Nestled deep in the text of the lengthy contracts for most credit cards and bank accounts are little clauses that not only prohibit harmed customers from suing their bank or card issuer, but also prevents them from banding together with similarly injured consumers to argue their dispute as a group. In October, the Consumer Financial Protection Bureau announced it would consider limits on these clauses, but now the banking industry is trying to use its leverage with D.C. lawmakers to shut down that process.
The clauses in question are generally referred to as “pre-dispute arbitration” or “mandatory binding arbitration” clauses. They are used by companies to prevent customers from taking them to court to resolve legal disputes. Rather than go to court, where a judge or jury would hear the facts and reach a decision on liability and damages, the matter is decided by an independent arbitrator.
Critics of the process note that arbitration often limits damages and supporters of the process have even admitted that it can be biased in businesses’ favor.
In many cases, these clauses also explicitly bar customers from joining in class actions. Because of the limited possible rewards of a single arbitration dispute — and because each wronged individual would need to go through the process on their own — companies can harm large numbers of customers, knowing they will only face arbitration actions from a small number of those affected.
Such class-action bans have been repeatedly upheld by the Supreme Court in recent years. In 2011, the nation’s highest court sided with AT&T in its attempt to use arbitration clauses to shut down a class action complaint.
Then in 2013, in the matter of American Express v. Italian Colors Restaurant, a group of AmEx-accepting merchants claimed that the only way they could afford to mount an antitrust lawsuit against the credit card giant was to pool their resources in a class action. On an individual basis, the costs would be too high and the rewards too little to justify the expense. But a narrow SCOTUS majority held there was no “effective vindication” exemption to these arbitration agreements, even if they allowed companies to break the law.
The 2010 Dodd-Frank financial reform law directed the CFPB to research the arbitration issue. And earlier this year, the Bureau published its first report on the use of pre-dispute arbitration on financial products. Its results raised questions about the supposed goal of these clauses.
Supporters of arbitration have positioned the process as pro-consumer and more expeditious and affordable than litigation. But the CFPB noted that financial services companies rarely try to compel individual consumer complaints into arbitration, only turning to these clauses when consumers try to join together. The report found that when credit card companies faced class action claims, they turned to arbitration 65% of the time in order to prevent the joined complaints from being heard together.
As a result, the CFPB is primarily interested in barring the use of arbitration clauses to prohibit class actions. And that’s what has the banking industry trying to pull some strings on Capitol Hill.
On page 113 of the current version of the Financial Services and General Government Appropriations Act [PDF], you’ll find Sec. 632 — also referred to as the Womack-Graves Amendment for Reps. Steve Womack (AR) and Tom Graves (GA).
This amendment would prohibit the CFPB from using any of its funding to restrict the use of forced arbitration clauses until after the Bureau completes an even more in-depth study on the issue than the one it undertook for its previous report.
In letters sent yesterday to lawmakers, a coalition of industry groups — including the American Bankers Association, Consumer Bankers Association, Financial Services Roundtable, and the U.S. Chamber of Commerce — argue that the CFPB’s report is “opaque, incomplete, and unfair,” and that the Bureau did not seek proper feedback from the public or industry before releasing it.
However, others point out that the CFPB worked on the study for three years — from 2012 to 2015 — and that the Bureau solicited public comment on the matter. It even held two different public hearings, in addition to meeting with many of the same stakeholders who are now attempting to stall the rulemaking process.
These supporters of the Bureau’s actions also contend that the “Additional Topics to be Studied” — including how consumers would be able to resolve disputes cheaply and efficiently without arbitration — detailed in the amendment have already been included in the CFPB report.
And it’s not as if there isn’t other available research on this issue that has come to a similar conclusion. A 2008 study on arbitration by researchers at Cornell and New York University found that “the frequent use of arbitration clauses… may be an effort to preclude aggregate consumer action rather than, as often claimed, an effort to promote fair and efficient dispute resolution.”
In its letters to members of the Senate and House Appropriations Committees, the bankers attempt to downplay the importance of class actions.
“The Bureau’s own study found that class actions provide little benefit to consumers (an average of $32), but lawyers reap an average fee of $1 million for each settled case,” reads the letter. “It is no wonder that plaintiffs’ lawyers and their allies have made regulating arbitration their top priority.”
But that argument fails to take into account two things. First, that those people who got the $32 payout would likely have received nothing if it weren’t for a class action, because class actions don’t require that every single affected customer file a separate complaint. They only require that a small number of plaintiffs can show that a larger, definable class of people were harmed in a similar manner.
Second, it assumes that the point of a class action is purely monetary and not to hold companies accountable. By this logic, companies should be allowed to do whatever they want so long as it avoids a big courtroom payday.
“Wall Street is seeking a get-out-of-jail free card that keeps lawbreakers out of court and prevents them from being held accountable for widespread wrongdoing,” says Lauren Saunders, associate director of the National Consumer Law Center. “If a company has harmed millions of consumers, forced arbitration clauses can force the victims to file millions of individual claims instead of letting a court order the company to repay everyone it injured.”
Christine Hines, legislative director of the National Association of Consumer Advocates, says that passing the funding bill with this rider “would take the country a step back, because it would not only waste taxpayer funds, it would deny legal remedies for harmed consumers, shield corporations from accountability for their misconduct, and ultimately encourage the re-emergence of the wild Wall Street practices that led up to the 2008 financial crisis.”
Editor's Note: This article originally appeared on Consumerist.