Speaker 1: The country's consumer watchdog is making it easier for customers
Speaker 1: to sue banks and class actions, a move which is
Speaker 1: sure to be widely opposed by financial industry groups, congressional Republicans,
Speaker 1: and the White House. The Consumer Financial Protection Bureau adopted
Speaker 1: a new rule on Monday banning financial firms from forcing
Speaker 1: customers to arbitrate disputes and to give up their rights
Speaker 1: to go to court. My guests are Raphael Mangual, a
Speaker 1: legal policy project manager at the Manhattan Institute, and Mike Gonzal,
Speaker 1: a fellow at the Roosevelt Institute and founder of the
Speaker 1: Roardy baumb financial blog who is in the Bloomberg Studios.
Speaker 1: Mike tell us about these mandatory arbitration clauses that are
Speaker 1: found often in the fine print of everything from credit
Speaker 1: cards to checking accounts. Yes, and they go far beyond
Speaker 1: that too, to elderly care homes, to students and a
Speaker 1: for profit schools. But in the financial world, where the
Speaker 1: CFPB has jurisdiction, there are two big developments I think
Speaker 1: that happened last two years that really pushed this into
Speaker 1: the public consciousness. Once one was a series of reporting
Speaker 1: by the New York Times really just saying how broad
Speaker 1: and widespread this is, um that virtually every type as
Speaker 1: you just mentioned, but virtually every type of financial product,
Speaker 1: be it your credit card, be it you're checking account.
Speaker 1: Basically anything that is not a mortgage, which is banned
Speaker 1: by law from having these kinds of arbitration of being forced,
Speaker 1: has these kinds of contracts, and it really is a
Speaker 1: transfer of power from people's ability to go to court,
Speaker 1: people's ability to be seen with public power, into private power,
Speaker 1: into setting set by the banks themselves. And the second
Speaker 1: was the Wells Fargo scandal. Um what people found, weirdly enough,
Speaker 1: was that the fake accounts that people were signed up
Speaker 1: for had these arbitration accounts, so people could not actually
Speaker 1: sue in the way that they normally thought they would.
Speaker 1: So the potential for abuse became very apparent, even though
Speaker 1: it was always there. Raphael, What does this new rule
Speaker 1: by the Consumer Financial Protection Bureau do well? It would
Speaker 1: essentially and banks from blocking consumers from joining class action
Speaker 1: lawsuits to resolve that there's their disputes with those banks.
Speaker 1: And the way that banks and other financial institutions normally
Speaker 1: do that is through the inclusion of an arbitration clause.
Speaker 1: But the problem is that the opposition to these sorts
Speaker 1: of clauses. Actually, I think UM reflects a fundamental misunderstanding
Speaker 1: of how effective class actions actually are as a way
Speaker 1: to resolve these disputes. Remember, most of these disputes per
Speaker 1: small dollar amounts, and so individual litigation is not going
Speaker 1: to be the most efficient way to handle that um,
Speaker 1: which is the benefit of an arbitration because it's a
Speaker 1: lot cheaper, a lot quicker, a lot more efficient, and
Speaker 1: although most people don't know this, more often results in
Speaker 1: a favorable ruling for a plaintiffs. Do you agree with that, Mike,
Speaker 1: there's also class actions which are really easy for plaintiffs. Yeah,
Speaker 1: so there's a quite I mean, this band's mandatory arbitration
Speaker 1: right to these sent that arbitration is efficient and obviously
Speaker 1: a good solution for people. It is still there is
Speaker 1: an option. It just bands mandatory arbitration right. The mandatory
Speaker 1: put of consumers into this kind of private realm of law. Now,
Speaker 1: who sues their bank over thirty dollars? I mean, you
Speaker 1: think of how sticky these contracts are. You know, if
Speaker 1: your bank charges you twenty bucks that was invalid and fraudulent,
Speaker 1: are you going to sue them? Are you going to
Speaker 1: leave because you know you have to re goo to
Speaker 1: HR and redo all your checking, you have to order
Speaker 1: new checks, you have to change everything. You're probably just
Speaker 1: going to eat it, especially if you do not know
Speaker 1: that other banks have protections as well. So this really
Speaker 1: does add an important element for consumers, and I think
Speaker 1: crucially the big thing here is that it removes that
Speaker 1: mandatory private power element. You do have your ability to
Speaker 1: go to a court, you do have your ability to
Speaker 1: band with other people in a way that is no
Speaker 1: longer dictated to you by the financial industry as a whole. Rafael,
Speaker 1: would you agree that for consumers this is a good thing.
Speaker 1: It might not be good for financial organizations. No, it's
Speaker 1: actually more likely to hurt consumers. And so one of
Speaker 1: the big reasons that you see some of the support
Speaker 1: that you're seeing for this new rule is this notion
Speaker 1: that you know there that consumers are essentially you know,
Speaker 1: without power in terms of you know, coming out on
Speaker 1: top of these disputes. But the Manhattan Institute actually published
Speaker 1: a report by UM University of Virginia professor Jason Johnston
Speaker 1: a while back, and that report actually found that seventy
Speaker 1: of the time a bank would actually refund the fees
Speaker 1: in response to a consumer complaint. And so again I
Speaker 1: think a lot of the support for this new rule
Speaker 1: to CEFPB is based on a fundamental just misunderstanding of
Speaker 1: what the facts on the ground are. And so the
Speaker 1: notion that you know, allowing these consumers to join class
Speaker 1: actions is somehow going to result and you know, payoffs
Speaker 1: for them is just not reflected in reality. I mean,
Speaker 1: the CFPPS own report that they that they published in
Speaker 1: support of this rule found that consumers were only getting
Speaker 1: about thirty two dollars um each UH in the unlikely
Speaker 1: event that a class action settled the resulted in a
Speaker 1: favorable verdict, whereas arbitrations that went to a decision delivered
Speaker 1: an average of over five thousand dollars for consumers. And
Speaker 1: the notion that this is good for consumers is just
Speaker 1: um again, not rooted in the facts, Mike. The CFPB
Speaker 1: report also found that hundreds of millions of these contracts
Speaker 1: include arbitration provisions and that companies have used the clauses
Speaker 1: to keep fights out of court almost two thirds of
Speaker 1: the time. Are there other problems with that? Yeah, I mean,
Speaker 1: if this was so bad, if this was such a
Speaker 1: good thing for the banks that they would now pay
Speaker 1: less somehow. Um, it's weird that the banks opposed it
Speaker 1: so much and consumer groups are so actively for it. Um.
Speaker 1: You know, there is obviously a big bias. You know,
Speaker 1: The New York Times investigated this and sound and found
Speaker 1: quite clearly very few people will ever sue or go
Speaker 1: to a court or try to go to arbitration over
Speaker 1: something like twenty or thirty dollars. Now, it is true
Speaker 1: that banks will often, you know, refund is because of
Speaker 1: there's now much more active enforcement as a result of
Speaker 1: the CFPB. But broadly, you want to think in terms
Speaker 1: of what are avenues that people have to find remedies
Speaker 1: against banks and they're not going to leave their bank
Speaker 1: over twenty dollars, and especially if other banks may also
Speaker 1: be committing the same kinds of problems. Raphael. Under the
Speaker 1: Congressional Review Act, lawmakers have sixty legislative days from the
Speaker 1: time they formally received the rule to overturn the bureau's decision,
Speaker 1: and then they've used that to reverse fourteen rules from
Speaker 1: the Obama administration. Will they be able to do the
Speaker 1: same with this rule? Uh, they certainly should look into
Speaker 1: doing that. UM. The question of you know, whether or
Speaker 1: not they'll actually be able to do it is is
Speaker 1: still up for debate. But I think they will and
Speaker 1: I think they should. But even if they don't, this
Speaker 1: rule is likely going to run into a lot of
Speaker 1: litigation UM in opposition to it UM, and that litigation
Speaker 1: is most likely going to be centered on the question
Speaker 1: of whether or not the cfpb s own findings actually
Speaker 1: support the promulgation of the rule. And Mike, the head
Speaker 1: of the key banking regulator, wrote to the head of
Speaker 1: the CFPB to raise concerns about the rule. Um the
Speaker 1: controller of the currency asked that they share data used
Speaker 1: to develop its arbitration rule. Tell me what the implications
Speaker 1: of that are in about forty five seconds. Sure, So
Speaker 1: there's obviously, as was just brought up, the Congressional Review
Speaker 1: Act might be something that happens. The sentence very busy
Speaker 1: with healthcare and soon to be tax reforms, so there's
Speaker 1: a question the timing and a tough vote. The other
Speaker 1: regulators could overrule the CFPP. The CFPP has this extra
Speaker 1: accountability measure that two thirds of the regulators could overrule it,
Speaker 1: and the o c c S actions could be understood
Speaker 1: as a measure to try to gain support for that.
Speaker 1: That is going to be a big lift, and it
Speaker 1: is not clear whether or not that would work one
Speaker 1: way or the other. Well, this will be something interesting
Speaker 1: to watch. Thank you both for being with us here
Speaker 1: on Bloomberg Law. That's Raphael Manuel, he's a legal policy
Speaker 1: project manager at the Manhattan Institute. And Mike Gonzal, he's
Speaker 1: a fellow at the Roosevelt Institute and founder of the
Speaker 1: Roardy Baum Financial blog. That's it for this edition of
Speaker 1: Bloomberg Law. Will be back tomorrow at one pm Wall
Speaker 1: Street time, and hope you'll join us. Thanks to our
Speaker 1: producer David Suckerman, and happy birthday to David and our
Speaker 1: technical director Sean Kilby. You can always find the latest
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