Fine Print And Your Day in Court
A new regulation from the Consumer Financial Protection Bureau – or “CFPB” as it is known – will make it easier for consumers to hold the financial industry accountable for illegal practices. But, the regulation is under attack from the financial industry, and a congressional repeal may be in the offing.
The new regulation deals with some of the fine print in the lengthy agreements consumer lenders impose on their customers. Buried in this fine print will be a clause that says the lender and the customer have agreed a private arbitrator – and not the courts – will resolve any dispute the customer might have with the lender.
If a lender has an illegal practice that rips off each of its thousands of customers by $30, no one can bring a class-action lawsuit in court because the fine print says the dispute must be in arbitration. To get around this problem, customers began bringing class claims to an arbitrator, but the lenders responded by amending the fine print to say class claims were not allowed in arbitration.
The result was that small-dollar disputes went unresolved. As the courts have observed, only a lunatic or a fanatic pursues a $30 claim.
Issued after years of study, the CFPB’s new regulation would prevent consumer financial institutions from using arbitration clauses to block class action lawsuits in court. The CFPB stopped short of an outright ban, an outcome many consumer advocates had pushed. The CFPB correctly noted we have very little systematic information about what happens in arbitration because, unlike the court system, arbitration proceedings are private.
The new regulation thus also requires consumer financial institutions to make available data about their arbitrations. The data will not include identifying information about customers such as names or addresses but will include information about arbitration outcomes. Both the CFPB and independent researchers will be able to use these data to ask if arbitration is working fairly for both sides.
The problems this new regulation seeks to address are far from hypothetical. For example, Wells Fargo has admitted that for years its employees created millions of phony accounts, leading many consumers to pay for services they never purchased. When customers did pursue legal remedies against Wells Fargo, the bank wielded its arbitration clause. Once in arbitration, claims would not receive any public attention, and the Wells Fargo fraud continued for many years than it otherwise might have.
The new regulation also should help to prevent problems from occurring in the first place. Because of arbitration clauses, the consumer financial industry had little to fear from private citizens seeking to enforce their rights. Public enforcement remained a possibility through agencies like the CFPB or the state attorneys general, but limited resources meant they would only be able to pursue a few of the biggest cases.
In response to the new regulation, the consumer financial industry has argued that lawyers sometimes file abusive class actions that benefit the lawyer but not the consumers the lawyer is supposed to represent. The industry is not wrong, but rather than block consumers from any effective relief, the better solutions are changes to the class action rules. As the CFPB noted in adopting its regulation, for the past twenty years Congress has done exactly this by passing a series of laws to curb class-action abuses.
Still, the House has passed a resolution to repeal the CFPB’s new regulation. The Senate has until September 18 to concur, or the regulation will go into effect. This is one story that should not get lost in the daily flood of news coming out of Washington.
I am Bob Lawless.