Last week, the Consumer Financial Protection Bureau (CFPB) stood up to big banks and said “enough.” The Bureau, which has become a tenacious champion for consumers in Washington, issued a rule that prohibits banks, payday lenders and other financial institutions from using fine print arbitration clauses to lock their customers out of class action lawsuits.
Banking lobbyists went crazy after the CFPB announced its rule, and have been working overtime to pressure their allies in Congress to kill the rule before it ever has a chance to help a single person. One of their go-to arguments has been that customers are just as likely to get relief through arbitration as they are by going to court.
That’s just wrong, and a class action settlement that was just approved by a federal judge in California shows why.
Last week, a court approved a settlement between U.S. Bank and many of its customers that provides millions of dollars in refunds to consumers (143 consumers received more than $10,000), as well as eliminating more than $25 million in illegal debts (and getting those debts removed from customers’ credit reports). The case resolved charges that U.S. Bank had not provided full disclosures required by California law to car owners who had their vehicles repossessed.
These repossession disclosure laws are extremely important. Without full disclosures, it would be easy for a bank to jigger how it sells or disposes of a car after it repossesses it, and the bank could easily cheat consumers out of the equity value of their cars. As a result, California, like a lot of states, has rules requiring complete and accurate disclosures of specified information, and says that a bank can’t pursue its customers for additional money after it repossesses and sells their cars unless it has made those disclosures. In this case, U.S. Bank violated California law, but illegally charged consumers many millions of dollars for purported deficiency debts anyway.
When one car owner found out he was being pursued for a debt he thought he did not owe, he became the plaintiff in a class action lawsuit.
But here’s the part that shows why the new CFPB rule is necessary: not everyone swindled by the bank was able to get justice in the court. That’s because roughly 1/3 of the customers impacted by US Bank’s illegal actions had signed an arbitration clause when they entered into a conditional sale contract with their car dealer. The arbitration clause included a provision that prohibits class actions. The other 2/3 had not. The court excluded those customers who were stuck with an arbitration clause from participating in the case. Despite the illegal conduct, those consumers were left with nothing: No car, millions of dollars in illegal debts still on the books and on their credit reports and no refund of illegally demanded payments.
The contrast couldn’t be starker. Customers whose car purchase contracts did not include an arbitration clause received substantial payments, averaging nearly double what U.S. Bank had collected illegally from them. They had their debt erased and their credit report cleared. Customers whose contracts did include an arbitration clause got nothing.
So, in short, U.S. Bank saved itself a ton of money – and immunized itself from liability for illegal activity – when it forced some customers into accepting arbitration as their only recourse for justice.
Now you know why banks love arbitration. And why they are fighting so fiercely to kill the CFPB’s common sense new rule.
It’s also easy to understand why banking lobbyists are working overtime on Capitol Hill these days to try and deliver a death knell to the rule. One of the most slavishly devoted lovers of big banks in Congress, Rep. Jeb Hensarling (R-TX, pictured), Chair of the House Financial Services Committee, is pushing for a Congressional Review Act (CRA) vote about the rule, which allows Congress to overturn an agency’s action within 60 legislative days of its publication. This is not a bi-partisan push: no Democrats are expected to carry water for the banks on this issue.
Many Republicans in Congress may decide to turn down the industry’s demands here. Polls show that both Republican and Democratic voters overwhelmingly hate it when banks use fine print contracts to take away customers’ right to go to court. But if the bank-loving Republicans in Congress succeed, the U.S. Bank case shows that this will be terrible news for consumers, and a huge give away to banks and payday lenders.
If you believe in corporate accountability, common sense consumer protections and every American’s right to their day in court, this is a critical moment: Pick up the phone, call the Capitol switchboard at (202) 224-3121 and tell your Representative and Senators: Keep the CFPB’s arbitration rule. Vote ‘No’ on any CRA motion to roll it back.
Photo by Gage Skidmore, via Flickr
