Douglas Whaley. Law professor, gay rights advocate, atheist, heart transplant recipient, actor, director, novelist, playwright, bridge player, husband, father, cat owner, storyteller. Much humor and, since the writer is a teacher, advice on many topics.
Banks love this. Now when the banks come up with new ways to
screw customers, the customers will remain screwed, with no legal redress of
any kind. Perhaps state attorneys
general will take action against the banks (ho, ho, ho, given that most states
have Republican administrations that are very bank-oriented) or perhaps state
and federal bank regulators will do so (another ho, ho, ho, since in a Trumpian
world Republicans are mostly in charge of those entities too).
Let me give you an example of the sort of evil banks do that
should upset you.
Say you have $1000 in your bank account and this month you
have made ten transactions out of the account: nine debit withdrawals of $30
each ($270 total) and then, on the last day of the month a check for $1000,
thus overdrawing the account, though the bank pays it anyway. The agreed-upon fee
for any overdraft of the account is $50 per transaction. You’d think this would
mean that the bank would hit you with one $50 overdraft fee, right? Ah, no.
Most banks engage in a practice of paying “high to low,” meaning that when
posting items against the balance they pay the largest one first (the big check) and then create supposed
overdrafts with all the little ones. Thus the bank charges you with $450 in
overdraft fees for nine transactions that supposedly overdrew the account. Banks love this sort of math because the
amount they make annually from overdraft fees is huge. Their overdraft profit in 2016 is now
estimated at $15 billion---that’s right, billion;
Outraged at this amount, you complain to the bank that both common sense and decency mandate you shouldn’t have to pay more than $50 for your
one mistake, but the bank points to a clause in the fine print of the agreement
you signed with them that allows them to pay overdrafts “high to low” in
computing overdraft fees. You say that
this is just wrong and the banks are taking unconscionable advantage of their
customers by this sneaky trick. You
threaten a class action lawsuit against the bank of behalf of all their customers injured by the
practice, but the bank chuckles and points out another clause in the contract
that forbids group lawsuits completely.
What? Oh, yes. There’s a clause stating that in the event of
any dispute with the bank the consumer will not sue in the courts (no judge, no
jury) but will instead resort to mandatory
arbitration. In such a procedure an
arbitrator, appointed from a panel of arbitrators and selected by the bank, hears the arguments of both parties (you and
the bank) and then decides the matter.
The loser typically pays the fees of the winner (though many banks waive
this requirement when consumers bring the arbitration). Hmm.
Well, it’s not worth hiring a lawyer and arbitrating over $450—it would
likely cost you much more than that in attorneys fees, which are not
recoverable in the arbitration even if you win.
Oh, but wait! You could bring a class action arbitration and that way
recover a huge amount, making it worthwhile.
“No, no, no,” the bank replies, pointing to the contract which clearly
forbids class action arbitration. You
can only arbitrate your particular dispute.
So what do you do? Well,
you can bitch, you can scream at the unfairness of it all, but in the end you will
pay the $450. The banks chuckle and don’t
mention that there are a lot of other unfair clauses in their contract with
you, all of them are protected by the mandatory arbitration clause that forbids
both going to a real court and also blocks class actions of any kind.
One other thing: studies show that if an arbitrator rules in
favor of consumers in a mandatory arbitration, he/she is unlikely to be selected
as an arbitrator in future disputes.
During the early days of the Obama administration, then
Harvard Professor Elizabeth Warren (an old friend of mine, by the by—see http://douglaswhaley.blogspot.com/2010/05/elena-kagan-and-me.html)
proposed the creation of what became the Consumer Financial Protection Bureau
(CFPB), which would have power to protect consumers from misbehavior by
financial institutions by passing regulations and bringing enforcement
actions. Since the creation of the CFPB
it has returned over $11.9 billion to 29+ million consumers and stopped many
outrageous practices. Most recently it
passed a rule that would forbid the use of mandatory arbitration clauses like
the one described above. This summer The New York Times printed an opinion
column written by the director of the CFPB, Richard Cordray, saying that the
bureau “found that group lawsuits get more money back to more people. In five years of group lawsuits, we tallied
an average of $220 million paid to 6.8 million consumers per year. Yet in arbitration cases we studied, on
average 16 people per year recovered less than $100,000 total.”
Bankers howled at the new CFPB rule forbidding mandatory
arbitration clauses. It would force the
banks to defend many lawsuits and spend lots of money, they argued. Lawyers will get rich, but the poor banks
will have to pass their losses on to their customers!
Congress to the rescue.
The new law overturns the CFPB rule and restores the status quo. Banks can still put whatever clauses they
like in bank contracts and if consumers sign them, well, ignorance has its
price, right? That might be fair if almost
all banks didn’t present uniformly ugly contracts to their customers,
contracts filled with unconscionable clause after unconscionable clause, all
phrased in language the consumer will likely neither read nor understand if noticed. Someone once said it’s like sticking your
head into the lion’s mouth and hoping it’s a friendly lion.
The argument that forbidding class actions only enriches
lawyers and will impoverish the banks is also wrong. As Cordray stated above, consumers get big
money from these suits. It’s true that
the lawyers also get paid, but the lawyers earned that pay. If the they lose the class action lawsuit
they get nothing and have wasted a lot of time and money. If banks want to avoid losing such suits or,
better yet, not have them filed at all, their remedy is simple: cut the crap
out the contracts and play fair with their customers. Customers only win lawsuits when the
banks have done something outrageous.
Stop doing outrageous things and the problem solves itself.
Ah, well, happily for the banks they needn’t change their
contracts at all. What Congress has done
is to encourage even more shenanigans hidden in fine print (Elizabeth Warren
calls it “mice print”). With mandatory
arbitration clauses still in force, the sky’s still the limit! By the way, every time you go on the internet
and buy something and click on an “I Agree” icon, the “Terms” you have just
agreed to will almost always have a mandatory arbitration clause hidden somewhere
Oh, one other thing!
The Republicans (from Trump down to almost every one of them in both
houses of Congress) are in favor of eliminating the Consumer Financial
Protection Bureau or at least drastically cutting back its abilities to do
Watch for it! That’s
the next step in this ugly saga.
On November 1, 2017, President Trump, as predicted, signed the bill overturning
the CFPB's rule forbidding mandatory arbitration, to the delight of the chiefs of the Consumer Bankers Association (CBA),
Independent Community Bankers of America (ICBA), National Association of
Federally-Insured Credit Unions and several other groups attending the signing.Richard Hunt, CBA president and CEO, said the
arbitration rule “was about protecting trial lawyers and their wallets,”
praising Trump and Congress for ensuring “consumers have the necessary tools to
receive relief without going through drawn-out class action proceedings.”]