One would have thought that between Wells Fargo trying to force customers who had bogus accounts opened in their name into arbitration and Equifax doing the same to consumers who just want to see if their private, personal data has been hacked, the push to kill the CFPB’s rule freeing consumers from arbitration and allowing them to participate in litigation would finally be dead.  Sadly, that’s not the case.  Those who want to keep mandatory arbitration have instead tried to convince the American public that the rule will usher in an era of non-stop class action lawsuits, line the pockets of trial lawyers, and leave average consumers out in the cold.  They’ve got it all wrong.

The need for the CFPB’s arbitration rule is quite simple: Consumers who lose money as a result of deceptive or abusive conduct often cannot afford to retain a lawyer and sue on their own.  This is particularly true if the damages are significant but still not large enough to interest a law firm seeking a share of any award.  And it is even more true for consumers who are seeking to recover a smaller or more modest sum.  Magnified tens of thousands or hundreds of thousands of times, these fees add up to tens of millions or hundreds of millions of dollars in profits for the banks—ill-gotten gains, in fact.  As Senator Lindsey Graham put it, “”Nobody is going to get a lawyer over a $10 overcharge, but when you overcharge millions of people $10, the bank or the credit-card company makes out like a bandit” in arbitration.  Class action lawsuits allow consumers to obtain relief for lower-dollar injuries by filing suit as a group and spreading the costs of litigation across many plaintiffs.  And, the possibility of facing a class action lawsuit also serves as a powerful deterrent against fraud and abuse by banks.

And here’s a snapshot of some of the real data from CFPB’s report on arbitration, and what they show over the study period:

• Investors have slim chances of recovery in arbitration, faring far worse than the industry:
  • In 341 arbitration cases, consumers obtained relief on their affirmative claims in only 32 instances – less than 10%.  And the total dollar amount of recovery by all investors during the period was $172,422.  And in 52 disputes involving $1,000 or less, consumers obtained affirmative relief in only 4 cases – again, less than 10%.
  • Yet financial companies obtained relief in 227 of 244 arbitration cases – over 90%.  And their total dollar recovery was $2,806,662.
• Compare class action settlements, where consumers recover far more:
  • The total amount of cash and in-kind relief amounted to $2.8 billion, and that did not include the value of changes in business practices required under the settlements.
  • 34 million class members received or were scheduled to receive cash relief.
• And don’t believe the notion that it all goes to the lawyers:
  • In the class action settlements studied, 24% of cash payouts went to attorneys’ fees, a percentage well below the average contingent fee in an individual lawsuit.
• Finally, the study debunks the idea that the possibility of class action liability raises costs for financial services or restricts access to products and services:
  • There was no statistically significant evidence that companies who dropped their mandatory arbitration clauses and faced class-action risk increased their prices.
  • Similarly, the study found no evidence that access to credit was more limited among companies that eliminated mandatory arbitration clauses.

The numbers clearly reflect that the danger of a torrent of litigation been vastly overstated and that class actions are an effective means for individual consumers to band together to fight back against the big financial firms when they have been swindled. 

And class actions are far more fair and transparent than arbitrations.  When class actions are adjudicated, whether it be in a courtroom or through a negotiated settlement, strict rules of procedure apply. In fact, reforms over the past 20 years have made it difficult to bring class actions without strong evidence of systemic abuses by the bank, thus discouraging frivolous cases.  And in court, an impartial judge oversees the process. By comparison, arbitrators are typically people who have had long careers in industry and who are not bound to apply the law when deciding claims.  Arbitration panels are not required to issue written decisions and rarely do.  And the cases are strictly private, making it harder for regulators to spot widespread abuses at banks—as we learned in the Wells Fargo scandal. Finally, unlike a court’s decision, an arbitration award is almost impossible to appeal.

To focus on trial lawyers in class actions and ignore the clear benefits to consumers of class litigation over arbitration amounts to the same old scare tactics and strawmen arguments.  Don’t believe them.