A consumer watchdog is one step closer to finally preventing big banks, payday lenders and other financial services from blocking class action lawsuits filed by disgruntled consumers. In a statement Wednesday, the Consumer Financial Protection Bureau proposed rules that would prohibit some financial services companies from including a clause in customer agreements that forces class action legal claims to be handled in arbitration.
Arbitration is a way for corporations to make sure consumers keep their claims out of court and away from the public eye. As a consumer, it’s difficult to avoid agreeing to these clauses because they're used by the majority of financial products and services — from checking accounts and prepaid debit cards to payday loans and student loan debt — and even if they aren’t, companies can add them to our contracts at any time.
“[Companies] provide themselves with a free pass from being held accountable by their customers,” CFPB Director Richard Cordray said in a statement. “Many violations of consumer financial law involve relatively small amounts of money for the individual victim. Group claims often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers.”
Corporations argue that arbitration saves legal fees and time on behalf of the consumer (jury trials can be lengthy, afterall). But facing a giant financial corporation in arbitration isn't always a fair shake for the little people. For starters, arbitration requires consumers to meet privately with banks and settle disputes with the help of an independent arbitrator. Whatever decision the arbitrator makes goes, as it can not be appealed. Further tipping the scale in favor of companies is the fact that financial institutions are often the ones who pick the arbitrator, often a private firm contracted to handle the dispute. In the past, research by the CFPB and the Pew Charitable Trusts found that banks sometimes keep the same arbitration firm on tap for consumer disputes, which may skew their decision. “If the arbitration company wants to continue having the bank’s business, are they going to rule in favor of the bank to keep it?” says Susan K. Weinstock, director of Pew’s consumer banking initiative.
Meanwhile, 40% of consumers face companies without an attorney, according the CFPB. Legal fees are expensive and consumers are often discouraged from fighting small individual claims, even if the company’s practice impacts many more consumers. Class actions are meant to empower groups with small claims to take on large corporations, but mandatory arbitration clauses are a huge roadblock. A recent report by Pew Charitable Trusts found that 64% of 32 financial institutions surveyed (including credit unions) used mandatory arbitration agreements, up from 62% in 2013.
Allowing consumers to band together and file class action lawsuits could make it harder for banks to get away with nefarious practices like transaction ordering. Studies have found that banks order transactions in such a way that makes it more likely that consumers will unwittingly overdraw their accounts and get hit with overdraft fees. The damage here is relatively small — the average overdraft fee is $35 — but if everyone impacted by transaction ordering could bring a single, more powerful class action lawsuit, the victims would have a better shot at compensation. “Consumers who have tried to file class actions against [transaction ordering] in the past, if there was an arbitration class, the lawsuit would be stopped dead in its tracks,” Saunders says. Wells Fargo was ordered to compensate customers $203 million for manipulating transaction posting in 2010.
The CFPB’s new rules could be a good first step toward holding financial services accountable for wrongdoing on a mass scale, says Lauren Saunders, managing attorney for the National Consumer Law Center. However, there is one area where it might have fallen short—the rules don’t ban financial firms from including mandatory arbitration clauses against individual consumers (as opposed to a group of people). That means an individual will still have to settle claims out of court if they want to pursue legal action. Because arbitrations often end with orders that neither party can discuss the settlement, the consumer can’t exactly spread the word to help others avoid landing in the same predicament.
“We wish they’d gone farther to address forced arbitration in individual claims as well,” Saunders says, but adds that, overall, “this proposal is a tremendous step forward.”
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