The Consumer Financial Protection Bureau may be under attack from Republicans, but if it’s going out, it’ll be like a lion, not a lamb.
In issuing a new rule, the watchdog agency took away a powerful tool that financial institutions used to avoid being sued by groups of consumers.
Whenever you obtain a financial product, such as a credit card, you get a written legal contract. In it, consumers often unknowingly agree to mandatory arbitration to settle disputes. Tens of millions of people use financial products or services that are subject to pre-dispute arbitration clauses, according to the CFPB.
Under the new rule, companies can still include arbitration clauses in contracts, but they can’t stop consumers from joining a class-action lawsuit. This is a game changer.
Mandatory arbitration clauses, according to CFPB Director Richard Cordray, have allowed companies to “avoid accountability by blocking group lawsuits and forcing people to go it alone or give up.”
This rule came about because of the 2010 Dodd-Frank financial reform legislation, which the Trump administration and Republicans have been trying to dismantle. The legislation required the CFPB to study the use of arbitration agreements and report back to Congress. The rule is a result of that report.
I see it as bittersweet. The rule change is a win, for sure, but not necessarily for aggrieved individuals who may dream of a big settlement in a court case to punish wrongdoing.
In class-action cases, lawyers can walk away with millions. Consumers may get some money, but it is seldom a huge payday individually.
Recently, I was reading a message board about a class-action suit filed against AT&T in 2010. The company was accused of improperly collecting taxes from customers for certain state and local taxes for Internet access on their smartphone, which plaintiffs claimed violated the Internet Tax Feedom Act. The business ended up settling, agreeing to help people get a refund for the overage.
One customer complained about receiving a check for one penny: “Guess they couldn’t find a way to send less.”
“A whopping $0.03!!,” another person wrote. “I betcha those attorneys made out like bandits on this settlement.”
In response to this customer, a company representative wrote, “The legal fees associated with the settlement and the costs of administering the fund, etc. will be deducted from each class member’s share of the settlement.”
There were 92 attorneys who represented customers in the AT&T case. They stand to collect 20 percent of the cash recovered from the taxing authorities, which, at the highest estimate, could net $191 million plus costs and expenses. And therein lies the problem with class-action suits: Customers often feel cheated even when they win.
I’ve been critical of the outcomes for individual consumers in class-action settlements, having been on the receiving end myself of pitiful payouts. The settlements I really loathe are those promising a discount on my future business with the company. How is that a punishment?
However, I do support the new arbitration rule, which applies only to new contracts with financial institutions. This is an important consumer protection.
Settlements in class-action lawsuits generally include orders for companies to change their conduct.
In its report to Congress, the CFPB found that, in settlements involving 53 groups that represented 106 million consumers, the companies in question agreed to implement new procedures and/or stop what they were doing.
Key to the new rule is also the transparency it will require. More information will be made public about individual arbitration cases and the outcomes. The data on how cases are settled in arbitration is limited, the CFPB wrote. In the cases the agency was able to review, consumers won an average of 12 cents for every dollar they claimed.
It’s important to note this fight is not over.
“We anticipate that this moderate rule will be strongly challenged by industry lobbyists pushing members of Congress to once again choose Wall Street interests over Main Street,” said Linda Sherry, director of national priorities for Consumer Action.
I agree with one point that critics attempted to use to derail the rulemaking by the CFPB: Class-action attorneys stand to get a greater financial benefit because more group lawsuits will be allowed to go forward. I don’t begrudge the attorneys earning fair fees. Yet when you get a check for a few dollars and the lawyers get millions, it’s hard to view that you’ve won a battle.
Still, even though individual consumers might not get big payouts, class-action settlements or even the potential for a legal challenge can bring about better business practices. This makes the settlements valuable to all.