Banks: Ar­bi­tra­tion rarely used

New fed­eral law would give bank cus­tomers a way to par­tic­i­pate in clas­s­ac­tion law­suits.

The Times-Tribune - - Business Weekly - STAFF WRITER BY DAVID FALCHEK

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]­

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