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Banks, consumer groups lock horns over arbitration

Frosh among AGs who back proposed curbs on banks' use of mandatory arbitration

Maryland Attorney General Brian Frosh. (File)

Maryland Attorney General Brian Frosh. (File)

Consumer rights advocates, joined by Maryland’s attorney general, and the banking industry are going toe to toe over a federal proposal to block banks from using mandatory arbitration to resolve disputes with their customers.

The 90-day comment period on a Consumer Financial Protection Bureau proposal to restore customers’ right to file class-action lawsuits against their banks ended on Monday. It drew thousands of statements from people on both sides of the issue.

The proposal by the Consumer Financial Protection Bureau is considered one of the boldest in the regulatory agency’s short history.

If enacted by the agency, the measure would stop financial institutions from using agreements that include mandatory arbitration and which prevent customers from filing class-actions suits related to their disputes. Such provisions typically force customer-bank disagreements out of courts and into arbitration, the regulation said.

The proposal also would require the arbitration provider to submit records to the CFPB.

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” said CFPB Director Richard Cordray when the proposal was introduced earlier this year. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them.”

The proposal would apply to new bank accounts, credit cards and certain consumer loans. Customers who wish to be covered by the pending proposal would have to pay off their loans and open new accounts after the 180-day period beginning on the regulation’s effective date to be covered.

Of the thousands of individuals and organizations that submitted comment letter over the past three months, critics of the measure called it a boon to trial attorneys while voices from the legal community argued it would give power back to the consumer.

“These clauses are ubiquitous, are mandated by financial services companies in situations where they have leverage and consumers have none, and are presented in a manner that often prevents consumers from understanding the adverse impacts on their rights,” wrote about 20 attorneys general, including Maryland’s Brian E. Frosh, in a comment letter supporting the proposal dated Aug. 11. The letter was submitted to the bureau by Massachusetts Attorney General Maura Healey.

But the American Bankers Association, which planned to submit a comment letter to the bureau before the end of the comment period on Monday, said in a statement the proposal will hurt consumers, arguing that banks resolve disputes “quickly and amicably.”

“Consumers will get less and pay more if the CFPB’s proposal to sideline arbitration and promote class actions is ultimately adopted (…) When needed, arbitration is an efficient, fair and low-cost method of resolving disputes in a fraction of the time — and at a fraction of the cost — of expensive litigation. This helps keep costs down for all consumers,” said ABA president and CEO Rob Nichols. “The CFPB has chosen to put the future of arbitration at risk by requiring companies to face a flood of attorney-driven class action suits from which consumers receive virtually nothing.”

Congress has taken some action in the past to limit the scope of arbitration agreements. The 2010 Dodd-Frank Act stopped the use of arbitration agreements for mortgage loans and certain whistleblower actions.

An investigation by The New York Times in 2015 found that when it comes to dispute over small amounts, usually bank fees or overcharges, consumers rarely go to arbitration. From 2010 to 2014, 505 consumers went to arbitration over an issue of $2,500 or less from among the tens of millions of people who are bound by arbitration clauses, the Times investigation found.

The letter from Frosh and other attorneys general sees the CFPB’s proposal as a way to make private arbitration proceedings public to set precedent and discourage other businesses “from committing similar violations,” particularly when it comes to smaller late fees and overdraft fees.

In 2010, Wells Fargo had to pay a $203 million penalty in a class-action suit after a Ninth Circuit panel ruled that the bank misrepresented the way it charged overdraft fees.

Since 2009, banks have had to pay more than $1 billion to settle class-action lawsuits related to overdraft fee charges, the New York Times reported, which has led banks involved in those suits to adopt mandatory arbitration clauses. Wells Fargo tightened its arbitration clause after the 2010 suit.