In May, the Consumer Financial Protection Bureau published its proposed rule to prohibit class action bans in forced arbitration clauses. If finalized, this proposal will restore access to remedies for millions of people. Big banks and lenders oppose this otherwise widely-supported and overdue development. However, the surprising reaction comes from credit union associations. Despite statements by credit union representatives and empirical data proving that most credit unions do not use forced arbitration, their lobbyists are decrying the rule.
When agreed to by both parties after disputes arise, arbitration can be a worthy tool. However, when arbitration clauses and class action bans are slipped into the fine print of take-it-or-leave-it contracts, consumers are unilaterally stripped of their right to seek remedies for harm in court. Instead, they are steered into closed-door proceedings on an individual basis where the decision-makers have incentive to favor corporations that repeatedly appear before them. Moreover, most consumer financial claims don't make it into arbitration because the amount at stake is often too low to pursue individually.
The CFPB's proposed rule to limit these "rip-off" clauses follows its exhaustive study that shows that forced arbitration results in the widespread suppression of customer complaints. It also shows that the clauses are ubiquitous in financial services contracts, with the notable exception of credit unions. From the CFPB evidence, 97% of credit unions (294 of 304) did not use arbitration clauses in their credit card contracts. By comparison, more than 60% of the largest bank issuers (30 of 50) used forced arbitration in their credit card contracts.
So what accounts for this huge difference? The answer may lie in the unique structure and dynamic of credit unions.
Credit unions are owned collectively by their members and are small relative to banks. They tend to be more customer-facing and responsive. At a CFPB field hearing held last year, Lou Vetere, President and CEO of Garden Savings Federal Credit Union, described credit unions as "kinder, gentler financial institutions." This portrayal applies to many credit unions' approach for handling disputes with members.
"Credit unions, generally speaking, do not have arbitration clauses in their agreements, whether their credit card agreements or deposit account agreements," Vetere said. "We believe in resolving disputes first from a member service perspective. We do not want to deny our members the ability to take us to court, whether it be one-on-one or through class action. We believe they have that right."
Credit union associations have made similar but less equivocal statements. A 2012 National Association of Federal Credit Unions letter to the CFPB said that forced arbitration clauses are "of limited value" and credit unions do not make "significant use" of these restrictive terms.
More evidence of credit unions' general disapproval of forced arbitration is present on their websites. Institutions such as Eagle Federal Credit Union and Directions Credit Union have posted fact sheets that warn and advise members to find service providers that do not use forced arbitration.
Given this record of credit unions eschewing forced arbitration, the industry's growing attacks on the CFPB proposal are jarring. In a recent letter to Congress, the Credit Union National Association shared the sentiment that credit unions are customer-facing and work closely with their members. Yet, it spins this dynamic into one where arbitration suddenly has become an essential tool.
CUNA claims that the CFPB rule virtually would bar arbitration. It also said that because credit unions are member-owned, members would sue themselves if they brought a class action suit. Members can remove directors from boards if they feel wronged, CUNA said.
NAFCU recently declared in a May letter to House members that "many credit unions have found that voluntary arbitration agreements are often the most optimal solution for resolving disputes."
The proposed rule does not ban arbitration as the associations assert. Nor is it a "de facto" ban. It does not prevent credit unions and their members from agreeing to arbitration after a dispute. It does not even prohibit forced arbitration outright. The rule simply restores consumers' ability to band together in class actions.
The credit union industry's protests about class actions are unfounded. As we mentioned, few credit unions force arbitration on their members and some dissuade customers from accepting financial products that require arbitration. If the industry claims about credit union structure and practice are accepted as true, credit union members may be disincentivized from pursuing class action claims. On the other hand, it may be in members' interest in certain cases to join together to address systemic wrongdoing.
Vetere testified that in his 10 years at Garden Savings, the institution faced litigation by its members only six times. At a subsequent hearing, John Rudy of Bellco Credit Union in Colorado testified that the institution had never once been threatened with a class action suit in his 12 years there.
Consistent with the CFPB proposal, credit unions can and should maintain member-centric practices that preserve their customers' post-dispute options, including their access to court.
Christine Hines is the legislative director for the National Association of Consumer Advocates. Sophia Huang is NACA's law and policy intern.