Consumer Confidential: Consumers want court date when banks don’t play fairly

The vast majority of consumers want to know they can seek their day in court if they get in a beef with a bank.

That’s the main takeaway of a report last week from the Pew Charitable Trusts, which examined so-called mandatory arbitration clauses in bank contracts. These are the provisions that say you can’t sue or join a class-action lawsuit, and if you want to settle a dispute, you have to take it to a professional arbitrator selected and paid for by the bank.

Unfair much?

“Consumers want a choice,” said Thaddeus King, who researches consumer banking for Pew and co-wrote the arbitration report. “They want to be able to go to court. They want to be able to join a class action. They want to be heard by a judge and jury.

”The banks, however, aren’t allowing that.“

A survey of more than 1,000 bank customers found that almost 90 percent want to be able to join class-action lawsuits involving questionable bank fees or similar practices, Pew found. Ninety-five percent said they wanted the right to have a dispute heard by a judge and jury.

However, three-quarters of leading banks prohibit customers’ participation in class actions, and 91 percent forbid jury trials, according to Pew.

These findings come as the Consumer Financial Protection Bureau considers a ban on arbitration clauses that block class-action lawsuits. The rule would apply to financial industries under the bureau’s jurisdiction, including banks, credit card issuers and debt collectors.

Most Republicans are against the proposed measure, but more than 100 Democratic lawmakers recently wrote to the bureau urging that it quickly adopt the rule ”to ensure that consumers have equal protection under the law.“

Class actions are seen by many in the business world as being frequently abused by lawyers more interested in squeezing money from companies than in seeking justice for plaintiffs. There’s some truth to that.

But class actions also serve a vital function by allowing aggrieved consumers to band together in pressing cases involving relatively small amounts of money that wouldn’t be worth pursuing on an individual basis.

In April, for example, the U.S. Supreme Court upheld a $203 million verdict in favor of Californians who were unfairly charged overdraft fees that ran between $25 and $35. The high court let stand a 2010 decision by a federal judge that Wells Fargo had deliberately arranged checking-account payments to ”maximize the number of overdrafts.“

A study by the Consumer Financial Protection Bureau last year found that ”very few consumers ever bring – or think about bringing – individual actions against their financial service providers either in court or in arbitration.“ It concluded that ”class actions provide a more effective means for consumers to challenge problematic practices by these companies.“

The banking industry begs to differ. It has steadfastly insisted that lawyers, not consumers, benefit from class actions and that arbitration is a more cost-effective and efficient means of handling problems.

”One question missing from the Pew survey is, ‘How much are people willing to pay to reserve their right to be part of a class action in which the average award is about $32?’“ said Nessa Feddis, senior vice president of the American Bankers Association.

”The CFPB estimates that eliminating arbitration will add more than 6,000 class actions every five years, and it expects that consumers will pay for financial institutions’ increased litigation costs in the form of higher fees and fewer services,“ she said. ”Meanwhile, taxpayers will pay for the increased burden on the court system and will have to wait longer for justice.“

First of all, the bureau isn’t talking about eliminating arbitration. Consumers would be free to go down that road if they desire. All the bureau is proposing is that class actions be an option as well.

Moreover, the advocacy group Public Citizen found that businesses file four times as many lawsuits as individuals, so it’s not as though consumers would be solely to blame for an ”increased burden on the court system.“

Finally, why is it a given that consumers would end up paying higher fees to cover ”financial institutions’ increased litigation costs“? If banks keep their noses clean, they won’t end up in court.

Then there’s the question of whether arbitration favors businesses over consumers. A 2007 study by Public Citizen found that over a four-year period, arbitrators ruled in favor of banks and credit card companies 94 percent of the time in disputes with California consumers.

A key problem: Since businesses pay for the arbitration process, some arbitrators may be reluctant to disappoint companies that could seek their services again in the future.

To that concern, banks say consumers should trust them to play fairly.

”If done well, arbitration is a very valuable forum for customers to resolve disputes,“ said Richard Foster, senior vice president of regulatory affairs for the Financial Services Roundtable.

”The CFPB should focus on improving the arbitration system for financial services customers rather than encouraging arbitration effectively be abandoned in favor of lengthy and expensive class-action lawsuits, which often only benefit plaintiff lawyers and not consumers,“ he said.

And that’s fine. Arbitration should be available to all parties in a dispute. But it shouldn’t be the only option.

”Without class actions, there’s just no reasonable way for a consumer to seek to vindicate themselves for a small harm,“ said Pew’s King.

No wonder most banks are fighting to keep things as they are.

No wonder nearly all consumers want change.