very large banks and financial companies which have a big exposure in the event of a class-action lawsuit,” said Chuck Hangen, chief operating officer at ESSA Bank. “Arbitration is more efficient from the bank’s point of view, but I’ve been with the bank four years and I’m not aware of someone suing us over a business practice or having to go to arbitration with a commercial customer.”
Jonathan Grande, vice president of Credit Administration for Peoples Security Bank, said the impact of the rule won’t be very great on the bank, since it doesn’t apply to commercial financial products. That’s where he feels small banks face the greatest exposure.
“If we use arbitration clauses, it is limited,” he said. “Maybe on credit cards, but even that portfolio isn’t that great.”
Robert Edgerton, chief executive officer of Luzerne Bank, wasn’t sure whether his bank used arbitration clauses. Small banks use software packages that offer canned contract language, he said. Either way, he said the bank can stay out of court by communication and customer service.
“From time to time, I’ll call a customer and calm him down,” Mr. Edgerton said. “Customers perceive a call from the president as a big deal and it shows them that their issue and their business is important.”
In some cases, however, an arbitration clause is an important component for the bank protecting its assets and shareholders.
Jim Bone, the chief financial officer of First National Community Bank said the arbitration rule isn’t as much about keeping the bank customer from suing the bank as it is giving the bank a quick way to make itself whole. The bank uses the binding arbitration clause on commercial financial products.
“In a business when things go south — and they can go south very quickly — and, when we’ve been harmed we want to accelerate the process in recouping our money,” Mr. Bone said. “We are interested in getting our money back — not getting jury awards or court damages — so we don’t have to go to court.”
Even on commercial products, small banks don’t always feel the need for arbitration clauses. Dunmorebased Fidelity Bank has a jury trial waiver as part of commercial accounts in the event of a legal dispute. The bank doesn’t want to be a defendant to face possible jury damages.
Under the terms of the proposed rule, banks that use binding arbitration clauses will have to report how many and the outcome. Up until know, the outcomes were secret. Contact the writer: [email protected]rock.com