When I read the news about the Equifax data breach on my phone last week, I immediately clicked on the company’s link, www.equifaxsecurity2017.com, to find out if my personal data was at risk. It was. What I didn’t realize at the time was that, just by checking on my data, I forfeited my right to participate in class action lawsuits against Equifax. So much for the “helpful” website Equifax created in response to the problem.
Once a few savvy consumers and policymakers, including New York State Attorney General Eric Schneiderman, read the fine print, uproar over the company’s clause ensued. Equifax ultimately clarified that the clauses only related to “the free credit file monitoring and identity theft protection products, and not the cybersecurity incident,” and then the company removed the clause altogether. But Equifax’s initial instinct to protect itself rather than do right by people is part of a real problem that has been getting worse.
Consumer financial services firms increasingly require consumers to sign forced arbitration clauses as a condition for using their products and services. If you have ever opened a checking account, signed up for a credit card, or subscribed to a phone service, chances are you have signed away your right to sue the company that is supposed to be serving you.
These clauses — which became commonplace after 2011 and 2013 Supreme Court rulings — are a big problem as they eliminate an important tool for people who have been wronged by financial firms’ illegal practices, such as banks’ high-to-low ordering of debit transactions.
Consider Angela who banked at Wachovia before Wells Fargo acquired it. In sworn testimony, Angela said she chose Wachovia as her bank because it was close to her home. Everything seemed fine until a series of overdraft fees caught Angela by surprise. She had never incurred an overdraft before, and she knew she had enough money in her account to cover her charges. Angela called the bank for an explanation and learned that Wachovia didn’t debit her account in the order the expenditures came in. Instead, the bank ordered the charges from largest to smallest. This deceptive practice, called debit resequencing, maximizes banks’ income from overdraft fees, which totaled $33 billion in 2016.
Angela is now one of more than 1 million Wells Fargo and former Wachovia customers who are part of a class action lawsuit against the San Francisco bank, which inherited Wachovia’s class actions and rolled them into its own. Together, they are arguing that these banks manipulated their accounts to maximize overdraft fees, bilking them out of billions of dollars. Wells Fargo, meanwhile, hopes to block the plaintiffs’ lawsuit by forcing people like Angela into individual private arbitration. Arguments in the case were heard on Aug. 24, and if the panel of judges rules in Wells Fargo’s favor, it is unlikely plaintiffs will see a dime of the money out of which they were cheated.
The recent Wells Fargo case is a textbook example of why we need to remove these clauses. Arbitration is litigation without rules performed behind closed doors, and it is rigged to favor corporations. Companies that require arbitration choose, hire and pay the arbitrators — a practice that raises serious questions about their impartiality. Arbitrators’ findings cannot be appealed in most cases. Once in arbitration, a Consumer Financial Protection Bureau study found that businesses won 93% of their claims and counterclaims.
Therefore, class action lawsuits are the only practical way for consumers like Angela—who have been cheated out of small amounts of money — to be made whole.
As Justice Stephen Breyer wrote in his dissent of the 2011 Supreme Court ruling on arbitration clauses: "What rational lawyer would have signed on . . . in litigation for the possibility of fees stemming from a $30.22 claim? . . . The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30."
In July, the CFPB announced an arbitration rule that would provide a solution to the growing problem by preventing companies from blocking class actions. “On paper, these clauses simply say that either party can opt to have disputes resolved by private individuals known as arbitrators rather than by the court system,” CFPB Director Richard Cordray explained in prepared remarks. “In practice, companies use these clauses to bar groups of consumers from joining together to seek justice by vindicating their legal rights.”
While the House of Representatives voted down the CFPB rule on July 25 in a highly partisan vote, the rule now awaits a Senate vote.
We should embrace the CFPB’s final rule. Financial firms’ deceptive practices, which all too often hit their poorest customers the hardest, aren’t disappearing. With consumer financial protections under siege in the current administration, there is a good chance consumers will continue to be vulnerable to firms’ manipulation and deception.
True, the fate of the CFPB’s arbitration rule won’t be determined in time for it to benefit Angela and her co-plaintiffs. But the ubiquity of arbitration clauses means we’re all vulnerable to the abusive practices that have proliferated throughout the financial industry in recent years. Unless government holds these firms accountable for wrongdoing, consumers’ right to collectively pursue justice must be preserved.