COMMENTARY: Consumer bureau’s new rule will better protect consumers from the abusive financial companies

Sen. Dean Heller is leading the charge to overturn a rule, just issued by the Consumer Financial Protection Bureau, that would prove very helpful to Nevada consumers if allowed to survive. This rule, issued July 10, prevents banks, credit card companies and other lenders from using small-print, forced arbitration clauses to prevent their customers from participating in class-action lawsuits brought against the company.

Unfortunately, Sen. Heller has put the interests of banks and financial service companies over those of Nevada consumers, co-sponsoring legislation to eviscerate the new regulation.

Nevada financial consumers, like those around the country, are often unaware of they are being victimized. When investment companies such as Wells Fargo open new accounts without customer permission, when phone companies such as AT&T misrepresent costs, when banks charge excessive check-bouncing fees, when for-profit schools lend money under false pretenses, and when pay-day lenders defraud their borrowers, they don’t send out announcements to let consumers know they have ripped them off. To the contrary, when these companies commit illegal acts, they often try to steal only a small amount from each consumer, hoping that by stealing a little from a large number of people, they can make lots of money without getting caught.

To further insulate themselves from liability, such companies have ingeniously inserted arbitration clauses into the small-print contracts they impose on their customers, using the internet or small-print envelope stuffers. Designed to prevent consumers from bringing lawsuits in court, these clauses also frequently prevent consumers from joining in class actions that might allow lots of people with small claims to join together and fight a big company.

Both forced arbitration and class actions are controversial. For many years the U.S. Chamber of Commerce and various business interests have campaigned to convince the world that arbitration is necessarily quicker and cheaper than litigation, and that class actions benefit only lawyers, and not class members. Yet many advocates for consumers say that forced arbitration is unfair, and that class actions in fact often do benefit consumers. These public-interest advocates urge that class actions help consumers both by providing compensation and, as important, deterring future unlawful conduct.

Faced with these debates, Congress in 2010 created the Consumer Financial Protection Bureau and ordered it to study the use of arbitration in connection with consumer financial products and services. Study it did. After spending three years collecting and analyzing massive amounts of data, the bureau produced a comprehensive report, hundreds of pages long. It found that many consumer financial products and services mandate arbitration; that virtually all the arbitration clauses prevent consumers from entering into class actions; and that most consumers covered by such clauses have no clue they have agreed to forgo litigation or class actions.

The bureau also determined that class actions are typically far more helpful to consumers than individual arbitration.

Focusing, for example, on cases involving unlawful check bouncing charges, the bureau found that class actions brought on this issue alone allowed millions of financial consumers to recover nearly $1 billion of damages as well as important non-monetary relief, all of which deters future legal violations.

By contrast, the bureau learned that consumers who have been defrauded by excessive check bouncing fees or other similar financial misconduct are not likely to know that they have been harmed, even less likely to realize that the harm was illegal, and certainly not likely to try to bring an individual arbitration claim over quite a small amount of money. This, together with the fact that federal and state investigative agencies are typically underfunded, is why class actions remain a critically important means of enforcing our laws.

In light of its findings the bureau has now issued a rule that prohibits financial companies from using forced arbitration to prevent consumers from participating in class actions. The rule also requires regulated companies to provide information to the bureau regarding arbitrations they impose so that regulators can further study the issue and decide whether additional rules may be needed.

The bureau’s new rule reflects years of study, but the story is not over. In addition to pushing for the bill co-sponsored by Sen. Heller, lobbyists for finance companies are now working hard to get the comptroller of the currency or the courts to knock out the regulation before it even goes into effect. It is time for Nevadans to reach out to their congressional representatives to ensure that the Consumer Financial Protection Bureau’s new rule is preserved so that Nevada financial consumers can be better protected.

Jean R. Sternlight is a UNLV law professor and director of the Saltman Center for Conflict Resolution.