Bank disputes can now have their day in court
Customers will no longer be forced to use arbitration
Consumers can now sue banks in class-action lawsuits.
The Consumer Financial Protection Bureau said Monday financial companies will no longer be allowed to force customers to use arbitration to settle group disputes, restricting the industry’s favored legal tool after years of review.
Currently, credit card and bank companies often insert arbitration clauses in their contracts to prevent consumers from banding together to file class-action lawsuits over scams and fraudulent products. Harmed individuals who seek remedy — often in small amounts — are forced to sue on their own in small claims court, discouraging many lawsuits from consumers who deem them not worthy of their time, money and effort.
Increasingly favored by large and small companies, arbitration involves a third party — typically a retired judge — reviewing evidence from both sides and issuing a legally binding decision. Arbitration gives companies more flexibility in choosing the arbitrator and allows them to avoid jury trial while saving on legal costs. Evidence and judgments in arbitration are sealed and kept confidential among the parties involved.
Consumer advocates applauded the agency’s move. Arbitration denies consumers’ day in court. And empowering consumers in courts would ultimately improve the business practices of banks, credit card companies, payday lenders and other financial firms, they say. “These companies are betting on the fact that most of us don’t read these provisions, buried in the fine print,” said Myriam Gilles, vice dean at Cardozo School of Law of Yeshiva University in New York.
Bankers were disappointed by the ruling, saying arbitration is an efficient way to resolve disputes. “Banks resolve the overwhelming majority of disputes quickly and amicably, long before they get to court or arbitration,” according to a statement from the American Bankers Association, an industry group. “Arbitration is a convenient, efficient and fair method of resolving disputes at a fraction of the cost of expensive litigation.”
The ruling will likely trigger a pushback from the Trump administration and Republican lawmakers who have been critical of the independent agency’s aggressive crackdown of the financial industry. Last month, the House of Representatives debated a Republican bill that proposes, among other industry-friendly provisions, to curb the consumer bureau’s power by having its funding appropriated by Congress and allowing the president to fire its director at will.
“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” consumer bu- reau Director Richard Cordray said in a statement. “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up.”
Wells Fargo came under fire last year for its use of arbitration clauses in an effort to evade a lawsuit filed by scores of customers over the bank’s unauthorized accounts scandal. The banking giant asked a federal court judge in Utah to dismiss their class-action lawsuit and settle disputes in private arbitration. The lawsuit was filed after Wells agreed to pay $185 million in penalties and $5 million in customer reimbursement for opening as many as 2 million accounts without customers’ authorization.
The landmark Dodd-Frank Wall Street Reform Act, which was passed in 2010 following the financial crisis, created the consumer bureau and ordered the agency to assess financial firms’ use of mandatory arbitration clauses.
In March 2015, the consumer bureau issued a report that concluded that credit card issuers representing more than half of all credit card debt used mandatory arbitration clauses. Banks representing 44% of all insured deposits did the same. But most consumers — three out of four — were not aware they had agreed to an arbitration clause, the report said.
Compared to lawsuit outcomes, arbitration also leads to smaller payouts for consumers, the consumer bureau said. In studying the five-year period from 2008 to 2012, the 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 bureau 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,” noted Richard Hunt, CEO of the Consumer Bankers Association.
The industry will certainly fight back to quash the rule and could get friendly reception in the Republican-controlled Congress, said Rachel Deutsch, senior staff attorney for Worker Justice at the Center for Popular Democracy, a worker advocacy group.
“Today’s rule is a great step in the right direction,” she said. “But this rule is going to face rough waters from lawmakers.”
The ruling will likely trigger a pushback from the Trump administration and GOP lawmakers who have been critical of the bureau’s aggressive crackdown of the financial industry.