Tuesday, Oct 23, 2018
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Congress sticks it to consumers


Banks and credit card companies were once able to prohibit their customers from banding together to file class-action lawsuits. Buried in the fine prints of customer agreements, these restrictions stipulated that all group claims had to be settled in an industry-run arbitration system, where a third party, usually a retired judge, handed down a binding ruling. 

The only other recourse for aggrieved customers was to file suits individually in small-claims court, which is expensive and time-consuming.

In 2014, Wells Fargo was found to have created millions of fraudulent savings and checking accounts on behalf of its customers and charged fees on these accounts. When some of the victims filed a class-action lawsuit, Wells Fargo asked a federal judge to dismiss the case, citing its customer agreements. It would have been dismissed had the director of the Consumer Financial Protection Bureau, Richard Cordray, not introduced a new rule that made it easier for customers to sue banks.

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That rule no longer exists, thanks to Republicans in Congress. First, the House voted to rescind it, and then a few days ago, the Senate voted 51-50, with Vice President Mike Pence breaking the tie to rescind the rule. 

It is hard to imagine how the rule’s reversal could be anything other than a gift to the financial industry and its lobbyists. What interest of the American people could possibly be served by immunizing financial institutions against the normal legal consequences of cheating people?

The congressmen and women who voted in favor of the measure presumably have an answer to that. The following is excerpted from Ohio Republican Sen. Rob Portman’s statement on his vote to reverse the rule: 

“This rule would, in most cases, have the practical effect of eliminating arbitration as a tool for dispute resolution entirely, even though many consumers prefer a low-cost arbitration option instead of going to court. In addition, the CFPB’s own study reveals that consumers who use the arbitration process frequently get better results than those who hire trial lawyers to file class-action lawsuits.”

This is the substance of Senator Portman’s argument against the rule, and not a single one of its claims is true. 

All the CFPB rule does is prevent mandatory pre-arbitration clauses from blocking consumers from coming together to pursue their legal rights in court. If it has the “practical effect of eliminating arbitration as a tool for dispute resolution,” then that is because consumers do not, in fact, “prefer a low-cost arbitration option.” But given that 20 percent of arbitration cases are filed by companies rather than consumers, it is hard to see how arbitration would be eliminated “entirely.”

Three out of four consumers don’t actually know about their arbitration “option” — though if they did, it is hard to see how they could prefer it. The CFPB study Senator Portman cites found that in the 1,060 arbritration cases filed in 2010 and 2011, “arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance.” Meanwhile, arbitrators “ordered consumers to pay $2.8 million to companies, predominantly for debts that were disputed.”

While consumers filed only 600 arbitration cases and 1,200 individual federal lawsuits per year on average in the markets the CFPB studied, the organization found that over 32 million consumers were eligible for relief through consumer finance class action settlements (even before the new rule). Cash payments from these settlements to class members alone were at least $1.1 billion. So it is misleading at best to assert that “consumers who use the arbitration process frequently get better results than those who hire trial lawyers to file class actions lawsuits.”

Yes, the 600 people who filed such cases may have won larger money hats than the 32 million who pursued class-action lawsuits, but if you are, say, someone robbed by Wells Fargo, you are much, much likelier to receive recompense from a class-action lawsuit than an arbitration. 

At a recent conference in Washington, the former White House chief strategist and two-time executive chairman of Breitbart, Steve Bannon, proclaimed: “President Trump and his whole candidacy from the very beginning ... was a repudiation of the elites, the repudiation of the foreign-policy establishment, a repudiation of the ‘Party of Davos.’”

Davos is an annual gathering in Switzerland of the who’s-who in banking, economics, and business. Rescinding Mr. Cordray’s rule was a victory for them, and as clear a repudiation of the President’s America’s first populism as can be imagined. The Senate put Davos first.

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