Banks, credit card companies, and other financial institutions will no longer be able to deprive customers of their rights in court under proposed rules issued Thursday by the Consumer Financial Protection Bureau (CFPB).
The proposed regulations will ban “forced arbitration” clauses in all contracts that involve consumer credit transactions.
Arbitration clauses require people to renounce their right to participate in class-action lawsuits. Instead, anyone who believes they’ve been cheated by a bank, payday lender, mobile phone company, or other form of consumer credit provider must turn to the private arbitration system. Previous CFPB research has found that consumers almost never do so. Only half of the few consumers who do go to arbitration have a lawyer with them, while the company they’re facing off against almost always has a legal team in the room.
Arbitration clauses now cover 53 percent of all credit card companies, 86 percent of all private student loan providers, and essentially the entire market for payday loans and wireless phone service.
The agency cannot retroactively liberate people from existing arbitration clauses, and the rules will not go into effect until the agency considers public comments, revises the proposal, and then publishes a final edition of the regulations.
But once that happens, all new credit card agreements, checking accounts, and loans will be subject to the traditional courts system. It is a massive change after years and years of work by the financial industry to hem in consumers’ rights to seek relief from deceptive and abusive business practices.
Financial industry actors and their political allies don’t take such threats to their bottom line lying down. The agency has been under assault since even before it opened five years ago. The attacks continue today, with both anonymously-funded smears on television and legislative tricks designed to cancel the CFPB’s budgetary and administrative independence. It will likely take such an end-around to prevent the arbitration rules from going into force: The Dodd-Frank legislation that created the agency explicitly authorized it to research and regulate these contract clauses, and to prohibit them if the evidence justified a flat-out ban.
A Disingenuous Defense
Industry sympathizers are already portraying the agency’s move as a “huge favor to lawyers” that “will end up hurting” the consumers it’s meant to help. This I’m-rubber-you’re-glue argument from the financial industry hinges on how class-action lawsuits tend to play out: Because thousands or hundreds of thousands of individuals are party to any settlement or judgment, no one consumer ends up seeing a particularly large payday. But the attorneys do cash in.
But that’s not evidence that arbitration is better for consumers than class actions. Small individual winnings derived from large corporate penalties are an effective way to curb abusive behavior by powerful economic actors. And the cases are often time-consuming and costly to pull together, so strong financial incentives for plaintiffs’ attorneys are also valuable for vindicating people’s rights not to get nickel-and-dimed.
Many of the most profitable methods of cheating consumers involve scraping very small amounts of money off very large numbers of individuals. Forced arbitration clauses leave each of those individuals to fend for themselves, spending time and money in an arbitration court to try to win back a $35 overdraft fee on a checking account. Individuals have both little incentive and little power to fight those battles, while the companies that engage in such dink-and-dunk consumer harm are pulling in millions or even billions from the practices.
Take Ticketmaster, for example. The online ticket vendor tacks a variety of fees onto the base price of concert and sports tickets. Customers might have been annoyed to see an “order processing fee” or a “delivery fee” pop up, but those labels made the charges appear tied to specific, functional tasks necessary to getting a ticket. In fact, a class-action suit alleged in 2003, those fees went straight into Ticketmaster’s own core profits.
Victims And Industry Workers Fight Over The First-Ever Federal Plan To Curb Predatory Payday LoansEconomy by CREDIT: America’s path to the first-ever federal regulations of payday and auto-title loans began Thursday…thinkprogress.orgThe fees swindled small dollar figures from some tens of millions of people, each of whom is owed a few bucks under a roughly $400 million settlement in the case. The deal has been criticized for its structure — instead of cash refunds, class members are getting coupons to use the next time they buy something through Ticketmaster, effectively locking in further revenue for the company that deceived them — and for the haul the lawyers who fought the case get from it.
But if those lawyers don’t spend a dozen years working on the suit, then nobody gets any compensation, and Ticketmaster likely keeps pretending that its fees are a service rather than a surcharge.
Similarly, a recent proposed settlement of two major class-action suits against Uber will only deliver a couple hundred dollars to any given driver participating in it. The lawyers who put the case together will see a much larger payday. But if courts had found that the drivers were bound by arbitration clauses in their agreements with Uber, approximately zero people would have gotten any compensation at all for the company’s allegedly abusive business practices.
‘Behavioral Relief’
Both Ticketmaster and Uber will change their behavior going forward as a result of these cases. People who buy tickets on the internet will get a more honest rendering of what they’re being charged, and Uber drivers will no longer be subject to arbitrary and oppressive policies. Dollar figures alone cannot capture the value of such “behavioral relief,” the CFPB noted in its landmark 2015 study of arbitration clauses.
The Chamber of Commerce and other business interests critical of the CFPB’s move here argue that arbitration delivers a superior outcome for individually harmed consumers. Those who bring a company to arbitration and win can see a significantly bigger check, after all.
Until recently, the data required to fact-check the business side of the arbitration policy argument didn’t exist. Like a carnival barker hollering about the latest big winner to attract more paying players, industry actors could invoke hypothetical arbitration outcomes to justify the status quo.
But now the hypothetical has deflated, thanks to the CFPB’s unprecedented ability to collect and analyze data on how the financial sector operates.
In reality, consumers barely ever even try to arbitrate an alleged swindle. The agency’s landmark study found that consumers bring companies to arbitration less than 600 times per year, and barely ever win. Just 78 consumers got a judgment in their favor from arbitrators in 2010 and 2011 combined, and the wins totaled less than $400,000 in value across all 78 cases.
That means an average win of about $5,000 per person, for a group so small they could all fit inside the same double-decker bus.
For everyone else who got hosed by an illegal or erroneous fee, a deceptive interest rate spike buried in the fine print, or an annuity scam, though, the arbitration system is failing to deliver even a whiff of justice.