With all the doom and gloom coming out of Washington these days, it is easy to miss the victories consumers have earned. Most notably, the Consumer Financial Protection Bureau (CFPB) turned 6 last Friday! In that time, defenders of the CFPB have helped it ward off countless attacks from Wall Street and allowed the agency to focus on its mission of protecting consumers from predatory lenders and unethical financial industry practices. Last week was no exception. After years of study, deliberation, and research, the CFPB followed through with its Congressional mandate under the Dodd-Frank Act by passing rules to rein in the abusive practice of forced arbitration in financial contracts. Thanks to this rule, consumers will be protected from “rip off clauses” hidden in financial contracts designed to deny Americans their day in court.
This is a huge achievement, and one that we have been fighting to win for many years. This rule will protect consumers who utilize financial products like credit cards, auto leases, check cashing services and retail banking by:
1. Preventing banks from barring consumers from joining class actions; and
2. Adding transparency to the arbitration process, by publishing arbitration claims and outcomes.
While the CFPB’s rule does not outlaw forced arbitration completely, allowing consumers to form class actions is nonetheless a huge victory. Unfortunately, many companies know that most consumers are unlikely to go through the hassle of individual arbitration for small offenses. This is perhaps best evidenced by a finding in the CFPB’s 3 year arbitration study, which showed that in the course of the study, only 25 consumers pursued a claim of $1,000 or less through arbitration. The net result of this phenomenon is that bad actors have been able to pocket billions in ill gotten gains wrongfully obtained from consumers, knowing that they are safe from legal action as long as consumers are prohibited from joining together to seek justice.
While allowing consumers to come together to form class actions will help them get their day in court, adding transparency to the opaque process of arbitration will prevent them from becoming victims in the first place. After the CFPB issued its $185 million enforcement action against Wells Fargo for committing approximately 3.5 million counts of identity theft, news came out that harmed consumers have been trying to sue Wells Fargo for this very practice since 2013. However, due to these “rip off clauses” that Wells Fargo buried deep in the fine print of their contracts, consumers were not only prevented from suing, but also from telling anyone about Wells Fargo's shady actions. This lack of transparency allowed Wells Fargo to continue this practice for an additional three years. If this new rule were to be enforced, bad acts like this wouldn’t be allowed to happen again.
The Wells Fargo example shows the critical importance of transparency in our legal system. It also rebuts a key industry argument in favor of forced arbitration. Wall Street executives often argue that arbitration saves consumers money and that class actions only benefit plaintiffs’ lawyers. In the Wells Fargo example, of the millions of account frauds, only 215 consumers pursued forced arbitration claims since 2009. Of those 215 claims, only 7 consumers received a settlement from Wells Fargo in spite of the clear evidence of wrongdoing by the bank. This example illustrates how arbitrators, who depend on the bank for repeat business, too often side against the consumer.
This is one reason why Wall Street and their allies in Congress are falling over themselves to try to roll back this important consumer protection. Wall Street knows that forced arbitration allows them to operate above the law. Rip off clauses snuck into the fine print of contracts allow banks to charge consumers illegal fees knowing full well that without the right to form a class action, consumers have no cost-effective way to fight back.
While Wall Street and their allies in Congress know that this rule will greatly diminish their ability to get away with fraud, consumers of all political stripes support this protection. The Pew Charitable Trusts found that 90 percent of consumers want their right to a class action restored and a recent poll found that a majority of both Republicans, Democrats, and Independents all support the implementation of CFPB’s arbitration rule.
In 2008, Congress specifically instructed the CFPB to look into the practice of forced arbitration and take action to curtail the practice if necessary. This week, the CFPB did just that. However, in spite of all the research and evidence that documents the abuse of this practice, many members of Congress wish to undo the work of the CFPB and remove the protections that an overwhelming majority of Americans support. We do not take these threats lightly. At NCL, we will continue to do all we can to ensure that these protections are not taken away from consumers by members of Congress more loyal to Wall Street than the citizens who elected them.