- – Forced arbitration is a tactic devised by corporate attorneys for Wall Street banks to block consumers from challenging illegal behavior in court. Big banks and payday lenders bury “ripoff clauses” in the fine print of take-it-or-leave-it contracts to kick charges of fraud and lawbreaking out of public courts and move them into secret proceedings weighted against the consumer.
- – Since arbitration is a secret process, consumers are often barred from sharing their stories with law enforcement or the press, allowing big banks like Wells Fargo to cover up widespread fraud.
- – These clauses often ban consumers from joining together in class action lawsuits as well, allowing banks to effectively opt of out of state laws and federal protections since it is often too expensive for millions of consumers with small-dollar disputes to pursue their claims in arbitration one-by-one.
- – The few consumers who can pursue arbitration are stuck in a rigged system where a firm handpicked by the corporation decides the outcome, with little hope of appeal. Since firms rely on big banks and lenders for repeat business, it’s no surprise they side with the corporation 93% of the time.
CFPB Authority and Study on Arbitration
- – In the Dodd-Frank Wall Street Reform and Consumer Protection of 2010, Congress directed the Consumer Financial Protection Bureau (CFPB) to study the effect of forced arbitration on consumers and ban or limit its use in financial services contracts if they found the practice harms consumers.
- – The CFPB spent three years compiling and analyzing data, resulting in the most comprehensive empirical study ever done on arbitration. The study clearly reveals the serious harms to consumers that result from forced arbitration and class action bans. Some key findings:
- -Forced arbitration is everywhere, impacting tens of millions of Americans. For example, 99% of payday loans, 92% of prepaid cards, and 85% of private student loans studied were subject to these clauses. Consumers have to effectively opt out of the marketplace in order to keep their basic right to a day in court.
- -Most people simply give up when forced into arbitration, especially for small-dollar claims. Without the option to join a class action, only 25 consumers with claims of less than $1,000 pursued arbitration annually. In contrast, class action lawsuits returned $2.2 billion in cash relief to 34 million Americans from 2008-2012, not including attorneys’ fees and litigation costs.
- -Consumers lose in arbitration, even when they win. Only 9% of consumers with affirmative claims in arbitration got any relief – recovering an average of just 12 cents to every dollar claimed. In contrast, 93% of companies won in arbitration, receiving an average of 98 cents on the dollar.
- -Consumers are blindsided by forced arbitration. Fewer than 7% of people studied realized that these clauses restricted their rights to hold banks and lenders accountable in court.
- – The data is clear: forced arbitration is not simply an alternate forum; these ripoff clauses – particularly those with class action bans – wipe out claims altogether, effectively giving banks a license to steal.
CFPB’s Proposed Rule
- – Enforcing existing rights, not “more” regulation: the CFPB proposed a rule to restrict the most harmful aspects of forced arbitration identified by its 2015 study. The rule does not create new processes or procedures; it simply restores consumers’ ability to enforce protections guaranteed by our Constitution and state and federal law.
- – The rule centers on two common sense measures:
- Restores the right of consumers to join together in court by prohibiting class action bans, ensuring consumers can hold banks accountable for widespread misconduct;
- Returns transparency to individual arbitration by publishing claims and outcomes without identifying information, ensuring bad actors cannot hide illegal behavior from public view.
- During its public comment period, the rule received strong support from key groups, including:
- -More than 280 consumer, civil rights, and labor organizations, including AARP, NAACP Legal Defense Fund, and the Leadership Conference on Civil and Human Rights
- -More than 100,000 individual consumers across the country
- -The Military Coalition, representing 5 million servicemembers
- -Over 100 members of the House and Senate
- -18 state attorneys general
- -210 law school professors
- -Editorial boards across the country, including the New York Times, San Francisco Chronicle, Boston Globe, Sacramento Bee, San Antonio Express News, and Akron Beacon Journal
- – Timeline and process:
- -In April 2012, the CFPB publicly launched its arbitration study, completed in March 2015.
- -In October 2015, the CFPB released initial outlines of a rule to restrict forced arbitration for Small Business Regulatory Enforcement Fairness Act (SBREFA) panel review.
- -In May 2016, the CFPB released its proposed rule and invited public comment for 90 days.
Class Action Lawsuits Help Consumers Hold Bad Actors Accountable
- – Class action lawsuits hold bad actors accountable and ensure harmed consumers recover:
- -In addition to the CFPB finding that class actions returned $2.2 billion to 34 million consumers after attorneys’ fees and costs – an independent study by a former clerk for Justice Scalia reached similar conclusions, finding “even the harshest critics of consumer class actions would have to concede that the picture it paints is a fairly successful ”
- -Without class action lawsuits, bad actors can pocket billions in stolen money and, in fact, gain a competitive advantage in the marketplace by harming consumers.
- – Class action bans block consumers from recovery, even where others receive relief.
- -In 2010 and 2011, five class action lawsuits were filed against payday lenders in North Carolina state court. Three of these cases settled for $45 million, with payments sent to over 200,000 consumers. But because of arbitration clauses with class action bans, the other two cases were dismissed and resulted in no compensation to the harmed consumers.
- -In recent years, several major banks were caught breaking the law by re-ordering customers’ transactions to charge multiple fees for one overdraft. Class action lawsuits against multiple big banks, such as JPMorgan Chase and Bank of America, rooted out these illegal overdraft practices and returned over $600 million to consumers nationwide. Wells Fargo, however, refuses to reimburse its customers and has spent nine years arguing that class action bans in its contracts mean its customers should not get this same relief.
Wells Fargo Used Forced Arbitration to Hide its Fake Account Scandal
- – After CFPB led a $185 million enforcement action against Wells Fargo for opening as many as 5 million fraudulent accounts and credit cards, it was revealed the bank’s customers had been trying to sue over fake accounts since at least 2013. However, due in part to ripoff clauses buried in the fine print of their contracts, customers were forced individually into secret arbitration – and Wells Fargo continued stealing from its own customers for another three years.
- – Even now, as the bank proclaims its focus on restoring consumer trust, Wells Fargo continues to insist that defrauded customers should be barred from having their day in court. As recently as June, the bank tried to kick defrauded consumers out of a public court in Utah.
- – A recent report found just 215 Wells Fargo customers pursued claims against the bank in arbitration since 2009, despite millions of fake accounts. It is not surprising so few consumers file: of the 48 cases that advanced to a final hearing, only seven consumers in eight years received a dime from Wells Fargo – with the bank paying out just $349,549. Indeed, consumers paid more restitution to Wells Fargo in arbitration than the other way around.
The Rule Protects Servicemembers and Veterans
- – Predatory schemes often specifically target our military, leading to significant financial strain on servicemembers, veterans, and their families. Congress has extended financial and civil protections to military families – such as the Servicemembers Civil Relief Act (“SCRA”) – to ease economic burdens on military personnel called to service and protect servicemembers against default judgments, foreclosures, and repossessions.
- – However, servicemembers must be able to access the courts to enforce their rights. In the years since SCRA passed, many banks and lenders have used forced arbitration to escape accountability for statutory and constitutional violations, leaving servicemembers unable to enforce their rights, and threatening military readiness and national security as a result.
- – A 2006 Department of Defense report emphasized that “loan contracts to Servicemembers should not include mandatory arbitration clauses or…require the Servicemember to waive his or her right of recourse, such as the right to participate in a plaintiff class [action lawsuit].”
- – The CFPB’s arbitration rule is necessary to ensure servicemembers can defend their rights and enforce SCRA protections against lenders that target our military. It has received strong support from the Military Coalition (representing 5.5 million servicemembers) and 29 military groups.