Consumer Financial Services Arbitration: Another Perspective

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Much has been said and written about Congress’ rejection of the CFPB proposal to ban class action waivers in arbitration agreements between consumers and financial services companies. One of the most frequent statements I have heard from some politicians in the media is that Congress has voted to ban class actions against banks. As is true with many political statements from both sides of the aisle, this one is only partially true. Here are a few additional (but not alternative) facts to place Congress’ action in context.

  • The CFPB rule, and not Congress’ rejection of it, would have represented a change in the law. Since the Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion, class action waivers have generally been enforceable in contracts for consumer financial services. The CFPB proposed rule was based on the agency’s authority granted under the Dodd-Frank Act. However, Congress and the President had the final say regarding whether the rule would take effect, and they exercised their authority to stop it. As a result, Concepcion continues to apply to consumer financial services contracts as if the CFPB rule had not been proposed.
  • Consumer finance arbitration agreements often include provisions that benefit the consumer. While class action waivers have been the target of much vitriol, the arbitration agreements most likely to be upheld under Concepcion are those that contain protections for the aggrieved consumer. For example, the agreement at issue in Concepcion provided for a minimum damages award of $7,500 plus recovery of twice the amount of the complainant’s attorneys’ fees in the event that the complainant recovered an arbitration award greater than AT&T Mobility’s last settlement offer. And arbitration is designed to streamline proceedings, resulting in cost savings for both sides. Although the sufficiency of such protections and benefits in any specific contract may be subject to legitimate debate, in most cases the truly aggrieved consumer is not left without a meaningful remedy.
  • Not all banks and consumer finance companies have adopted arbitration agreements. Although many banks and consumer finance companies have, since Concepcion, added arbitration agreements with class action waivers to their contracts, many have not. Some are not fans of arbitration, and would rather take their chances with class litigation than subject themselves to a potential onslaught of arbitration proceedings. For the customers of those organizations, Congress’ rejection of the CFPB proposed rule has not limited any procedural rights.
  • Competition limits the ability of banks and consumer finance companies to take advantage of consumers. Consumer finance is a highly competitive business. That’s why banks and other consumer financial services companies spend so much time and effort promoting their products and services. Banks tend to like their customers, and understand that in this highly competitive environment, they need to be fair to them and keep them happy. The myth that banks exercise extraordinary power over their customers cannot be squared with their need to compete for their business.
  • Most banks and consumer finance companies are not bad guys. Banking and consumer finance serve important societal needs. For that reason, regulators are concerned not only with making sure that they do not deceive or abuse consumers, but also that they remain safe and sound. Of course these organizations want to make a profit, but a healthy concern for profits, and for the well-being of their shareholders, does not make them bad. Politicians who consistently portray big banks in particular as villains are merely pandering to their constituents and ignoring all of the good that banks do for their customers, their communities and the economy. While some banks and consumer finance companies no doubt engage in abusive practices, they are the exception and not the rule, and it is unfair and incorrect to paint them all with the same brush.
  • Class actions can be, and too often are, abusive. Politicians who decry limitations on class actions presume that class actions are always, or at least generally, worthy of their support. While there certainly is an important place in our legal system for meritorious class actions, too often class actions are brought not principally to benefit class members or right wrongs, but rather to line the pockets of the lawyers who bring them. The significant waste in time and money caused by class actions that never should have been brought drains our economy of resources that could be put to better use, increases the costs of doing business, and ultimately harms consumers through unjustifiable, upward pressure on prices. The only winners in such cases are the lawyers. I do not mean to disparage reputable plaintiff lawyers who bring good cases for their clients, but neither should we be misled into thinking that all class actions serve worthy goals.