Last month’s Consumer Financial Protection Bureau (CFPB) study combined with the Wells Fargo account opening fraud and Friday’s public letter from six senators will cause many banks to rethink arbitration clauses in their account documents. While banks argued for decades that arbitration clauses are a common commercial practice in the U.S. and benefit customers to settle conflict quickly and inexpensively than going to court, the CFPB is about to argue that it helps hide wrongdoing while denying fundamental legal rights. This post explores both sides of the argument and suggests a solution on how to get ahead of this growing regulatory focus.
Banks including Wells Fargo, Chase, Citibank, PNC, SunTrust and many others have used arbitration clauses to settle legal disputes by using a private party arbitration hearing that is binding and often confidential. Some account opening documents go even further and stipulate there will not even be a hearing but an investigation process done via email or phone before an arbitration judge determines fault.
Further, arbitration action is not only binding, they are final and final even in the case where a misassumption or mistake was made. In some instances, the CFPB found that the arbitrator didn’t even provide a reason for the decision just a ruling. Finally, and awarded damages are often limited by arbitration agreement thereby limiting expensive challenges or even basic legal representation.
The Six Senator Letter
Last Friday, senators Elizabeth Warren (D, MA), Patrick Leahy (D, VT), Al Franken (D, MN), Sherrod Brown (D, OH), Richard Blumenthal (D, CT) and Dick Durbin (D, IL) banded together to say that bank customers are often given no choice and forced into mandated arbitration that "helps hide fraudulent schemes such as the sham accounts at Wells Fargo from the justice system, from the news media, and from the public eye." They go on to state, “These clauses eliminate consumers’ ability to bring a claim in open court or to band together in a class action before any dispute has arisen. Forced arbitration clauses deny access to the courts even when consumers are seeking to enforce their rights under fundamental state and federal laws.” The real irony here is that since bank customers agreed to arbitration when they opened real accounts, Wells is arguing that customers cannot take legal action regarding the fraudulent accounts and are prohibited from forming a class for mass legal recourse.
A recent study by the CFPB (HERE) found that most Americans have been forced into mandated arbitration by their bank for at least one account; few could explain what that means. This has put many banks in the CFPB cross-hairs which quickly bring up a study (HERE) done by Public Citizen, a non-profit, that found bank customers that arbitrated credit card disputes lost the proceedings 94% of the time.
Further, the CFPB finds that the most problematic issue is that a material number of banks have complete bans on class action activity. As the press is doing with Wells Fargo, the public is calling foul that a bank could charge an entire class a made up fee and each customer must deal with arbitration on their own, an activity that the CFPB points out that very few consumers do.
Given that it is likely that mandated arbitration will either be legislated against, regulated or both, banks would serve themselves well to get out ahead of this trend and save heartache by looking at this issue now. Community banks should review their current use of arbitration language and discuss the risk internally. Make sure your arbitration language is at least what you intended. Is there a need, given your bank size, that there should be a no class action charge? Are you giving your customers to at least access small claims court or is that also prohibited? The first step is to make sure your arbitration language accurately reflects not only your bank’s intent but its products and customer base.
Even if nothing changes on the legislative or regulation side, where arbitration might limit legal risk, reputational risk is now acerbated so the risk argument for forced arbitration could be negligible. Giving bank customers the option for arbitration is more consumer-friendly and likely reduces your future regulatory risk. As such, this might be the right time to take another look at this issue, get clear on where you stand and then make any changes now before your position gets taken up by the CFPB or local press.
Submitted by Chris Nichols on September 26, 2016