With the help of Idaho’s two Senators, the U.S. Senate voted on Oct. 24 to kill a rule allowing mistreated bank customers to band together to seek redress in court.
The vote allows banks to force their customers into often one-sided arbitration of grievances against the banks. Forced arbitration clauses prevent bank customers from bringing group lawsuits to recover for improper banking practices. And, they deprive bank customers of resort to the judicial system where they can get a fair shake.
The Consumer Financial Protection Bureau (CFPB) issued a rule in July that prevented financial institutions from requiring customers to arbitrate disputes with their banks, rather than going to court. Mandatory arbitration clauses are written into the fine print of hundreds of millions of lengthy consumer financial service contracts. The CFPB rule would have allowed consumers to join together to sue banks for their misconduct. It was good public policy and supported by the polling data. An American Future Fund poll showed 67% support for the rule, including 64% of Republicans polled.
In announcing the rule, CFPB Director Richard Cordray noted that “when Wells Fargo opened millions of deposit and credit card accounts without the knowledge or consent of customers, arbitration clauses in existing account contracts blocked their customers from bringing group lawsuits for the unauthorized account openings.” The rule was designed to protect bank customers from this type of misconduct in the future, and to give them a realistic chance of recovering their damages if it does happen.
It is impractical for an individual to arbitrate a small dollar dispute with his or her bank. If the bank has manipulated the processing of checks on an account to substantially increase the overdraft fees, resulting in an excessive charge of several hundred dollars, the cost and time consumed in arbitration is practically prohibitive. The banks know this and that is why they slip arbitration clauses into their mind-numbing consumer contracts. And, that is why very few people arbitrate their banking disputes.
If mistreated customers can aggregate their claims and join together to sue in court for banker misconduct, they have a substantially greater chance of being made whole for their losses. Going after claims of several hundred dollars for each of thousands of cheated customers makes a joint recovery feasible. Court proceeding are not weighted in favor of an economically powerful party, like arbitration can be, and those cheated can have the benefit of trial by jury.
Arbitration is a good alternative for resolving commercial disputes where large amounts are at issue and the parties stand on relatively equal ground. It is not a reasonable alternative where a weaker party is unwittingly forced into it and only a small dollar amount is involved. The more powerful parties in such disputes know that many of the arbitrators are inclined in their favor in hopes of getting repeat business. The weak party with a single small claim will not provide repeat business.
The banks lobbied hard for their win against consumers on this issue and succeeded in making it difficult to discourage mistreatment of bank customers. The vote to repeal the CFPB rule was 50-50 in the Senate, with the vice president breaking the tie. The U.S. House of Representatives had already voted for repeal on July 25, hardly allowing the ink to dry on the July 10 rule. Both of our Congressmen voted for repeal. Too bad the bank customers did not have a lobbying arm working for them.
Jim Jones is a former Idaho attorney general and a former Idaho Supreme Court chief justice.