Battle over fine print: Why GOP is risking consumer ire to support banks
A new federal rule would have banned the forced arbitration clauses that limit consumers' options. But Republicans are wary of a wave of lawsuits, are eager for an antiregulation win, and want to keep stocks rising on Wall Street.
By the barest of margins, Congress delivered a major win to the financial industry, repealing a new federal rule that would have made it easier for consumers to sue financial companies.
Normally, even though it affects millions of Americans, a rule banning the arbitration clauses that companies insert into the fine print of consumer agreements might not garner much attention.
But in the wake of scandals involving financial giants Equifax and Wells Fargo, both of which tried to use the arbitration clauses to avoid class-action lawsuits, the subject took on sudden political relevance. Even a majority of Republican voters supported the ban, a recent poll showed.
Nevertheless, the GOP-controlled Senate voted 51-50 Tuesday on the side of the financial-services industry. Vice President Mike Pence broke the tie when two Republican senators defected.
Why risk bipartisan consumer ire to support big banks?
Some finance experts say it reflects the enormous clout of banks and Wall Street firms in Washington, and a penchant among political conservatives to see lighter regulation as an economy-friendly move, even in the wake of the 2008 crisis, which was rooted partly in financial-industry excesses and improprieties.
Yet consumer advocates argue it is precisely that Wall Street clout that makes the watchdog Consumer Financial Protection Bureau (CFPB), which originated the rule against forced arbitration, a helpful counterweight for average Americans.
GOP lawmakers say they want to avoid an explosion of class-action lawsuits against big banks and others that the new rule might have fostered. They were also eager to rebuke the CFPB and deliver an antiregulation win to business in a session that so far has failed to undo some other Obama-era regulations.
And they may have been anxious to stop anything that might derail the stock market’s seemingly inexorable climb – a surge that helps them politically.
“As long as the market continues on the upward swing, nobody wants to rock the boat,” says Seth Kaplowitz, a lecturer in finance at San Diego State University.
Big banks and other financial companies stick arbitration clauses in the fine print when consumers sign up for credit cards and other types of loans. The language keeps customers from banding together in class-action lawsuits if they have a dispute.
Industry officials praised the vote. “The rule was always going to harm consumers and not help them,” American Bankers Association President Rob Nichols said in a statement. “Today’s vote puts consumers first rather than class-action lawyers.”
But consumer advocates – and a 2015 CFPB study – suggest otherwise: The arbitration clauses mostly favor the industry.
Nine out of 10 cases favor companies
For one thing, consumers have little incentive to use arbitration for disputes over small amounts, since it costs them $200 or more to have a hearing. So arbitration hearings typically involve larger debts – an average of almost $16,000.
And of one third of cases that actually went to an arbitrator in 2010 and 2011, only about 1 in 5 consumers won, getting a total of just over $360,000 in reimbursements or debt forgiveness in those 341 cases, the study found. (The rest of the cases were settled, pending, dormant, or had an unknown outcome.)
By contrast, companies won money in more than 9 out of 10 arbitrated cases in which they filed claims or counterclaims – and they received a total $2.8 million from consumers.
Most arbitration clauses allow consumers to use small-claims courts instead, but there, too, the advantages appear tilted in the companies’ favor. In 2012, consumers in jurisdictions representing about a quarter of the US population filed fewer than 870 small claims against the big banks and other major credit-card issuers. In those same jurisdictions, the issuers filed more than 41,000 small claims against consumers, most of which were probably debt-collection cases.
“You'd be stupid to sue over $30,” says Karl Frisch, executive director of Allied Progress, a consumer watchdog organization based in Washington. “But a bank can make a lot of money off of $30 [mistakes] … when you multiply it by millions.”
Class-action suits tend to counter this imbalance. From 2008 to 2012, 350 million claimants won 419 settlements that averaged $540 million a year. In a number of cases, they forced companies to change their business practices. Of the cash that was paid out, just under one quarter went to attorneys.
That may explain why the CFPB’s rule, which would have prevented companies from using arbitration clauses in consumer contracts, was so popular.
Two-thirds of Americans – including a majority of Republicans – support the rule banning forced arbitration, according to a survey released earlier this month that was commissioned by American Future Fund, a conservative advocacy group. A 2016 Pew survey found even higher support – 89 percent – for class-action lawsuits against banks.
The furor over Equifax and Wells Fargo
The fallout from two recent financial scandals – the recent breach of sensitive consumer data at Equifax and the opening of up to 3.5 million fake accounts at Wells Fargo – complicated the GOP’s antiregulation push.
When respondents in the American Future Fund poll were told that Equifax had used arbitration clauses, support for the ban went up from 67 percent to 75 percent. The 800 respondents were all identified as likely voters.
On the flip side, allowing the rule to stand likely would have caused an explosion of class-action lawsuits. The CFPB estimated more than 600 extra federal suits per year, costing the industry more than $500 million in payouts and additional fees.
Those estimates seriously understate the true costs, the US Treasury charged in a report released this week. The CFPB didn’t include class actions at the state level and used a low estimate for attorneys’ fees.
Of course, someone would have had to pay those extra costs, which led industry spokesmen and many Republicans to say the rule would have cost consumers.
But after 2009, when four credit-card issuers (Bank of America, Capital One, Chase, and HSBC) stopped using forced arbitration as the result of a lawsuit, a CFPB analysis found no statistically significant evidence that their customers paid more in fees or received less in credit as a result.
The data set was too small to guarantee that there was no extra cost, according to Alexei Alexandrov, a former senior economist at the CFPB who wrote the analysis. But data from the CFPB report suggests that even an explosion of new suits would have had little effect on the more than 100 million consumers who have credit cards, he writes in an email.
While difficult to project exactly, and relying on some assumptions, “it should be in the same order of magnitude [as the current cost of class-action litigation] – at most a dollar per consumer per year (and likely much less, if any),” he says. (Mr. Alexandrov stresses he is not speaking for either the CFPB or his current employer, Amazon.)