If you were surprised by a $35 late fee by your credit card company, would you think about suing? Probably not. Yet you’d feel ripped off, and you might even call us for help.
But did you know that you probably can’t sue your credit card company, even if you wanted to? That may be about to change.
When you sign up for a bank account or a credit card, what you might not know is that somewhere buried in the fine print of your account agreement is something called a mandatory arbitration clause.
These three words might not seem all that important, but they effectively strip you of your right to sue your bank or credit card issuer alongside other consumers in class action litigation. And any time your rights are taken away, you should pay close attention.
Now, the Consumer Financial Protection Bureau (CFPB), the government agency responsible for protecting consumer interests in the financial and banking sector, wants to balance the scales of justice with a proposed rule that would prohibit banks and credit card companies from writing mandatory arbitration clauses.
If this proposed rule were to become official, financial institutions would no longer be able to contractually prevent consumers from bringing suit as a class, or from joining in a class action lawsuit filed by someone else.
How we got here
For years, financial institutions and other corporations have benefited from mandatory arbitration clauses, which stopped consumers from taking their bank to court when things went wrong.
These clauses typically allow lawsuits to proceed individually — and not as a class — where the cost of litigation far exceeds the value of the claim. Mandatory arbitration clauses have been challenged in the last four decades but have gotten the support of the U.S. Supreme Court, making binding arbitration a powerful tool for companies to tip the scales of justice in their favor.
The CFPB conducted a study released in 2015 that showed very few consumers ever bring suit — or consider bringing suit — against their financial institution, either in an individual lawsuit or in arbitration.
The reason? Because it costs money to seek civil justice. As conservative 7th Circuit Judge Richard Posner once remarked, “Only a lunatic or a fanatic sues for $30,” Carnegie v. Household Int’l, Inc., 376 F.3d 656 (7th Cir. 2004).
Class action lawsuits return hundreds of millions of dollars to consumers and serve as a deterrent to companies for legally questionable practices. Class action lawsuits are in effect the only way consumers can reasonably seek civil justice if they are wronged by a company.
Writing the rules
When financial institutions draft adhesion contracts that include mandatory arbitration clauses, consumers agree to only settle disputes in expensive individual lawsuits, or through arbitration. The terms of the arbitration clauses further limit consumer rights by going so far as to dictate which arbitration company will be hired.
When the company chooses the arbitrator, there is an inherent bias in favor of the company, known as the “repeat-player effect.” This bias gives the company an advantage in the process, and removes the level playing field. The results of arbitration are also closed, so no other consumers or would-be plaintiffs can know how certain issues — or even what issues — are being handled.
The biggest legal challenge to bad consumer banking habits came in the last decade, when consumers fought excessive bank overdraft fees and won.
Through class action litigation, it was revealed that some of the nation’s biggest banks were making record profits by reorganizing account data so that bank customers’ largest transactions processed before smaller ones, deliberately creating a scenario where the chance of overdrawing the account was maximized, generating more fees. Instead of processing transactions chronologically, the largest debit would occur first — by design — so that if the account went into the red, all subsequent debits would trigger additional fees.
The overdraft fee litigation resulted in hundreds of millions of dollars being returned to class members — consumers who were the least able to pay hefty fees. Of the banks that returned funds to consumers and those that did not, the only difference between them was one thing — mandatory arbitration clauses.
Banks that required forced arbitration ended up paying nothing. And when there are no consequences for bad behavior, there’s not much reason to change. The arbitration clauses acted as “Get out of jail free” cards. But instead of Monopoly money, it was your money.
And if you have never overdrawn your bank account, you might think that you didn’t benefit from the overdraft fee litigation. But in addition to returning funds to millions of customers, the banks also agreed to change their conduct.
For example, bank customers can now opt out of overdraft protection. That means if you don’t have the funds in your account to cover a transaction, your card will simply be declined, but you will not incur expensive bank fees. The new policies gave consumers a choice — and choice is a powerful thing.
Changing the system
Mandatory arbitration clauses are not unique to the financial sector. Some of our favorite businesses, like rental car companies, use them to deter legal challenges. Corporations hate class action lawsuits, because they empower consumers to band together to collectively bear the expense and risk of litigation.
So long as mandatory arbitration clauses are allowed, corporations can continue to sidestep the legal system, avoid accountability and defraud customers with self-granted immunity.
As consumer advocates, we support the Consumer Financial Protection Bureau’s proposed rule as a first step toward creating a climate of honesty, fairness and respect between businesses and consumers. By allowing consumers access to the legal system, the checks and balances are restored to deter companies from treating their customers in a way that would make a customer want to bring suit in the first place.
The CFPB’s proposal makes this a great day for American consumers. It’s also a great day for businesses. There is a glimmer of hope that companies which want to play by the rules will finally be on a level playing field with their competition.
And from that, we will all benefit.