When Gary Childress of Raleigh, North Carolina learned in July 2008 that he was being deployed to Iraq as part of his Army National Guard service, one of the things he did before reporting for duty was to contact Bank of America, where he and his wife Anne had a credit card account. He wanted to let the bank know that he was on active-duty status because under the Servicemembers Civil Relief Act or SCRA, a law passed by Congress in 2003 to reduce burdens on military families, all interest rates on debts that servicemembers owed before going on active status must be reduced to 6%. This interest rate protection was significant to the Childresses, who owed over $5000 on their Bank of America credit card with an interest rate of around 27% when Gary left for Iraq.
Bank of America began sending Anne Childress monthly statements suggesting that the interest rate on the account had been reduced to 6% as the SCRA requires. But according to a lawsuit the bank just settled in federal court in North Carolina, these statements were deceptive. In fact, the bank was actually continuing to charge a much higher interest rate. And the Childresses were not alone; the bank’s own internal audits, as well as an investigation conducted by the Office Of the Comptroller of the Currency, revealed that nearly 130,000 servicemembers and their families were affected by Bank of America’s illegal and deceptive practices, which went on for over a decade.
One of the other families affected was Jackie and Raymond Love of Garrett, Indiana, who had a mortgage with Bank of America with an interest rate of 7% when Raymond was deployed to Iraq in 2004. Like the Childresses, the Loves asked Bank of America to reduce their monthly payments to 6% in accordance with the SCRA, and Bank of America began issuing monthly statements suggesting that it had complied, but later investigations showed that the Loves’ mortgage rate was not in fact reduced. What’s worse, the formula Bank of America used to make it appear that the Loves’ rate had been reduced to 6%, known as interest subsidization, caused the Loves’ mortgage payments to be recorded as late even when they paid on time, which in turn damaged their credit score. The Loves filed for bankruptcy in 2011, and their house was sold at auction.
In 2015, the Childresses and others fiiled a class action lawsuit. And in July of 2017, they reached a settlement with Bank of America that will award nearly $30 million, after fees and expenses, to the approximately 130,000 military families who were overcharged and deceived by the bank. The cheated servicemembers will not need to file claims in order to receive compensation under the settlement; the amount owed to each class member will be calculated based on Bank of America’s records, and checks will be sent out automatically. If any class members can’t be found or their checks go uncashed, the remaining funds will be donated to nonprofits that provide assistance to servicemebers and veterans.
This class action lawsuit was possible because Bank of America does not force its credit card customers to enter into arbitration provisions that ban class actions. But most banks do. In fact, in a comprehensive report to Congress in 2015, the Consumer Financial Protection Bureau (CFPB) found that over half of credit card contracts include provisions requiring customers to settle disputes in private arbitration rather than in court, and nearly all of those provisions ban class actions. Moreover, the CFPB’s study found that large banks were far more likely than small banks and credit unions to include forced arbitration provisions and class action bans in their account agreements.The CFPB study found that where bank arbitration clauses ban class actions, only an infinitesimal number of consumers ever go to arbitration; more than 99.9% of cases just disappear and no consumers receive anything.
So if another large bank systematically overcharged servicemembers interest in violation of the SCRA and lied about it like Bank of America did, those affected would not have been able to join together in a class action lawsuit like the Childresses and Loves. Instead, they would each be forced to go up against the bank by themselves in a secretive arbitration proceeding, where confidentiality rules would prevent each servicemember from sharing information with others. Given the many demands on military families’ time, most people affected by such a scheme would never even find out that their rights had been violated, let alone pursue in arbitration the money they were owed. And instead of paying nearly $30 million to around 130,000 military families as Bank of America did, a bank with an arbitration provision banning class actions would have paid nothing, or at most might only have to pay out a few thousand dollars to a handful of servicemembers if any went forward with arbitration.
Now, the Senate will soon be asked to decide whether it is better if Americans can enforce consumer protection laws, as the servicemembers in these cases did, or if it’s better to let banks pocket millions of dollars in illegal profits at the expense of those who defend our nation.
That’s because, on July 19, 2017, the Consumer Financial Protection Bureau issued its long-awaited rule that prohibits banks and payday lenders from using forced arbitration clauses to strip consumers of their ability to bring class actions against them. If that rule is permitted to go into effect, all military families, and all American consumers, will be able to join together in a class action lawsuit like the Childresses and others did if they were harmed by widespread illegal conduct in the financial sector, no matter who their lender happens to be. Unfortunately, on July 25, the U.S. House of Representatives voted to repeal the CFPB’s rule under the Congressional Review Act, a law that allows Congress to throw out any federal regulation issued within the last sixty days. Big banks want the Senate to follow suit, and pundits suggest that the vote will be close.
So it’s time for Senators to decide whose side they’re on: big Wall street banks who don’t want consumers to be able to hold them accountable in court for their actions, or military families and other everyday Americans who want to be able to join forces and fight back when banks rip them off. America is watching.
Paul Bland, Contributor Executive Director, Public Justice
This post was co-authored by Karla Gilbride, Cartwright-Baron Staff Attorney at Public Justice
John Gear is a Salem attorney in solo practice