The best thing CFPB can do to address “junk fees” is rein in forced arbitration
On October 24, 2017, the U.S. Congress dealt a heavy blow to consumers when, after a tie-breaking Senate vote by then-Vice-President Mike Pence, it voted to repeal the Consumer Financial Protection Bureau’s (CFPB) rule prohibiting class action bans in forced arbitration clauses. Since then, the courthouse doors have remained shut for countless consumers who have been harmed by abusive practices, including unfair junk fees that financial institutions use to pad their bottom lines. Now that the CFPB is tackling unfair fees in consumer financial services, it should also look towards revisiting the practice that handcuffs consumers’ ability to hold financial entities’ accountable for wrongful charges. And we’ve just shared our views with the CFPB.
In the run-up to its previous rulemaking, the CFPB conducted an extensive study on forced arbitration in the consumer financial services marketplace. It found that forced arbitration and class action bans were pervasive in consumer finance contracts and that only about 600 consumers filed for arbitration per year in the time period studied. Conversely, it also found that 32 million consumers were eligible for relief from class actions each year.
Unlike in a public court, consumers who are forced to go to arbitration must go before a private decisionmaker who is not bound to follow the law and may be incentivized to favor the more powerful party. There are fewer procedural protections in arbitration than in court, and even if an arbitrator makes an egregious error, their decisions are virtually unappealable. The prospect of having to go it alone against a corporation with substantially more resources in such a disadvantageous environment heavily discourages consumers from bringing claims even when they are the victims of real misconduct.
This is especially true in instances where the harm suffered by a consumer is relatively small. For most consumers, it is not worth it to try to fight for a $50 refund in arbitration, which is exactly what unscrupulous businesses bank on when they engage in misconduct that inflicts small but widespread harm on a large number of consumers. While each consumer may only lose $50 or less, this can add up to staggering profits for a large corporate entity.
Junk fees, such as overdraft fees, convenience fees, and late fees fall squarely into this category of wide-reaching low-dollar harms that would be impossible for consumers to challenge individually, whether in arbitration or in court. For junk fees and similar systemic abuses, the most efficient and effective mechanism for obtaining remedies for consumers and stripping wrongdoers of their ill-gotten profits is for consumers to band together in court. When large groups of consumers can join their claims together, they can overcome the barriers of individual action and stand on more equal footing against the corporate entity that harmed them.
The power of banding together to combat junk fees is readily illustrated by Scharfstein v. BP West Coast Products LLC, an Oregon case against a gas station operator where a jury found in 2014 that an operator violated Oregon’s trade practices law by charging millions of consumers an undisclosed $0.35 fee when using their debit cards. The case resulted in a verdict of $409 million. After multiple appeals, the gas operator finally settled, and agreed to pay back the illicit gains it had made. No consumer would mount a legal challenge over $0.35, but when all the consumers who have been subjected to the illegal charge join their claims together, they can stop a systemic and shady business practice.
Similarly, in Lembeck v. Arvest Central Mortgage Co., a case brought in a California federal court, consumers accused a mortgage servicer of overcharging fees to process payments. The servicer allegedly charged consumers $10 to make payments by phone and $5 through an online portal even though it only cost $0.50 to process the payments. The surplus went straight into the servicer’s accounts as additional profits for no additional service. Fortunately, consumers who had been ripped off by these excessive fees were able to band together to successfully challenge the servicer and get their money back. According to the 2021 settlement agreement, class members would receive an automatic payment by digital payment option or by check.
Consumer collective and individual actions to stop harmful practices involving mortgage loans do not face the same uphill battle to seek accountability because the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed following the 2007–2008 housing and economic crisis, specifically prohibited the use of forced arbitration clauses in connection with home loans and contracts related to them.
In a recent Request for Information, the CFPB sought out public input on consumer experiences with junk fees. Additionally, it has recently published research on overdraft fees and announced that it intends to apply greater scrutiny to financial institutions that depend heavily on fees for revenue. The Bureau can also use this time to highlight the prominent role of forced arbitration and class action bans have in giving these wrongful practices free rein to flourish. Moreover, to effectively protect consumers from junk fees, the Bureau should grab the opportunity now to renew its work on forced arbitration, as it is specifically authorized to do under Dodd-Frank.
With forced arbitration clauses cutting off most consumers’ ability to band together in a single action, there is little hope of obtaining remedies for consumers on the same scale on which they are being harmed by junk fees, and there is little chance of fully holding bad actors accountable and deterring future misdeeds. The foundational research has already been done, the statutory authority to address forced arbitration still exists, and the momentum to eliminate forced arbitration in more and more areas of the law is greater than it has ever been. The CFPB is the right agency to address this hindrance in financial services, and it is the right time to strike another blow against forced arbitration and move towards a fairer marketplace for consumers.
Read more on junk fees and forced arbitration in NACA’s comment to the CFPB here.