The Senate, in Tuesday’s much anticipated decision, voted to overturn the Consumer Financial Protection Bureau’s controversial rule that would have placed limits on mandatory arbitration. This is especially good news for the financial services industry. If passed the rule would have banned banks from including arbitration provisions in their customer account applications. Those provisions currently block them from collectively filing class action lawsuits.
At the time of its introduction in July, the Democrats and consumer advocates praised the arbitration rule as giving average people more power to fight industry abuses. They pointed to Wells Fargo’s unauthorized creation of millions of bogus customer accounts as a recent example.
The Arbitration Rule
It began with the CFPB (Consumer Financial Protection Bureau). Under the 2010 Dodd-Frank Act, they were authorized to look at the issue of consumer harm from arbitration practices, including whether class action waivers essentially forced consumers into arbitration.
The arbitration rule became effective on September 18, 2017, with a March 19, 2018 mandatory compliance date. The CFPB arbitration rule targeted clauses which are often buried in the fine print of contracts signed by consumers when they apply for credit cards or open checking accounts. Typically, the language prohibits customers from joining together to file class action lawsuits, but requires disputes to be settled through private arbitration.
On October 24th, the Senate voted 51 to 50 to override the CFPB’s consumer arbitration rule. Had the rule been enacted, companies would have had to remove arbitration clauses from their contracts by March.
Pro-Arbitration Rule Argument
Democrats and other supporters argued that enacting the arbitration rule would provide consumers with protection against abusive bank practices. They believed the rule would prohibit the financial industry from using forced arbitration agreements. In their view, it is a common banking industry tactic which allows them to refuse to do business with consumers who will not sign away their right to sue them in a court.
“Big financial companies can lock the courthouse doors and prevent consumers who’ve been mistreated from joining together to seek the relief they deserve under the law.”
-- George Slover, senior policy counsel for Consumers Union
Supporters do not consider it in the public interest for consumers to lose the right to present their disputes in court. Advocates point out that the resolution of disputes through arbitration is binding and believe most of their decisions favor businesses.
The CFPB ’s main argument in favor of the arbitration rule is that class action lawsuits are an important tool for holding banks accountable. Recent data breaches at Wells Fargo and Equifax were cited as further proof that the rule was needed to protect consumers from such abuses by companies.
Con-Arbitration Rule Argument
For years, the financial service industry has lobbied against the arbitration rule. Their position is that its enactment would have made lending more expensive for customers and unleashed an overwhelming flood of class action lawsuits.
“The entire purpose of this rule is to promote class action litigation and stop arbitration resolution when there is a dispute.”
-- Sen. Mike Crapo (R-Idaho)
Supporting the financial industry’s position against the arbitration rule is the same 2015 study used by the CFPB in support of its creation. According to the study if the rule were approved, the “53,000 financial services companies who currently use arbitration agreements will now have to spend between $2.62 billion and $5.23 billion over the next five years to defend an additional 6,042 class actions. The CFPB expected those numbers to be repeated every five years.”
Arbitration vs. Class Action Lawsuit: Facts From The CFPB Study:
- Length of Time to Judgement. On average arbitrations are settled in less than seven months, while class actions could take years.
- Value of Settlement Awards. On average, consumers who prevailed in arbitration are awarded $5,400, but the average class action settlement payment is only $32.
- Cost to Consumers. Arbitration filing costs are capped at $200, but to initiate a federal court lawsuit the costs doubles to $400.
Additional opposition to the arbitration rule came from the Treasury Department. A day prior to the Senate vote, they released a report (Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule). The report used data from the CFPB study to criticize the arbitration rule. The department estimated that the rule would generate more than 3,000 additional class action lawsuits over the next five years.
On the whole, this decision to kill the arbitration rule is good for both consumers and businesses. While it is true that businesses, such as banks, write customer agreements to protect their interests, they are also meant to facilitate a hospitable environment for their customers. Because of competition, the primary aim of most businesses is greater customer satisfaction. In general, satisfied customers equate to loyalty, additional business opportunities, and greater profits. No successful business seeks to abuse their own customers; such practices would only result in them moving their business to a competitor.
Unfortunately, some of our representatives in government are of the opinion that all businesses are abusing their customers for profit and it is their responsibility to save them. While there are individual instances of bad business practices; it is not fair to place that label on the entire financial services industry.
Some members of government appear to be wearing ideological blindfolds, whereby even when confronted with data that contradicts their beliefs; they will not be swayed from their initial opinion. We need only look at the CFPB study, which was the basis for the arbitration rule to see the truth. It actually provided a stronger argument in favor of keeping arbitration, presenting facts that consumers benefited less from long costly class actions.
Sometimes even good intentions can be misguided.
An important fact from the CFPB study was that only 4% of the plaintiffs entitled to claims actually file one for their portion of the settlement amount. Consumer protection is important, as is keeping businesses honest. Maybe if the CFPB had faced the issue of arbitration fairly and objectively they could have developed recommendations that have real world applications that are in the public interest.
If the CFPB had taken a less heavy handed approach to the issue of arbitration they could have brought about some real reforms. Rather than eliminating arbitration altogether, a better approach may have been for the CFPB to explore ways for improving the current system.
Here are some ideas for managing the arbitration system that have floated around that could benefit both consumers and businesses.
- Bring transparency to the arbitration process by allowing monitoring of decisions and publish the results.
- Give consumers the opportunity to opt out of arbitration.
- Set criteria that allows claimants to organize under specific circumstances.
Supporters of the arbitration rule should have been honest with the people they claim to be protecting about who the real winners would have been had it passed. The truth is in the numbers. Plaintiffs in a class action lawsuit get $32 and their attorneys get millions. Need I say more?
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