Some Good News Out of Washington: The CFPB Cracks Down on “Ripoff Clauses”




For most of 2017, the Trump Administration and its allies have been waging war on the rights of everyday Americans. The Senate confirmed Neil Gorsuch to the Supreme Court, and he has already proven himself to be an extreme conservative. The House of Representatives has passed a string of bills effectively seeking to close the courthouse door to millions of Americans wronged by large corporate interests. And Republicans remain intent on eliminating health insurance for millions of Americans.

But amidst this gloom, there’s a glimmer of hope at the Consumer Financial Protection Bureau (CFPB). In recent weeks, the CFPB acted to crack down on so-called “ripoff clauses” that have victimized consumers of financial products and services. Specifically, it finalized a rule prohibiting corporations that provide these services from using non-negotiable arbitration clauses, hidden in contracts, that limit the ability of consumers to band together to enforce their legal rights. Alliance for Justice applauds this vital action.

Class actions are essential instruments to help wronged consumers obtain justice. For example, because customers were able to band together, a half million former customers were able to hold Bank of America accountable for illegally pulling credit reports and making credit inquiries without customers’ permission. Bank of America pledged to pay $1.645 million. In another instance, the company UniRush settled with thousands of prepaid debit card holders who had joined together in a class after their cards had malfunctioned, causing distress for many people who couldn’t pay for daily living expenses. Many victims of this financial misconduct would not have brought suit individually because of the expense of hiring a lawyer and bringing a case.

Unfortunately, because of hidden arbitration clauses, not everyone can join together to bring a class action, as epitomized by the recent Wells Fargo fake accounts scandal. The bank fraudulently created more than two million fake accounts, and thousands of customers accrued late fees on accounts they never created and didn’t even know existed. Such customers remain at risk of having their credit scores go down and borrowing rates go up.

The thousands of Wells Fargo customers impacted by the same corporate fraud seem like perfect candidates for a class-action suit. But because Wells Fargo had an especially egregious arbitration clause stuck into contracts, it successfully shunted each consumer individually into arbitration with only a few exceptions. Rather than thousands of victims being able to stand together against one of the largest banks in the country, each account holder will have to fight for their rights alone versus the goliath Wells Fargo. And, rather than giving them a chance to publicly present their case before a jury of their peers, Wells Fargo is trying to force each consumer to argue, in secret, before arbitrators largely handpicked by the financial industry. In fact, as Alliance for Justice emphasized in its comment to the CFPB, arbitrators are bound by neither precedent nor rules of procedure, and their decisions cannot be appealed. They rely on companies for business, but then are presumed to be a neutral arbiter. The empirics bear this out: in 2010 and 2011, a study examined 341 arbitration cases brought forth by consumers. Companies won 91% of these disputes.

Take the story of Charles Beard. A sergeant in the Army National Guard, Beard took out some loans to buy a car. While Beard was serving in Iraq, the lender came to Beard’s house and repossessed his vehicle. This is directly contrary to federal law, which requires a court order to repossess a car from a servicemember.

Sergeant Beard sought to join his suit with other servicemembers whose rights were similarly violated. But his class action against the lender was thrown out of court because of a mandatory arbitration clause that had been hidden in his car loan. Instead of fighting the bank in open court with others who were cheated, Sergeant Beard spent four years in an individual arbitration. He eventually got back $6,500, but the arbitrator refused to grant him compensation for the illegal repossession. “I tried to fight for everybody,” Sergeant Beard said, “but it only ended up with me.”

The CFPB’s critical rule will help ensure consumers who have been wronged by large lenders will receive the compensation they deserve. And the rule will help prevent fraud in the future. While there were rumors of widespread misconduct at Wells Fargo for several years, customers who brought cases were consistently forced into secret arbitrations instead of open courtrooms. Clandestine arbitrations allowed Wells Fargo to continue perpetrating this fraud until finally the CFPB stepped in and fined Wells Fargo $185 million for its misconduct. The ban on ripoff clauses in contracts for financial services will help consumers across the country seek justice in open courtrooms.

The CFPB carefully studied the rule before it was issued. It conducted its own thorough quantitative studies to ensure that the rule would be fair to consumers, and it read over 110,000 comments submitted to the agency on the matter. It listened to the concerns of industry, consumer activists, and everyday individuals around the country before issuing a final rule.

Yet the Republican Congress, carrying the water for big banks, has already indicated its desire to repeal the rule via a once-obscure law called the Congressional Review Act. Though it only had been used once in history before 2017, the GOP has already used it numerous times this year to roll back protections for consumers and the environment.

It remains to be seen whether Congressional Republicans will be successful in repealing the CFPB’s new rule. Such an action would be a gift to Wall Street to the detriment of the American consumer.