Forget the Sixth Amendment, which guarantees the “right to a speedy and public trial” in criminal matters. And who needs that ancient Seventh Amendment and its fancy “right of trial by jury.” The U.S. Treasury Department has concluded that American consumers can not be trusted to thoughtfully exercise these Constitutional rights — at least not when doing so might be an annoyance to the financial services sector.
This morning, the Treasury released a report [PDF] criticizing the Consumer Financial Protection Bureau’s recently finalized rule that limits the use of forced arbitration in consumer financial services.
What Is Forced Arbitration?
Those who read Consumerist frequently are probably familiar with arbitration, but for those who aren’t, here’s a crash course: Go look at the contract/user agreement/terms of service for just about any company you do business with: your bank, credit card company, wireless provider, cable/broadband service, software, e-commerce, electronics, online services… There’s a very good chance that buried deep in that contract is a clause that does two things, neither of which are to your advantage.
First, it blocks you from suing that company in court. Instead, you must go through private — often confidential — arbitration. Second, these clauses almost always include a condition barring you from joining your complaint together with other customers who were wronged in the same way, even through arbitration.
So Company X can illegally overcharge 10 million customers, but rather than face a single class-action lawsuit representing all 10 million victims, Company X says it’s more convenient to face 10 million individual arbitration hearings.
Except they know that this will never happen. Very few Americans know about or understand the basics of arbitration, so the odds of even a small percentage of those 10 million customers hiring an attorney and arbitrating a dispute is going to be small. Thus, rather than facing a single class-action representing 10 million customers, Company X might face 10 or 15 arbitration claims. And even though each of those few customers might go into arbitration with exactly the same evidence, it’s entirely possible that they could each result in a different decision by the arbitrator. What’s more, it’s likely that no one will know as many arbitration hearings include a gag order preventing the customer from saying anything publicly.
If the individual harm done to each customer is small, Company X might also face zero arbitration cases. After all, who is going to hire a lawyer and go through the arbitration process for a $1 overcharge? As federal appeals court Judge Richard Posner noted in Carnegie v. Household Int’l, “only a lunatic or a fanatic sues for $30.”
Maybe Company X gives refunds — possibly even a few dollars extra as a “sorry about that” — to the handful of customers that notice and take the time to complain to customer service, but Company X has not been held accountable and made to answer for its apparent crime.
Say 100,000 Company X customers realize the overcharge, spend the half an hour on the phone with customer service escalating their complaint, and finally get a refund and another $10 in credit for their troubles (so $11 each). That means Company X has only had to pay out $1.1 million of the $10 million it illegally collected. It’s also avoided the stigma and cost of a criminal or civil defense and possibly avoided having to explain to state or federal prosecutors what happened.
This is why critics of forced arbitration have referred to these clauses as “get out of jail free cards” for big businesses.
The New Rule
The 2010 Dodd-Frank financial reforms not only established the Consumer Financial Protection Bureau, but also directed the CFPB to study forced arbitration to determine if it was being abused and needed to be regulated to guarantee that financial institutions were not allowing themselves to sidestep the legal system.
After years of research, the CFPB finally finalized its arbitration rule in July 2017.
That rule does not outlaw forced arbitration. Rather, it prevents certain financial companies — only those that are directly regulated by the CFPB — from using forced arbitration to block class actions.
In the CFPB’s view, this means that banks, credit card companies, and other affected companies could still seek to have legal disputes resolved through arbitration, but they would not be able to minimize their liability for large-scale crimes and mismanagement.
The Treasury Disagrees
Yet, to the Trump administration — via the new Treasury Department report — making banks accountable for their bad behavior is unacceptable.
Claiming that the financial sector will face “extraordinary costs,” the Treasury Department says that restoring consumers’ rights to hold banks’ accountable is not worth the additional 600 class-action lawsuits that might be filed each year, resulting in $100 million a year in additional legal defense fees, and $340 million per year in settlements.
That sounds like a lot of money, but when you consider that the ten largest banks in the U.S. have nearly $12 trillion in assets, and that these additional hundreds of class-action lawsuits would be spread out across thousands of affected financial services companies, this is not a rule that banks can’t afford to comply with.
Or — and this is just a crazy suggestion — maybe the bad banks that would get sued could stop doing awful things like, opening millions of fake accounts in customers’ names to juke sales figures, and then telling those customers they can’t sue.
We’ve Heard This Song Before…
The Treasury steals another talking point from the banking lobby when it makes the argument that class actions shouldn’t be allowed because plaintiffs rarely get much money while class-action attorneys get rich (almost as rich as bankers!).
“[P]laintiffs who do claim funds from class action settlements receive, on average, $32.35 per person,” reads the Treasury report, which plays up the fact that plaintiffs’ lawyers will make an additional $66 million a year if there is no forced arbitration.
Again, that seems like a ridiculous amount of money, but the Treasury glosses over that this is the payout for all class-action attorneys across potentially hundreds of lawsuits.
Meanwhile, disgraced Wells Fargo CEO John Stumpf, who admitted before Congress that he’d heard about employees opening up fake accounts at least three years before settling with the CFPB over such allegations (and who may have actually been warned about the problem nearly a decade earlier) initially walked away from his position in the midst of the scandal with a compensation package worth $130 million.
The bank’s board, facing heavy backlash from lawmakers and the public, eventually clawed back about half of that, but a man who allegedly turned his head while thousands of his employees were defrauding millions of customers still ended up with a golden parachute that was worth all of the additional compensation that all class-action plaintiffs attorneys might see.
As for the “small payout to plaintiffs” argument, it glosses over the fact — as described above — that some companies use arbitration clauses to avoid accountability for transgressions that are small on an individual basis but substantial when seen as a whole.
But again, maybe the way for the banks to make sure that plaintiffs’ attorneys don’t make all those extra millions is to not screw over their customers?
“The Treasury report willfully ignores the fact that class actions returned $2.2 billion to consumers between 2008 through 2012 — after deducting attorneys’ fees and court costs,” says Lisa Donner, executive director, Americans for Financial Reform. “That hardly seems like ‘no relief.’
Donner also points to a study from the Economic Policy Institute, which found that the average consumer who goes to arbitration ends up having to pay their bank or lender $7,725 in fees.
“It is clear that consumers derive benefits from class-action lawsuits and lose when forced into secret arbitration,” she says.
Just The Latest Attack On Your Rights
Bank-backed members of Congress are currently attempting to undo the rule using the Congressional Review Act, a previously little-known federal law that allows Congress to stop any new federal regulations within the first few months after they have been finalized. The House CRA resolution passed on a nearly party-line vote in July, almost immediately after the arbitration rule became official, but it has since stalled in the Senate where it reportedly does not have enough support from moderate Republicans to reach the 50 votes it needs. However, the CRA repeal window for the arbitration rule doesn’t close until early November, so it’s possible the Senate could pounce on it at the last minute.
With legislative repeal of the rule in doubt, the U.S. Chamber of Commerce — which is the nation’s biggest lobbying organization, even though some people mistakenly think it’s a governmental agency — recently sued the CFPB in federal court, seeking to halt the rule.
The Treasury Department report, which lists no author and does not appear to have been written at the request of any Congressional committee or even the White House, seems to be a de facto legal brief in support of the Chamber of Commerce lawsuit.
Or perhaps this is a personal crusade for Treasury Secretary Steve Mnuchin, a former Goldman Sachs banker, who took over collapsed mortgage lender IndyMac in 2009 at the bottom of the Great Recession. As CEO of IndyMac, which changed its name to OneWest under Mnuchin’s leadership, the lender was heavily criticized for overly aggressive foreclosure actions. Between the time Mnuchin’s investor group acquired the IndyMac portfolio and when they sold it in 2015, the company was a defendant in more than 1,500 civil lawsuits filed in federal court.