Ahead of CFPB Rule, Congress Prepares for a Showdown over the Future of Forced Arbitration and Consumer Class Actions

Image credit: Johnny Silvercloud (CC BY-SA 2.0)

Last week, lawmakers laid the groundwork for a battle over consumer rights and forced arbitration that likely will play out through the spring.

First, congressional Democrats introduced several bills to restore consumers’ right to hold corporations accountable in court for wrongdoing. Led by U.S. Sen. Al Franken (D-Minn.), lawmakers on March 7 introduced a slate of bills aimed at ending the use of forced arbitration in various sectors. Forced arbitration provisions, also known as “ripoff clauses,” block consumers from challenging illegal corporate behavior.

Lawmakers were joined at a packed press conference by people who had been harmed by forced arbitration: a veteran illegally fired from his job while serving in the military and blocked from suing his employer; a victim of Wells Fargo fraud whose class action was kicked out of court; and former news anchor Gretchen Carlson, barred from speaking out about sexual harassment she had suffered at Fox News.

Among the bills introduced were Franken’s Arbitration Fairness Act, which would prohibit forced arbitration in consumer, employment, civil rights, and antitrust cases and Sen. Sherrod Brown’s (D-Ohio) Justice for Victims of Fraud Act, which would close the “Wells Fargo loophole” by restoring consumers’ right to sue when banks open fraudulent accounts without their knowledge.

However, in stark contrast to this push to strengthen rights and restore corporate accountability, GOP lawmakers began pressing to make it harder for consumers to band together when harmed and take corporations to court.

Two days after the Franken press conference, the House passed H.R. 985, the so-called “Fairness in Class Action Litigation Act” would effectively kill class actions by imposing insurmountable requirements to file group lawsuits. This would make it nearly impossible for consumers to hold corporations accountable for illegal and abusive behavior.

Among other onerous provisions, H.R. 985 would require that each harmed person suffer the “same type and scope of injury.” Under this absurd standard, a Wells Fargo customer with two fake accounts opened in his or her name could be barred from joining together with customers who had three fraudulent accounts. The bill also would build in costly and unnecessary delays and appeals, limit plaintiffs’ choice of counsel, and drastically restrict attorneys’ fees.

Joining together in a class action often is the only chance real people have to fight back against widespread harm, including corporate fraud and scams – particularly when claims involve small amounts of money, where it would be too costly for an individual to pursue a separate claim. Class actions have also been critical vehicles for overcoming race- and gender-based discrimination and have been instrumental in achieving victories as momentous as desegregation of our schools, as was the case in Brown v. Board of Education.

Beyond protecting the rights of the disadvantaged, class actions act as a crucial check on corporate misbehavior by returning money to harmed consumers and workers. Removing the threat of class liability would encourage systemic fraud, as banks and lenders that pad their bottom lines by committing fraud would have a competitive advantage in the marketplace.

In the financial sector, the proposed CFPB arbitration rule is a major target of financial industry lobbyists precisely because it would restore the right of consumers to join class action lawsuits. According to the CFPB’s arbitration study, class actions returned $2.2 billion in cash relief to 34 million consumers from 2008-2012, not including attorneys’ fees and litigation costs. While the CFPB rule is expected to be finalized this spring, it would be rendered largely ineffective should H.R. 985 become law.

You can watch our video against H.R. 985 here and follow developments on Twitter using the hashtag, #RipoffClause.

Faces of Forced Arbitration

Stories of consumers harmed by forced arbitration in financial services contracts.

Photo credit: Juli Shannon (CC BY-NC-ND 2.0)

This afternoon, lawmakers introduced several pieces of legislation to curb the growing use of “ripoff clauses” and ensure harmed consumers, service members, students, and workers have a right to fight back in court against corporate wrongdoing. Known as forced arbitration, this practice strips Americans of any meaningful way to hold companies accountable for fraud or abuse and grants corporations a license to steal to pad its bottom line.

Forced arbitration no place in any system that is fair to everyday people. The bills introduced today would work hand-in-hand with a rule proposed by the Consumer Financial Protection Bureau (CFPB) to restrict the financial industry’s use of forced arbitration. Below are the stories of several real people harmed by forced arbitration, who would benefit from this newly-introduced legislation and the proposed CFPB rule.

Credit Cards

Tracy Kilgore, New Mexico

In July 2011, Tracy Kilgore went to a local Wells Fargo branch to change a signature card on behalf of the Daughters of the American Revolution, where she volunteered as Treasurer. Tracy did not personally bank with Wells Fargo or have any accounts with them. The bank teller asked her for her name and ID and began typing away her computer, and she promptly left once the change was processed.

Two weeks later, Tracy received a letter from Wells Fargo saying her credit card application had been rejected, though she never applied for one. When she saw the application was filed the day after she had visited the Wells Fargo branch, it became clear the bank tried to open a fraudulent credit card in her name. After Tracy found the rejected application was listed on her credit report, she called and wrote to Wells Fargo for months asking them to remove it. The bank kept saying it would take another 7-10 days, then another 2-3 weeks, to no avail. In the end, she never even got an apology.

Now, Tracy has joined with other defrauded customers in a class action lawsuit against the bank, but Wells Fargo is trying to force each consumer to fight them one-by-one in a biased and secretive arbitration system. Even though Tracy has never banked with Wells Fargo, their lawyers are trying to block her from suing them in court by pointing to an arbitration clause she never signed.

Auto Financing

Sergeant Charles Beard, California

Sergeant Charles Beard was about to be deployed to Iraq and asked for some help making his car payments. His lender, Santander Consumer USA, Inc., offered him a forbearance for a few months, but in exchange, had Sergeant Beard sign a modified lease agreement. Little did he know, a forced arbitration provision was buried in the fine print.

While serving his country in Iraq, Sergeant Beard fell behind in his payments.  Men came to his home and repossessed the car – breaking federal law, which protects active duty soldiers by requiring lenders to obtain court orders before seizing their cars. Sergeant Beard brought a class action against the lender with other soldiers to enforce their protections under federal law, but their claims were thrown out due to a class action ban in the arbitration clause.

Payday Loans

Stephanie Banks, Oregon

In August 2013, Stephanie Banks made $15 an hour as a bookkeeper for the Salvation Army. To help pay rent for her and her son, she took out a $300 loan from the payday lender Rapid Cash, putting up the title to her car as collateral. Her interest rate was capped at 153.73% per year under state law.  Soon after, Ms. Banks started chemotherapy to treat her lung cancer and retired from her job. A year later, she was in serious financial trouble, and had to declare bankruptcy. She listed the loan from Rapid Cash as a debt to discharge and finished the process in court with a lawyer.

Then, in August 2015, Ms. Banks almost had a heart attack when she received a letter from a collection service, claiming she owed Rapid Cash over $40,000. They threatened to destroy her credit if she did not pay immediately. Ms. Banks filed a free motion in court to dispute the $40,000 claim. Rapid Cash responded by pointing to an arbitration clause, buried in the fine print of the original agreement she signed two years earlier. The court ruled the clause still held and Ms. Banks would have to argue her case to a private arbitration firm chosen by Rapid Cash. To do this, she would have to pay $200 in arbitration fees, almost as much as her original loan.

Debt Relief

Bernardita Duran, New York

Bernardita Duran was 53 years old with only $700 in Social Security income when she paid an Arizona debt relief company to settle her credit card debts. Four thousand dollars later, Ms. Duran realized she had been scammed. She sued the company in New York federal court to get her money back, but the company pointed to a clause in their contract which stated her claims must be decided a private arbitrator – located in Arizona.

Ms. Duran protested that she could not afford to travel to Arizona, as it would cost more than a month’s worth of her income and prevent her from making rent. But the appeals court ruled that only the arbitrator in Arizona could decide if Ms. Duran could bring her claim in New York – meaning she would have to first travel across the country to Arizona to argue to the arbitrator that it’s unfair and unconscionable to force her to arbitrate her case there.

Private Student Loans

Matthew Kilgore, California

Ever since he was a child, Matthew Kilgore wanted to be a helicopter pilot. Mr. Kilgore thought he was on his way to achieving his dream when he enrolled at Silver State Helicopters, a for-profit aviation school that offered pilot training and certification. At the school’s recommendation, Mr. Kilgore took out a $55,000 private student loan from lender Keybank to cover his tuition. But Mr. Kilgore’s ambitions came to a sudden end in 2008 when his school abruptly went out of business and filed for bankruptcy, leaving students with tens of thousands of dollars in student loans but no marketable skills or diplomas. Since then, his loans nearly doubled to $103,000 with accrued interest.

Mr. Kilgore filed a lawsuit on behalf of himself and other Silver State students against Keybank to prevent them from enforcing their loan agreements or ruining the students’ credit. However, Keybank loan contracts contained an arbitration clause which prohibited class actions. An appeals court ruled the students would have to settle disputes with Keybank individually in arbitration. Meanwhile, other Silver State students who had similar loans with Student Loan Express, Inc. got $150 million in debt relief because their loan agreements did not include an arbitration clause.

WATCH: Want to Prevent Another Wells Fargo? Ban Forced Arbitration

Recently, House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) suggested that it took the Consumer Financial Protection Bureau (CFPB) too long to find out about the bank’s misconduct. Yet Chairman Hensarling’s Financial CHOICE Act includes provisions that would make it harder for the CFPB to learn about future abuses by banks and lenders.

The Financial CHOICE Act would preserve the financial industry’s use of forced arbitration, a relatively new phenomenon designed to allow corporations to keep misconduct out of public view, evade the law, and escape accountability. Buried in the fine print, “ripoff clauses” force consumer and worker claims into arbitration – a secretive, rigged system where the corporation gets to pick the arbitration provider and which rules will apply – and bars people harmed in similar ways from joining together in class actions to challenge systemic abuses.

Because agencies have limited resources, individual and class action lawsuits brought by consumers and workers often act as the canary in the coal mine to alert agencies to fraud and abuse. The CFPB is in the midst of a rulemaking that would restore consumers’ right to join together to hold banks accountable for predatory behavior like the Wells Fargo scandal. Since May, more than 100,000 individual consumers and 281 consumer, civil rights, labor, and small business groups wrote in to support the proposed rule.

The CHOICE act would bar CFPB from restoring consumers’ rights to take banks to court preserving the secrecy and lack of accountability that allowed Wells Fargo to get away with this misconduct for so long.

Background on the Wells Fargo Scandal

At least 3,500 Wells Fargo employees opened approximately 1.5 million bank accounts and approximately 565,000 credit cards without the consent of their customers. According to the CFPB, its “investigation found that since at least 2011, thousands of Wells Fargo employees took part in these illegal acts to enrich themselves by enrolling consumers in a variety of products and services without their knowledge or consent.” In February 2012, Wells Fargo started using forced arbitration clauses in all of its customer checking and savings account agreements, shortly after evidence began emerging that it was defrauding its customers.

Customers have been trying to sue Wells Fargo over fraudulent accounts since at least 2013. However, the bank forced those customers into secret, binding arbitration by invoking fine print in consumers’ legitimate account agreements to block them from suing over fake accounts. This practice helped keep Wells Fargo’s massive fraud out of the spotlight for so long.

Shariar Jabbari & Kaylee Heffelfinger et al. v. Wells Fargo (U.S. District Court, N.D. Cal.)

Consumers filed a lawsuit against Wells Fargo claiming that the bank unlawfully opened a series of accounts in their names and then charged fees in connection with those unauthorized accounts. The lawsuit specifically alleged the existence of a corporate policy compensating employees based on the number of accounts opened.

Since this practice was so widespread, the consumers filed their suit on behalf of all consumers subjected to this conduct. In 2015, Wells Fargo vigorously denied the allegations, describing its culture as “focused on the best interests of its customers and creating a supportive, caring, and ethical environment for our team members.”

  • Shariar Jabbari opened two accounts in January 2011. By April 2011, two additional accounts were opened in his name, with $100 transferred to each from his savings account. By June 2011, five more accounts were opened for Jabbari without his knowledge or consent.
  • Wells Fargo invoked its newly-added arbitration clause to dismiss the complaint, arguing that disputes, including any dispute over whether the clauses applied at all, must be decided by a private arbitrator hired by the bank. The bank claimed that these customers “agreed” to arbitrate everything because the fake accounts “could not have been opened had [the customer] not opened the legitimate accounts which he admits to opening.” Therefore, even completely unauthorized accounts could not escape the “expansive terms of the arbitration agreements.”
  • Another customer in the class action, Kaylee Heffelfinger, claimed that Wells Fargo opened two accounts in her name in January 2012, weeks before she opened legitimate accounts in March 2012. Wells Fargo argued that “it is at least plausible that [its] employees generated the unauthorized accounts in January 2012 after Heffelfinger initiated a relationship with, and provided information to, the Wells Fargo branch where her legitimate accounts were opened” and thus even those claims should be forced into arbitration.

Incredibly, the federal district court granted Wells Fargo’s demand for individual arbitration on each of these claims. The customers appealed, and on September 8, 2016 – the day the CFPB announced its enforcement action – Wells Fargo settled with the customers on the condition they not disclose the details of their case.

David Douglas v. Wells Fargo (Superior Ct of Los Angeles, CA)

A customer named David Douglas tried to sue Wells Fargo on his own after he learned that three of the local employees at his Wells Fargo branch used his personal information to open at least eight accounts under his name without his permission, charging him fees for those accounts. More than three years ago, Douglas alleged that Wells Fargo “routinely use[d] the account information, date of birth, and Social Security and taxpayer identification numbers…and existing bank customers’ money to open additional accounts.”

  • Wells Fargo moved to compel forced arbitration over the disputed accounts, suggesting that “[s]ince the information allegedly misused was provided in connection with the original account, by definition any such claim of misuse arises out of or relates to the original account.” The bank similarly claimed that Douglas’ allegation that Wells Fargo transferred money into these fake accounts without his permission “is the most routine kind of claim covered by the Arbitration Agreement that one can imagine.”
  • Douglas opposed these arguments, adding that he never could have signed a forced arbitration agreement for those unauthorized accounts because they were opened without his knowledge. Incredibly, the court granted Wells Fargo’s demand for arbitration, relying on the arbitration clause from his original, non-fraudulent account with Wells Fargo which claimed to cover “all disputes” between him and the bank.

By pushing these cases into secret arbitration, Wells Fargo was able to keep this scandal out of public view for years and continue profiting from massive fraud. This culture of secrecy was pervasive. As CFPB Director Richard Cordray described at the Senate Banking Committee hearing on September 20, when the Los Angeles City Attorney brought an action against the bank, “one of the first things Wells Fargo did…was aggressively seek a protective order to keep the proceedings as much as possible from public view.” These actions, along with forced arbitration, allowed the bank to evade accountability and transparency for at least five years.

Senate Banking Committee Hearing on September 20

At the Senate Banking Committee hearing, Senator Sherrod Brown (D-Ohio) asked Wells Fargo CEO John Stumpf if the bank would continue to argue in court that mandatory arbitration clauses covering real accounts should apply to fake accounts, forcing defrauded consumers into arbitration. Stumpf was non-committal, replying that he would “have to talk to my legal team, and we can get back to you on that.”

During the second panel, Senator Brown asked Director Cordray, how the agency’s proposed rule to restrict forced arbitration in consumer financial contracts would have helped customers that sued the bank over fraudulent accounts. Cordray replied that Wells Fargo’s arbitration clause might defeat a class action, noting that “as happened here, when there’s massive wrongdoing on a wide scale, but small amounts of harm to individual consumers, it will be very difficult to get any relief other than through a class action.”

Senator Elizabeth Warren (D-Mass.) then asked Director Cordray if he thought that “forced arbitration clauses make it easier for big banks to cover up patterns of abusive conduct, including the years of misconduct by Wells Fargo in this case.” Cordray answered, “I do think so, yes.”

Senator Warren went on to note that the CFPB has “proposed strong new rules that would ban forced arbitration clauses that prevent consumers from joining together to bring a public action in court,” and “[i]f we had class actions on this back in 2010, 2009, 2008, then the problem never would have gotten so out of hand.”

House Financial Services Committee Hearing on September 29

At the House Financial Services Committee Hearing, Representative Brad Sherman (D-Calif.) asked Stumpf if he would continue to invoke ripoff clauses to deprive consumers of their day in court in light of this scandal. Stumpf refused to end this practice.

CFPB Arbitration Rule Receives Strong and Widespread Support

The U.S. Consumer Financial Protection Bureau’s (CFPB) proposed rule to restrict forced arbitration – a tactic banks and lenders use to block consumers from challenging illegal behavior in court – has been met with widespread support. Below are selected highlights of comments from individual consumers, elected officials, advocacy groups and newspaper editorial boards who weighed in during the public comment period, which ended on Aug. 22, 2016.

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More Than 100,000 Consumers Across the Country Support the Rule

Between the proposed rule’s announcement on May 5, and the close of the comment period on Aug. 22, at least 100,000 individual consumers across the country submitted comments or signed petitions urging the CFPB to restrict forced arbitration in consumer finance. On the other side, FreedomWorks – a conservative political group affiliated with the Tea Party – claims it “generated nearly 15,000 responses opposed to the rule.”

Of the 100,000-plus positive comments, 69 percent of consumers voiced general support for the proposed rule, emphasizing that “[b]arring consumers from joining class actions directly opposes the public interest.” Another 31 percent pushed the CFPB to expand the rule’s coverage and “take the extra step to prohibit individual arbitration in the final rule.”

This overwhelming support for action against forced arbitration echoes a recent national poll, which found that, by a margin of 3 to 1, voters in both parties support restoring consumers’ right to bring class action lawsuits against banks and lenders.

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Key Statements of Support

38 U.S. Senators commend CFPB for proposed rule

“Recognizing the urgent need to address these troubling practices, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 to improve accountability, strengthen the financial system and establish the CFPB. Dodd-Frank included several restrictions on the use of forced arbitration, including a mandate for the CFPB to take action on arbitration. Congress specifically directed the CFPB to study the use of forced arbitration in connection with the offering of consumer financial products and services, and authorized it to ‘prohibit or impose conditions or limitations on the use of’ such agreements based on the study results.”

65 members of the U.S. House of Representatives praise the rule

“Consistent with the bureau’s exhaustive study on forced arbitration, which found that forced arbitration restricts consumers’ access to relief in disputes with financial service providers by limiting class actions, the proposed rule is a critical step to protect the public interest by ensuring that consumers receive redress for systemic unlawful conduct… There is overwhelming evidence that class-action waivers in financial products and services agreements undermine the public interest.”

18 state attorneys general want to extend the reach of state enforcement efforts

“Although we believe consumers will be best served by the total prohibition of mandatory, pre-dispute clauses in consumer financial contracts and we encourage the bureau to consider regulations to that effect, the proposed rules provide a substantial benefit to consumers by restoring their fundamental right to join together to be heard in court when common disputes arise in the commercial marketplace. Many of our respective consumer protection laws include private right of action provisions, the purpose of which is to complement and extend the reach of our state enforcement efforts.”

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Special Protections for Wall Street, No Day in Court for the Rest of Us

scales of justice

Image Credit: Michael Coghlan (CC BY-SA 2.0)

Last week, some members of the House Financial Services Committee lavished praise on a piece of legislation they said would “restore due process rights to all Americans.”

“All the bill says is that if somebody wants their day in court, they should have their day in court,” the bill’s sponsor, Rep. Scott Garrett (R-N.J.), explained, adding that “preserving the rights of Americans to defend themselves in a fair and impartial trial…is one of the most fundamental rights, and it is enshrined in our Constitution.”

Representative Jeb Hensarling (R-Texas), Chair of the committee, championed the measure as well. “Every American deserves to be treated with due process,” Rep. Hensarling declared. “They ought to have the opportunity to have a trial by jury. They ought to be able to engage in full discovery. They ought to be subject to the rules of evidence.”

A listener might have thought these legislators were standing up against forced arbitration – “rip-off clauses” that big companies bury in the fine print of contracts to prevent people from suing them, even if they have broken the law.

Astoundingly and unfortunately, the legislators were actually moving in the opposite direction. They were extolling HR 3798, the so-called “Due Process Restoration Act,” which would extend special legal protections to Wall Street banks and other financial firms charged with violating federal securities law by the Securities and Exchange Commission (SEC).

This piece of legislation does nothing to restore due process to ripped-off consumers and investors. Instead, the “Due Process Restoration Act” makes it harder for the SEC to hold corporate wrongdoers accountable when they break the law.

Big banks and others charged in SEC hearings already possess several crucial legal protections that their investors and consumers lack in forced arbitration: robust opportunity for discovery, a public hearing, a trained adjudicator bound to make a ruling based in law, and – crucially – the right to two full appeal processes, including a review in federal court. Yet HR 3798 would make it harder for the SEC to prove its case and allow the accused party to unilaterally terminate the proceedings, forcing the SEC to either drop the charges or refile in federal court.

According to Professor Joseph Carcello of the University of Tennessee, giving companies this right to “choose the venue is unlikely to be in the best interest of society, and will almost certainly make it more difficult for the SEC to deter and punish securities law violations, including fraud.”  Professor Carcello further emphasized that if fairness is a concern for members of the committee, then it is more unfair for citizens to be forced into arbitration in their contracts with financial institutions.

An amendment offered by Reps. Keith Ellison (D-Minn.) and Stephen Lynch (D-Mass.) threw the gap between the words and actions of HR 3798’s supporters into particularly stark relief. The amendment would have ensured that firms using forced arbitration against consumers and investors could not benefit from the bill’s special protections. Yet, in a display of staggering hypocrisy, this commonsense amendment was defeated on party lines.

Despite grandiose claims of due process, HR 3798 would only further tilt the playing field in favor of special corporate interests when it comes to battling financial fraud and corporate rip-offs.  If lawmakers truly wish to “restore due process rights to all Americans,” they should pass legislation to ban forced arbitration and support the upcoming Consumer Financial Protection Bureau rulemaking on this abusive practice.

Wall Street firms and brokers accused of breaking federal law do not need special legal protections, but the right of ordinary Americans to have their day in court very much does need defending. Lawmakers should legislate accordingly.

— Amanda Werner