Class-action lawsuits critical to shedding light on bank fraud
© Getty Images

Just two weeks after consumers got crucial legal rights restored by a new rule from the Consumer Financial Protection Bureau (CFPB), the U.S. House of Representatives voted July 25 to strip consumers of the ability to join together and hold large financial institutions accountable in court. Now it is up to the Senate to decide whether to move forward with repeal. 

Though the CFPB rule is based on a congressional directive and five years of careful study, its opponents have rallied around a claim that the agency’s own findings show consumers on average receive greater relief in arbitration than class-action lawsuits. This claim is enormously misleading — and a shaky basis for congressional action on the rule.

ADVERTISEMENT
While the average consumer who wins a claim in arbitration recovers $5,389, consumers obtain relief regarding their claims in only 9 percent of disputes. On the other hand, when companies make claims or counterclaims against consumers, arbitrators grant them relief 93 percent of the time — meaning they order the consumer to pay. If you consider both sides of this equation, the average consumer ends up paying $7,725 to the bank or lender in arbitration.

 

But let’s consider the consumers who do win in arbitration. How do those numbers stack up against class-action lawsuits?

In an average year, at least 6.8 million consumers get cash relief in class actions — compared with just 16 consumers who receive cash relief from arbitration. Consumers in class actions recover at least $440 million, compared with a grand total of $86,216 from forced arbitration. Simply put, banning consumer class actions lets big banks and financial institutions keep hundreds of millions of dollars every year that would otherwise go back to the consumers they’ve hurt.

Wells Fargo is a prime example. After the bank was fined $185 million for opening as many as 3.5 million fraudulent accounts and credit cards, it was revealed that Wells Fargo had been blocking consumer class actions alleging this exact fraud for years. Forced arbitration not only allowed Wells Fargo to keep its fraud out of the headlines, but helped pad its bottom line.

In line with typical outcomes in arbitration discussed above, a recent report found that consumers paid out more to the bank in arbitration than the other way around between 2009 and 2016 — the prime years of its fraudulent account scandal.

The financial industry also claims that arbitration is cheaper and faster for consumers, but again, these claims do not hold up. Consumers pay an average cost of $161 to file a claim in forced arbitration, while they generally don’t pay anything to join a class action. Consumers typically wait 150 days for a decision in forced arbitration, while they have to wait approximately 215 days for a conclusion in most class actions.

In other words, arbitration is certainly not cheaper — especially since the average consumer ends up paying a bank or lender $7,725 in the end — and only a couple months faster. It is also important to note that the CFPB rule does not prohibit consumers from choosing arbitration; the rule merely ensures consumers are free to join a class-action lawsuit if they so choose.

Lastly, opponents of the rule argue that letting consumers join together in court will increase costs and decrease available credit, but this claim is contradicted by real-life experience. Consumers saw no price increases after Bank of America, JPMorgan Chase, Capital One and HSBC dropped their arbitration clauses as a result of court-approved settlements, and mortgage rates did not increase after Congress banned forced arbitration in the mortgage market. 

The evidence clearly shows that class actions return hundreds of millions to consumers, while forced arbitration only pays off for banks and lenders. It’s no wonder they are fighting so hard to keep it.

Heidi Shierholz is the policy director for the Economic Policy Institute, a think tank that seeks to include the needs of low- and middle-income workers in economic policy discussions. From 2014 to 2017, she served under the Obama administration as chief economist at the Department of Labor.


The views expressed by contributors are their own and not the views of The Hill.