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On Thursday, the Consumer Financial Protection Bureau is expected to propose a regulation that will cause significant harm to the very consumers it is supposed to protect. The regulation will effectively eliminate the ability of consumers to use arbitration to seek redress for allegedly improper late fees, overdraft fees, or other small individualized claims that they cannot otherwise resolve with their financial service companies’ customer service departments. A “solution” in search of a problem, the bureau’s rule would replace arbitration — a consumer friendly system that is fast, convenient, and inexpensive — with America’s broken class action system. That’s great for class action plaintiffs’ attorneys but a bad deal for consumers.
Arbitration is a form of “alternative dispute resolution.” Parties who agree to arbitrate disputes rather than wait forever on the dockets of our overcrowded courtrooms have their cases heard before neutral arbitrators selected mutually by the parties and usually receive a decision in a few weeks’ time. Customers can participate in hearings by telephone, Skype, or in person. Unlike court, where a plaintiff has to pay her own way into the courtroom (it currently costs $400 to file a federal civil case), financial services companies actually cover all or virtually all of customers’ costs to bring complaints in arbitration. Furthermore, arbitration’s simplified procedures mean that customers don’t need a lawyer to get redress.
Class action litigation mostly benefits the plaintiffs’ lawyers who file the cases. In a class action, plaintiffs with nearly identical harms are grouped together to sue a company for alleged wrongdoing. These cases last for years and, in the end, consumers frequently end up with a coupon or maybe a few dollars while the trial lawyers make off with millions of dollars. According to a recent study on class action lawsuits, only 13% of them settle on a class-wide basis. And among the consumers eligible for relief in those 13% of cases, only 4% ever receive even one red cent from the settlement. Using simple math, class action lawsuits benefit a whopping one-half of one percent of the class members in this type of litigation. (That study, by the way, was the Consumer Financial Protection Bureau’s own 2015 Arbitration Study.)
Companies that offer arbitration programs for their customers do so because they believe it is a better alternative for customers than the broken class action system — a hypothesis the information in the bureau’s study confirms. These companies actually subsidize arbitration for their customers; some even pay a bonus award to customers that prevail against the company in arbitration, creating even more incentive for those companies to resolve customer disputes long before they even get to arbitration. They are able to subsidize these programs, however, only because they do not simultaneously have to set aside millions of dollars to defend themselves in class action lawsuits. That is why a condition of making arbitration available to customers is that claims be pursued in arbitration and not in class actions in court.
Any American who has ever started a small business or managed a family budget understands the economic reality that a company forced to be a class action defendant would likely stop voluntarily subsidizing arbitration. No economically rational company (or individual) is going to spend additional money voluntarily when it is forced to pay millions in litigation costs imposed by the broken class action system. That’s because no one chooses to pay twice for less.
Can the bureau seriously believe that businesses will subsidize arbitration programs while also being subject to wildly-expensive class action litigation? The reality is that arbitration is going to go away, leaving consumers with litigation as a sole means of redress.
And the sad irony is that because many of the grievances that consumers have against financial companies are based on each consumer’s unique facts, they will not be similar enough to bring in a class action. Couple that reality with the likelihood that no consumer will pay a $400 filing fee to vindicate a claim for a $50 overcharge and consumers will be left with a system in which they have no economically sensible way to obtain redress for alleged harms.
But the bureau, which appears to recognize the benefits of arbitration, has never publicly addressed what it believes the practical impact of prohibiting class action waivers would be, or explained why sacrificing arbitration for class actions is a good deal for consumers — we hope it will do so on Thursday.
The bureau is entitled to its own opinions about the effectiveness of class action lawsuits but is not entitled to its own facts. If, at the end of the day, the bureau is looking out for consumers, the facts do not support a rule that forces consumers either to use the broken class action system or abandon their claims altogether.
The bureau should go back to the drawing board before proceeding with this rule. Quite literally, consumers cannot afford for the bureau to get this wrong.