It looks like a pervasive abuse is about to bite the dust.
A major way that financial firms have tipped the playing field even further in their direction is the inclusion of mandatory arbitration clauses in their contracts. The argument has been that this feature is beneficial to consumers, since arbitration is cheaper that litigation in the event of a dispute. But studies have repeatedly found that to be bollocks. The arbitrators that are chosen to serve are not only screened to be big institution friendly; arbitrators that wind up ruling in favor of customers have this funny way of being moved to the bottom of the selection list, while hanging arbitrators get regular assignments. For instance, from a 2009 report by the Center for Responsible Lending:
Arbitration cases can be unfair not only because consumers have no choice in the matter, but also because prior results from Public Citizen research suggests that consumers may win only 4% of the time. The relationship as currently structured gives arbitration forums and arbitrators a strong incentive to side with “repeat players” that control the flow of ongoing business, rather than a consumer seen only once. In the credit card context as well as many other consumer transactions, it is very difficult to find a product without a forced arbitration agreement hidden somewhere in the fine print.
And a New York Times investigation found that individuals almost never avail themselves of arbitration for amounts under $2500; they found only 505 examples from 2010 to 2014.
Similarly, the forced arbitration clause means class action attorneys cannot take up these cases. Despite the regular demonization of their efforts, banks find it profitable to engage in penny-ante grifting which is just not worth it for a customer to pursue, like charging undisclosed fees, or timing and ordering deposits and check clearing during the day so as to maximize the amount of consumer fees. While consumers don’t net much from these lawsuits, the bigger point is to stop this behavior going forward and to put financial firms on notice that if they engage in small scale ripoffs across large numbers of customers, they face good odds of being caught out and having to pay back a lot of their ill-gotten gains. The New York Times series also identified consumer abuses that class action lawyers had targeted but were stymied by the presence of mandatory arbitration clauses, such as Citibank selling consumer insurance they could not actually use, and merchants who disputed American Express’ hefty processing charges.
The New York Times today reports that the Consumer Financial Protection Bureau will soon bar mandatory arbitration clauses in consumer financial products. Even though the rule is not final and is subject to a comment period, the tone of the Times report is that the provision becoming final is close to a certainty. From the account:
The nation’s consumer watchdog is unveiling a proposed rule on Thursday that would restore customers’ rights to bring class-action lawsuits against financial firms, giving Americans major new protections and delivering a serious blow to Wall Street that could cost the industry billions of dollars.
The proposed rule, which would apply to bank accounts, credit cards and other types of consumer loans, seems almost certain to take effect, since it does not require congressional approval.
In effect, the move by the Consumer Financial Protection Bureau — the biggest that the agency has made since its inception in 2010 — will unravel a set of audacious legal maneuvers by corporate America that has prevented customers from using the court system to challenge potentially deceitful banking practices.
“It’s going to spell the end of arbitration,” said Alan S. Kaplinsky, a lawyer with the firm Ballard Spahr in Philadelphia, who pioneered the use of arbitration clauses to thwart class-action lawsuits and thus opposes the proposed rule. “It will lead to a huge upsurge in litigation and take away a benefit to consumers.”….
“It is a good start,” said Berle M. Schiller, a federal judge in Philadelphia who has been critical of arbitration clauses that dismantle class actions and tip the scales in favor of companies. “Class actions are the only way that companies can be brought to heel.”
The agency’s proposed rule would be the first significant check on arbitration since a pair of Supreme Court decisions in 2011 and 2013 blessed its widespread use. Those decisions signaled the culmination of an effort by a coalition of credit card companies to stop the tide of class-action lawsuits.
Note that the rule will apply only to new accounts and loans, but consumers can cancel existing ones and sign up again.
I’ve been generally critical of Dodd Frank as delivering much less than it promised, but this is an important exception. Dodd Frank not only established the Consumer Financial Protection Bureau, but also tasked the agency to investigate arbitration. Its 2015 report showed how the process was skewed in favor of bigger players. Again from the Times”
For the few who did go through with the process, the report also showed the lopsided nature of the rulings. Businesses won bigger judgments against consumers in arbitration — a total of $2.8 million in 2010 and 2011, largely for debt payments — than the consumers obtained in relief, according to the agency’s analysis.
During that period, only 78 arbitration claims resulted in judgments in favor of consumers, who received less than $400,000 in total relief.
It’s rare to see a clean win for consumers versus banks, particularly given that the Consumer Financial Protection Bureau has tended to be cautious. However, previous research and reporting and the agency’s own analysis showed that forced arbitration was a clear-cut abuse, paving the way for action. And the Administration generally has been pursuing various bank settlements and fines to burnish Obama’s “tough on bank” claims, even though these actions are rounding error compared to the massive wealth transfer represented by the stealth bailouts. But even though this is a comparatively small step, it will still over time curb a lot of misconduct, particularly the type that hits low-income customers disproportionately hard. The howling by the Chamber of Commerce and bank allies says that the financial services industry expects this measure to hurt them where they care most, in their wallets. About time.