Banksters can't explain why, if arbitration is so good for consumers, banks force it into all contracts up front
Nothing prevents banks from giving consumers the choice to arbitrate once a dispute arises
Nicklaus: Agency wants to save consumers from the perils of fine print
By David Nicklaus | St. Louis Post-Dispatch
Most of us don’t read the fine print that comes in financial contracts, and the banks know it.
The Consumer Financial Protection Board, fortunately, wants to restore a fundamental right that many of us have unknowingly signed away. The agency wants to make sure that, if a financial institution engages in systematic wrongdoing, consumers can have their day in court.
A proposed CFPB rule would modify mandatory arbitration clauses that have become common in all sorts of consumer contracts, from opening a checking account to taking out a payday loan. Under the proposal, financial institutions could still require that individual disputes be handled by a private arbitrator, but they could no longer prohibit class-action suits.
“This is an incredibly significant step,” says Rachel Weintraub, general counsel at the Consumer Federation of America. “Consumers need redress when there’s a problem.”
Bankers, obviously, don’t like the proposal. Rob Nichols, president of the American Bankers Association, issued a statement saying consumers “will get less and pay more” as lenders are hit with a flood of class-action suits.
His prediction implies that banks will jack up the cost of credit, but that’s not what has happened in the past.
In 2009 and 2010, four large banks dropped their mandatory arbitration clauses as part of an antitrust settlement. The CFPB couldn’t find any evidence that they increased fees or made less credit available.
It’s true that arbitration is less costly than a court case, but a class action is, practically speaking, the only way to find justice for people like Gideon Homa, a New Jersey man who noticed a decade ago that his American Express rebate card wasn’t paying back as much cash as he had expected.
Homa, who estimated his losses at $354, learned that the arbitration filing fee could be as high as $450. An attorney filed a class-action suit and got an appellate court’s approval to go ahead. That approval was rescinded, however, after the U.S. Supreme Court upheld mandatory arbitration in another case in 2011.
In a report last year, the CFPB found that arbitration works overwhelmingly in financial institutions’ favor. It studied cases from 2010 and 2011 in which consumers won a total of $400,000. Companies won $2.8 million.
Arbitration is, then, an effective way for lenders to collect disputed debts. It’s not a very effective way for consumers to resolve small problems.
Opening the door to class-action suits “restores a situation in which a business can’t get away with engaging in unlawful practices that cost each consumer $5 or $30,” Washington University Law Professor Michael Greenfield says. “This is a vehicle for holding them accountable.”
F. Paul Bland Jr., executive director of Washington-based advocacy group Public Justice, expects a flurry of claims against payday lenders, some of which operate online and, he says, flout state laws. The CFPB says nearly all payday loan contracts have mandatory arbitration clauses.
The U.S. Chamber of Commerce, like the bankers group, is critical of the proposed rule, saying it “will have the effect of eliminating arbitration for most consumers.”
That’s not necessarily true. Banks can still require individual disputes to be arbitrated, a process in which they win most of the time.
For consumers, meanwhile, it’s hard to see any disadvantage in the proposed rule. They should thank the CFPB for saving them from the pitfalls of fine print.