WASHINGTON, May 8, 2016 — This past Thursday, the Consumer Financial Protection Bureau (CFPB) proposed new rules that among other things would allow consumers to file class action lawsuits against financial companies. You mean they can’t do that now? Right. Until the new rule is finalized, consumers with disputes against financial companies are still required to sign arbitration agreements with those organizations that bar them from participating in class action lawsuits.
After an overhaul of the Dodd-Frank law in 2010 that required the CFPB to study the issue, and more recently with the issuance of a 377-page report, what has been obvious and well understood by anyone examining the issue of forced arbitration is now being addressed. Finally, it appears this one-sided, big business-favoring economic advantage is going to come to an end.
The new rule would apply to bank checking and deposit accounts, credit cards, prepaid cards, money-transfer services, certain auto and auto title loans, payday and installment loans and student loans.
One typical example of the current legal unfairness in this area was reported by the Oregonian. In August 2013, Stephanie Banks “was battling lung cancer,” according to their news report, and she “also was struggling with her finances,” so “she turned to Rapid Cash for help.” Banks “took out a $300 loan from the payday and title loan lending company” at an annual percentage rate of 153 percent, “the most allowed under Oregon law.”
Banks soon “became too weak to work her $15-an-hour job as a bookkeeper at the Salvation Army and she declared bankruptcy,” thinking the $300 loan “was history until she got a letter claiming that she owed $40,000.” The Oregonian added that “because of a clause in the loan contract Banks signed,” she and her attorney “couldn’t go to court to dispute the $40,000 amount – or argue that Banks shouldn’t owe any money to Rapid Cash or collection agency Ad Astra.”
This is precisely the kind of situation the CFPB’s new rule is meant to address. Its latest proposed rule is not its first, nor is it the only action meant to stop these unfair clauses from hurting consumers. The CFPB already prohibits mandatory arbitration in most mortgage and home equity disputes. Transactions targeting the military also cannot have such clauses if they involve payday loans or vehicle-title loans.
In March, the Department of Education came out with proposals to ban mandatory arbitration clauses by schools that receive federal funding. The Centers for Medicare and Medicaid Services is also considering restricting the use of these mandatory clauses in long-term care facility contracts.
Whether consumers know it or not — and the problem is that most do not — when a product or service is purchased either at a store or on the Internet, such as using a money transfer service like Paypal, consumers are agreeing to resolve all disputes through binding arbitration.
Corporations conduct extensive market research to design the arbitration provisions in their contracts in a way that makes them easy to miss or ignore, with headers such as there’s nothing you need to do. It is almost impossible to see these clauses before applying for a credit card or purchasing a product, which means just by “receiving” the product or service, one is “agreeing” to sign away all legal rights and protections. To make matters worse, consumers do not gain anything from “agreeing” to waive their rights. Consumers do not get better rates, faster service or enjoy any other form of passed-on savings.
The contracts you sign require you to agree to arbitration. You are not allowed to file a lawsuit, nor can you participate in a class action lawsuit, because that type of litigation is also prohibited in the contract.
If all was fair in the world of finance, arbitration as a solution to a dispute might be fine. In the case of credit cards, the problem is that the agreements consumers sign to obtain these cards are so stacked against them that saying the process is fair is more ridiculous than asserting the existence of the Easter Bunny. The truth is, the business wins in arbitration proceedings virtually all the time.
How is the outcome stacked? The first answer is that arbitration groups such as the American Arbitration Association (AAA) own millions of dollars in the shares of companies that are also their clients. Corporations also pay millions directly in “memberships.” Conflict of interest? Exactly.
Arbitration for American consumers, simply, is not fair, because:
- The business chooses the location for the hearing. This can be an immediate obstacle for the consumer. Paypal requires consumers to arbitrate in California no matter where they live or what resources they have to pay for travel.
- The business picks the arbitrator. Sometimes, the business allows the consumer to pick an arbitrator from a list the business provides. But the chosen arbitrator is still clearly financially beholden to the business for supplying that business. Ruling against the business would likely result in an end to the repeat business gravy train.
- The business can change the rules mid-stream if it chooses, such as by cancelling the agreement with the consumer or allowing or disallowing certain types of evidence. This is akin to moving the goalposts closer in a football game when you are on offense, and moving them further when you are on defense.
- Consumers, who are at an extreme financial disadvantage compared to the business, must pay all their own costs, and they do not get to recoup these expenses even if they win. This often forces abandoning the thought of fighting.
In 2012, more than 500 Wall Street brokers that mishandled investors’ money had these records erased by arbitrators, meaning future investors would have no knowledge of their prior misconduct. The new rule, according to the agency “will also require companies to report arbitration results to the agency, making it easier for regulators and consumer groups to spot bias and other trends that would be harmful to consumers.”
A 90-day public comment period will take place, after which the final rule will be drafted. The Office of Management and Budget will review it, and by next year, the favoritism currently benefiting financial companies will be history. The new rule is most certainly going to take affect because it does not require congressional approval.
But, as would be expected, the financial industry is fighting hard to prevent the rule from taking effect. They claim arbitration is faster and less expensive. Sure. For them.
The proposed rule will finally level the playing field between consumers and financial companies. No more mandatory arbitration clauses will be allowed and consumers can collectively sue such companies, meaning class action lawsuits would be allowed, whereas currently they are not). The rule would still prevent consumers from filing individual lawsuits, however.
Step by step, inch by inch, injustice is falling.
Paul A. Samakow is an attorney licensed in Maryland and Virginia, and has been practicing since 1980. He represents injury victims and routinely battles insurance companies and big businesses that will not accept full responsibility for the harms and losses they cause. He can be reached at any time by calling 1-866-SAMAKOW (1-866-726-2569), via email, or through his website.
His book “The 8 Critical Things Your Auto Accident Attorney Won’t Tell You” can be instantly downloaded, for free, on his website: http://www.samakowlaw.com/book.