I heard recently from a woman who read my column about a customer’s dispute with a bank over items allegedly stolen from his home during the foreclosure process. She said the same thing was happening to her and she wanted to know if there was a class-action lawsuit she could join.
Like many customers, she probably didn’t know banks often are immune to class-actions because they stick terms in their customer agreements requiring grievances to be resolved through arbitration instead of the courts.
That may be changing. Maybe.
Earlier this month, the Consumer Financial Protection Bureau issued a rule that would allow customers to join together to file class-action lawsuits against banks and other financial businesses such as credit card issuers, student lenders, payday lenders, debt collectors and credit reporting companies. The rule prohibits those businesses from blocking participation in class-action lawsuits through the use of forced arbitration clauses.
The rule doesn’t apply to your current banking relationships; those terms can’t be changed. But it would apply to any new accounts you open starting next March, unless Republican lawmakers in Washington get their way.
I’ve told you several times about their quest to roll back the Consumer Financial Protection Bureau’s regulatory authority so it can’t create rules such as this. Their legislation has been advancing, but slowly. In the meantime, they are turning to a rarely used political maneuver to try to rescind this rule.
Republicans say arbitration has worked just fine and class-action lawsuits benefit lawyers more than customers. They might have had an easier time making that argument if it wasn’t for the Wells Fargo fake account scandal, which was exposed, of course, by the Consumer Financial Protection Bureau last year.
As many as two million credit card and bank accounts allegedly were opened in customers’ names without their knowledge or permission by Wells Fargo employees trying to make sales goals and qualify for bonuses. Fed-up customers ignored their account terms and filed class-action lawsuits. The bank initially sought to block them but gave up amid the public backlash and settled the cases.
Consumer advocates point to the scandal as a prime example of why banks and other financial businesses should be subject to class-action lawsuits.
“Wells Fargo’s illicit acts of opening millions of accounts without customers’ consent would have come to light much earlier if consumers could go to court against the big bank,” said Christine Hines, legislative director of the National Association of Consumer Advocates. “By supporting repeal of the arbitration rule, some members of Congress are choosing Wells Fargo’s ability to cheat customers over the constitutional rights of their constituents.”
Under the new rule, companies still can require individual disputes to be handled through arbitration, but they cannot use terms that prohibit participation in class-action lawsuits.
The bureau isn’t as concerned about individuals being forced into arbitration because it said the reality is that companies don’t always enforce those terms to block individual lawsuits. But they use them to block class-action lawsuits. A 2015 bureau study found credit card companies invoked that clause to block class-actions about two-thirds of the time.
Republican lawmakers consider the anti-arbitration rule to be another example of unnecessary regulation on the banking industry. They are trying to kill it using the Congressional Review Act, which allows Congress to overturn an agency’s rule within 60 legislative days with a simple majority vote.
The House approved that resolution Tuesday along party lines by a vote of 231-190. With one exception, all Republicans who participated in the vote supported the rescission. That included Rep. Charlie Dent of Allentown. All Democrats voted against it, including Rep. Matt Cartwright, who represents parts of Northampton, Carbon and Monroe counties and all of Schuylkill County.
The resolution now is before the Senate, where supporters include Pennsylvania Sen. Pat Toomey.
“The CFPB’s ill-conceived rule is yet another government-sponsored bonanza for trial lawyers at the expense of consumers seeking a speedy and fair resolution of their disputes,” Toomey said in a statement on the Senate banking committee’s website. “This rule is based on a political study that 86 members of Congress warned was ‘not fair, transparent, or comprehensive.’ Rather than reexamine its defective study, the CFPB has chosen to forge ahead with a flawed rule. Congress must now exercise its authority to block it.”
The banking industry supports the legislative effort to kill the rule.
“Arbitration has long provided a faster, more cost-effective, and higher recovery means of addressing consumer disputes than class-action lawsuits,” said Richard Hunt, president and CEO of the Consumer Bankers Association. “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.”
Class-action lawsuits aren’t always just about money, though.
“Resolving group lawsuits often requires companies to not only pay everyone back, but also change their conduct moving forward. This saves countless consumers the pain and expense of experiencing the same harm,” the Consumer Financial Protection Bureau said in a news release announcing the rule. “Without group lawsuits, private citizens have almost no way, on their own, to stop companies from pursuing profitable practices that may violate the law.”