On Tuesday, Consumer Financial Protection Bureau (“CFPB”) Director Richard Cordray published an opinion piece in the New York Times in response to recent attempts by lawmakers to repeal a new CFPB arbitration rule. The rule that was published in the Federal Register on July 19th prohibits most credit card issuers and banking institutions from requiring consumers to enter into mandatory arbitration agreements that bar collective action lawsuits. In his op-ed titled “Let Consumers Sue Companies,” Director Cordray addresses what he believes are misconceptions about the final rule.
With regard to the collective action lawsuits, Director Cordray states:
First, opponents claim that plaintiffs are better served by acting individually than by joining a group lawsuit. This claim is not supported by facts or common sense. Our study contained revealing data on the results of group lawsuits and individual actions. We found that group lawsuits get more money back to more people. In five years of group lawsuits, we tallied an average of $220 million paid to 6.8 million consumers per year. Yet in the arbitration cases we studied, on average, 16 people per year recovered less than $100,000 total.
It is true that the average payouts are higher in individual suits. But that is because very few people go through arbitration, and they generally do so only when thousands of dollars are at stake, whereas the typical group lawsuit seeks to recover small amounts for many people.
When a bank charges illegal fees to millions of customers and then blocks them from suing together, a result is not millions of individual claims, but zero. So the bank gets to pocket millions in ill-gotten gains.
Not only do group lawsuits help consumers recover money they otherwise would forfeit, but they also protect many more consumers by halting and deterring harmful behavior. For example, when banks reordered bank debits to charge more overdraft fees, consumers sued and recovered $1 billion. Most banks have since stopped the practice.
Director Cordray next asserts that the rule will not bar individual arbitration:
Our rule does not ban individual arbitration, as our opponents falsely claim. It simply ensures that consumers have the option of joining together to sue companies. Companies and consumers can still use arbitration to resolve their differences, but companies cannot unilaterally block group lawsuits.
Director Cordray also discounts claims that class-action lawsuits benefit “lawyers rather than consumers,” before adding:
Finally, this rule does not risk the safety or soundness of the banking system. We estimate the potential costs of this rule for the entire financial system at under $1 billion per year, whereas banks alone made $171 billion in profits last year. The law already bans mandatory arbitration clauses in financial contracts for military service members and in mortgages (the largest consumer financial market), yet the financial sector remains strong.
In truth, by blocking group lawsuits, mandatory arbitration clauses eliminate a powerful means to get justice when a little harm happens to a lot of people. It is the height of hypocrisy for companies to say they’re helping consumers by closing off the very same legal option they use when they’ve been wronged.
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