Calif. bars financial firms from imposing mandatory arbitration
Wells Fargo's home state of California passed a law aimed at curtailing the bank's use of closed-door arbitration to shroud complaints from aggrieved customers affected by its scandals.
Governor Jerry Brown signed a measure inspired by the San Francisco-based lender's fake-accounts scandal. It prohibits financial firms from forcing customers out of court and into arbitration to settle disputes when employees used clients' information to commit fraud.
Regulators fined Wells Fargo $185 million last year over its widespread practice of opening checking and credit accounts without customers' authorization to meet aggressive sales goals. The company said in August a more inclusive review found employees may have created 3.5 million bogus accounts. Wells Fargo has also been embroiled in other consumer spats in recent months over unwanted car insurance, mortgage lending and overdraft fees.
The bank said it's taking steps to rebuild the trust of its customers.
"We are focused on making things right for our customers, fixing the problems, and building a better Wells Fargo," a company spokesman said in a statement.
Washington Democrats who railed against the bank's use of mandatory arbitration with harmed customers were infuriated in September when it appeared that Equifax Inc. would try to take the same approach after disclosing that hackers had stolen personal data for almost half of all Americans. Equifax eliminated forced arbitration clauses from its TrustedID free credit monitoring and identity protection services offered to customers after the data breach.
The Consumer Financial Protection Bureau finalized a rule in July that would allow more consumers to sue financial firms. Last week, a coalition of corporate lobbying groups, led by the U.S. Chamber of Commerce, sued the agency. They claimed its actions aren't valid because its structure, as created through the 2010 Dodd-Frank Act, is unconstitutional. They also challenged the research the CFPB used to write the arbitration rule, saying it's flawed and that the regulator ignored evidence that shows its regulation will harm consumers.
The groups filed the lawsuit as the fight over the CFPB's regulation comes to a head on Capitol Hill. While the agency argued that it gives consumers more power to hold firms accountable, some Republicans say the rule will mostly benefit trial lawyers and could result in Americans paying higher interest rates on credit cards and other financial products.
GOP lawmakers are trying to overturn the regulation through legislation, though they have a limited time to do so and it's not clear they have enough votes in the Senate.
Senate Minority Leader Chuck Schumer, a New York Democrat, has called Republican efforts to allow forced arbitration a "get-out-of-jail-free card" for firms like Wells Fargo.
At a Senate hearing on Tuesday, Democrats prodded Chief Executive Officer Timothy Sloan over the bank's use of the closed-door forums. While he said Wells Fargo has been dealing with the account scandal in court, he wouldn't commit to dropping mandatory-arbitration clauses altogether.
A Wells Fargo spokeswoman said in December the company uses arbitration as a "last resort'' when trying to resolve disputes and that the process doesn't bar customers from pursuing remedies in small claims court. Most banks view arbitration as a faster and cheaper alternative to fighting class-action lawsuits brought on behalf of thousands of customers.
Eligible Wells Fargo customers will receive as much as $10.7 million from the bank in refunds and compensation for bogus accounts opened in their names. Separately, the bank in July won preliminary court approval of a $142 million settlement with consumers. The more than 500,000 affected by its auto insurance debacle will receive as much as $80 million, including extra funds for possibly 20,000 who lost cars.
The bill, introduced by state Senator Bill Dodd, was co-sponsored by Consumer Federation of California and Consumer Attorneys of California and had the backing of state Treasurer John Chiang. If Brown had tried to kill the measure, the Democrat supermajority in both houses could have overridden his veto.
"Had my bill been in place before the scandal, Wells Fargo would have been held publicly accountable years ago, and the fraud could have been prevented from spreading," Dodd said in a statement in September.