By Claude Solnik
BridgeTower Media Newswires
LONG ISLAND, NY — Long before Wells Fargo came under Congressional scrutiny for fraudulently opening millions of accounts in consumers’ names, it faced lawsuits seeking class action status.
None of them went anywhere.
“Class actions were filed in 2014 and 2015 that would have stopped the company from what they were doing and gotten refunds,” said Paul Bland, executive director of Washington, D.C.-based consumer rights group Public Justice.
“They were thrown into individual arbitration.”
While hindsight may be 20/20, class action suits might have prevented more such abuses. Wells Fargo, however, is continuing to succeed in fending off suits seeking class action status.
The firm, which didn’t respond to a request for comment, points to little-noticed arbitration clauses that bar consumers from going to court over many contracts, even in cases of fraud.
Don’t hold your breath waiting for arbitration cases against the California-based bank, which typically involve one consumer at a time.
Each customer files an individual claim, which means a massive case like Wells Fargo’s would entail hundreds of thousands of smaller cases.
The Wells Fargo case, along with a stream of others, however, is leading to a stronger push to end a now common ban on class action suits in arbitration clauses.
The Consumer Financial Protection Bureau, a federal agency charged with representing consumers’ interests, has crafted rules that would remove the class action ban.
“These arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year,” CFPB Director Richard Cordray said in a written statement.
Christine Hines, legislative director at the National Association of Consumer Advocates in Washington, D.C., says forced arbitration contracts in fine print typically “deny consumers’ ability to go to court.”
“If a bank wants to force an individual into arbitration, they could,” Bland said of the new proposal. “But they are talking about (barring) provisions banning them from being part of a class action.”
While the agency may seek to open up contracts to class action suits, this could be the beginning of a new fight – not between banks and consumers – as a Republican administration takes office.
Forced arbitration, in theory, is more of a solution than a problem, especially in cases with numerous disputes.
Telecom and the financial service industry are among the biggest users of these clauses, complete with class action bans, which the U.S. Supreme Court upheld in 2011 in AT&T Mobility v. Concepcion.
The CFPB found 53 percent of credit card issuers include forced arbitration clauses, along with 92 percent of prepaid cards, 86 percent of private student loans and 99 percent of payday loans.
While only 9 percent of banks and credit unions use them, those that do command 44 percent or nearly half of insured deposits.
The Dodd-Frank Wall Street Reform and Consumer Protection Act bans arbitration clauses in mortgage contracts.
Although some argue arbitration benefits consumers indirectly, the CFPB found there is “no evidence of arbitration clauses leading to lower prices for consumers.”
More than 75 percent of consumers surveyed by the CFPB did not know whether they were subject to arbitration clauses with financial service providers.
“They’re too small,” Bland said of willingness to pursue many small, if systematic, problems through arbitration. “Nobody can make a living handling a case for a thousand dollars on an individual basis.”
Hines said arbitration in cases with numerous small claims essentially acts as a financial force field.
“That’s why they ban class actions,” Hines continued. “That is really the only way for most consumers to seek accountability and remedies.”
Some others argue arbitration is an ideal alternative means of conflict resolution, quicker and less clunky than the courts.
Alan Kaplinsky, a partner who leads the consumer financial services group at Philadelphia-based Ballard Spahr, sees arbitration as an efficient way to resolve disputes.
Rep. Randy Neugebauer (R-Texas), chair of the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit, and Rep. William Lacy Clay (D-Missouri) worry eliminating class action clauses could lead banks to force plaintiffs to go to court.
They in a letter to the CFPB director said the agency concluded “arbitration is generally faster, more convenient, and results in better outcomes for consumers than in-court litigation.”
They worry banks could eliminate arbitration, which “would leave many American consumers seeking to remedy small dollar disputes without a viable forum for resolution.”
While financial institutions say they could face a costly onslaught of court cases, Hines said individual arbitration only works as an option, not a mandate.
“Arbitration is fair when consumers choose it after the dispute arises,” Hines said. “Consumers should be able to choose arbitration or the court system.”
The American Arbitration Association, the nation’s biggest arbitration group, is a nonprofit with extensive rules regarding ethics, serving the “parties” and the public.
They say they strive for fair outcomes, examining every case and holding up high standards.
Still, companies award contracts to arbitration groups such as the American Arbitration Association.
“Companies want to be named in the banks’ arbitration clauses,” Bland said. “So arbitration companies set up systems designed to make the companies happy.”
The National Arbitration Forum, once among the biggest arbitration providers in the nation, ended consumer arbitration after facing charges of conflicts of interest.
Even if AAA works, Hines said the issue is that few people ever seek arbitration, since it often makes sense only by consolidating cases.
“They have a system set up for individuals who are so determined that they go through this process,” Hines said. “Some people might benefit. Very few people even use the process.”
Numbers paint a picture of arbitration as a relatively rare proceeding: The CFPB found consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits annually in markets it considered.
From 2010 and 2012, 1,847 arbitration disputes were filed, including at least one-fifth by companies. There were on average about eight cases annually involving debt disputes of $1,000 or less and 25 involving other claims of
$1,000 or less.
Of the more than 1,000 arbitration cases filed with the American Arbitration Association in 2010 and 2011, claims for compensation were upheld in 32 cases and debt forbearance in 46, according to the CFPB.
Federal consumer finance class actions over a five-year period led to $2.7 billion in cash, relief, expenses and fees – with roughly 18 percent going to attorneys’ fees and expenses, according to the CFPB.
At least $220 million per year was paid out to consumers from these settlements, while settlements regarding checking accounts over three years alone totaled $600 million for at least 19 million, according to the agency.
Many banks cashed checks in sequences based on amounts not time, leading to big overdraft charges, class action suits and settlements.
“They did it in a way that would ensure the greatest number of fees,” Hines said. “There were class actions against banks for that practice.”
Banks can charge small fees, adding up to millions of dollars, but hardly making arbitration worthwhile and often inoculating big banks from individual claims.
“Very few people notice a small fee,” Hines said. “One person will have a small fee on their account, but they apply that fee to a lot of people.”
The courts sometimes allow class action cases to proceed: The U.S. Supreme Court on April 4 ruled against Wells Fargo, which sought to require arbitration, in a case related to overdraft fees.
The bank was required to pay $203 million, although that may be because the case sprang out of contracts written years ago.
“There are rare circumstances where a judge may find that an arbitration is so unfair or unconscionable that they will invalidate the clause,” Hines said. “But in most circumstances, arbitration clauses and class action bans stand.”
Bland won a case against a debt consolidation company that argued consumers must seek arbitration in Oklahoma City, regardless of their residence.
Small businesses filed an antitrust case against American Express over rules regarding the use of other credit cards, but lost the right to file class action suits due to arbitration clauses.
More than 90 percent of arbitration agreements the CFPB studied prohibit class arbitration.
Between 2010 and 2012, only two class arbitrations were filed with the AAA, including one not pursued and the other not resolved as of the date of the CFPB study.
The debate over who benefits from arbitration is likely to continue, at least in part because it’s difficult to obtain results from individual cases.
“Arbitration is secret, so we don’t know exactly what’s happening,” Hines said.
The CFPB’s comment period on the new rule ended Aug. 22, letting the agency implement it before a Republican administration takes the helm. But that doesn’t mean it will stand for long.
Legislation known as the Congressional Review Act, enacted in 1996 as part of the Small Business Regulatory Enforcement Fairness Act, lets the House and Senate override federal agency rules by a majority vote.
“It’s only happened once,” Bland said of a 2000 Occupational Safety and Health Administration workplace rule. “Banks will ask Republicans in Congress to repeal the rule after the CFPB adopts it.”
President Barack Obama vetoed four such resolutions, but a Republican Congress and president likely could erase a rule with a simple majority.
Kaplinsky said Republicans would be able to “nullify” the provision “and not have to overcome the hurdle of a supermajority vote.”
As to Wells Fargo, it settled with regulators for $190 million. But if that sounds big, look at where the money went.
The CFPB, the Office of the Comptroller of the Currency and the Los Angeles prosecutor brought the case. Wells Fargo is paying $185 million to regulators and $5 million to consumers – who still can’t bring class action suits.
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