Ready, Set… Sue! Forced Arbitration Fading

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You may not realize it, but you probably can't sue your credit card company, along with a host of other businesses, ranging from your health club to your cell phone provider. But that may be ending - here's why it matters.

Talk to a lawyer, and they’ll tell you: You can sue anyone for any reason at any time. It’s your constitutional right. (And other people can sue you as well, even for internet posts. Check out When Free Speech Gets Expensive.)

But while it may be theoretically possible to sue on a whim, in the real world it’s not as easy as it may seem – at least not if the target is your bank, broker, cell phone provider or many other businesses you deal with. That’s because, before they agree to do business with you, many of those companies require that you accept a contract provision waiving your right to sue in favor or arbitration. Why didn’t you know that? Because it’s in the fine print you never read.

But it looks like mandatory binding arbitration may finally be fading. A provision in the massive new Wall Street reform bill has already killed mandatory arbitration in mortgages and home equity loans, and it further allows the new Consumer Financial Protection Bureau to potentially nix it in most other consumer financial agreements as well.

Here’s the letter of the law:


(a) STUDY AND REPORT – The (Consumer Financial Protection) Bureau shall conduct a study of, and shall provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.

(b) FURTHER AUTHORITY – The Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers. The findings in such rule shall be consistent with the study conducted under subsection (a).

What’s the big deal – isn’t arbitration cheaper anyway?

Arbitration is generally much less expensive, less complicated and less time-consuming than going to court – which typically makes it a more appealing way to resolve a dispute. But critics have long argued that the arbitration panels deciding these cases often include current or former industry insiders, potentially stacking the odds in favor of big business.

That’s one reason consumer advocates – including me – have long argued against making arbitration mandatory. But here’s a more important reason: disallowing lawsuits prevents consumers from banding together and forming class action lawsuits. And class action lawsuits are sometimes the only thing that can actually change how a corporation does business.

Example: Just last week Wells Fargo was ordered to pay $200 million in connection with this class action suit that accused it of deliberately rearranging customer checks and account debits to maximize overdraft charges.

What Wells Fargo was doing – and many banks still are doing – is clearing big checks first, which may reduce a checking account to zero, then clearing the smaller checks and debit charges made on the same day. Here’s how that would maximize their overdraft charges:

Say you have $2,000 in your checking account. You use your debit card to make ten $10 purchases. Then you write a check to buy something that costs $2000. What should happen is the ten $10 purchases would clear, but the $2,000 check would bounce, resulting in a $30 bounced check fee. Common industry practice, however, is to re-order the debits: clear the $2,000 check first, leaving the account with a zero balance. Then bounce the ten $10 purchases, resulting in $300 of bounced check fees.

Think that’s fair? It’s been going on for years. Would going to arbitration with Wells Fargo over $300 in fees have changed anything? No. Would hundreds of people banding together and costing Wells Fargo $200 million dollars change their behavior? Quite possibly. (In this specific case, however, not yet – Wells is appealing the judge’s ruling.)

Bottom line? While you may not know a lawsuit from a swimsuit, this new potential prohibition against mandatory arbitration could help protect you from abuse. It’s not a done deal yet, but we’ll be staying on top of it – I’ll let you know what happens.

Stacy Johnson

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