Consumer Law & Policy Blog

What I Learned From Listening to Wells Fargo's CEO Stumpf Testify (and to Senator Warren's and Brown's Questions)

by Jeff Sovern

As we noted yesterday, on Tuesday, Wells Fargo CEO John G. Stumpf testified before the Senate Banking Committee about the Wells Fargo Customer Fraud Fiasco.  Video is available here and Senator Elizabeth Warren's two rounds of questioning, by themselves, here. I have now listened to Mr. Stumpf's testimony, and I learned that Wells engaged in cross-selling to "deepen" its relationships with its customers.  I am somewhat embarrassed to acknowledge that I don't know what a deep relationship means to a bank (If you will forgive a personal note, I have banked at the same institution for nearly forty years, and I currently have four accounts there--and yet I don't know if our relationship counts as deep or not.  I would be surprised, though, if anyone at the bank knows my name, or could recognize me).  But I got a different perspective on why Wells pursued cross-selling so aggressively from Senator Warren's interrogation, during which she observed that in quarterly phone calls with stock analysts, Mr. Stumpf had repeatedly touted the number of accounts its average customer had, a number that increased over time.  Wells apparently led other banks in that number.  Senator Warren also reported that Wells' stock price increased during that same period, yielding Mr. Stumpf personally a profit in the hundreds of millions, if I understood correctly (though presumably the stock price also rose because of other activities as well).

Mr. Stumpf, to his credit, took responsibility for the fiasco and also promised to make things right.  But he said little about what making things right means. For example, when senators asked about Wells customers who might have had their credit scores reduced because of the phony accounts (e.g., if Wells employees requested credit reports as part of the process of opening a credit card account a consumer had not requested) which might have resulted in consumers paying higher interest rates on mortgages they later applied for, say, Mr. Stumpf was unable to say more about what would be done in such cases beyond making it right.   I would have expected that Wells would be prepared to say what would make things right by now.  After all, this matter became public in 2013, when the Los Angeles Times reported on it, and the CFPB, OCC, and Los Angeles City Attorney have been investigating for some time, an investigation that culminated in the largest penalty in CFPB history.  But Mr. Stumpf didn't know the answer to that question.

Regular readers will recall that I hoped that a senator would ask whether Wells will waive its arbitration clauses in defending civil law suits arising from the matter.  In fact, Senator Sherrod Brown asked just that--but all I learned from the answer is that Mr. Stumpf is not an attorney. He didn't know the answer to that question either. But maybe the answer has come from the cross-selling cases already brought in which Wells did not waive its arbitration clause. Sigh.

Did Arbitration Clauses Help Wells Fargo Get Away With Account Opening Frauds for Years?

That's a point made in an op-ed in The Hill, Why Wells Fargo Got Away with It So Long by Public Citizen's Robert Weissman and AFR's Lisa Donner.  The whole piece is worth reading, but here's an excerpt:

[M]ore than three years ago, a Wells Fargo customer named David Douglas sued in California, contending that the bank's employees and branch managers "routinely use the account information, date of birth, and Social Security and taxpayer identification numbers ... and existing bank customers' money to open additional accounts." Douglas alleged that branch managers opened at least eight accounts in his name and created fake business accounts under his name without his knowledge.

This case should have gone to court but was blocked by a ripoff clause. Douglas's lawyers argued that an arbitration provision in a legitimate account agreement should not bar him from suing over a sham account he never agreed to open. However, citing recent 5-4 U.S. Supreme Court decisions, the judge held that the ripoff clause in the original agreement blocked him from suing Wells Fargo.

In 2015, another Wells Fargo customer, Shahriar Jabbari, tried to file a class action against the bank, claiming that employees hid fees, refused to close accounts on request, and forged signatures and addresses. Wells Fargo publicly denied these allegations. Again, the judge ruled that the ripoff clause in the original account agreement forced any unresolved disagreement into arbitration, and Jabbari's class action was kicked out of court.

A Question I Would Like to See Asked at the Senate Wells Fargo Hearing Tomorrow: Will Wells Invoke its Arbitration Clause to Prevent Consumers From Litigating their Claims Against Wells?

by Jeff Sovern

Tomorrow, the Senate Banking Committee will hold a hearing on the Wells Fargo unauthorized accounts fiasco.  The first witness will be Wells' Chairman and  CEO, John G. Stumpf.  I hope some Senator asks Mr. Stumpf about the Wells Fargo arbitration clause.  Some class actions have already been filed against Wells, and Wells' arbitration clause is relevant to those proceedings.  You might think that such an arbitration clause would not apply to a dispute over an account a consumer never agreed to open.   But recall that many of the accounts were opened in the names of consumers who already had other accounts with Wells.  I randomly selected a Wells Fargo credit card agreement in the CFPB's credit card contract database and took a look at the arbitration clause.  The clause is written broadly, and defines a dispute as "any unresolved disagreement between you and the Bank. It includes any disagreement relating in any way to the Card or related services, Accounts, or matters . . . . It includes claims based on broken promises or contracts, torts, or other wrongful actions."

I don't know If that's typical of the arbitration clauses the consumers entered into, but assume it is.  The accounts which employees opened were arguably "related" to the existing accounts if they arose from supposed cross-selling.  But even if they weren't, because that sentence says "includes," the arbitration clause is not necessarily limited to disagreements related to the accounts the consumers had with Wells.  The clause says "any unresolved disagreement (emphasis added)."  Accordingly, consumers with existing Wells accounts are probably bound by the arbitration clause even as to accounts they never opened, unless there is some argument I haven't thought of or the clause is invalid for some reason.  That means the class actions would go away, and as the cost of arbitrating the individual actions might be prohibitive, Wells might avoid civil liability beyond what it ends up paying in actions brought by government agencies.  You could say that if the consumers didn't want to be subjected to arbitration, they shouldn't have agreed to it in the accounts they did open, but unfortunately, our arbitration study showed that few consumers understand these clauses and that many don't believe they mean what they say, which means that consumers can't protect themselves from arbitration clauses, much less very broad ones like this one.  Isn't something wrong when consumers can't litigate a claim about an account they never opened?

Another problem with arbitration in this context is that arbitration proceedings, unlike most court proceedings, are secret, and so we might never learn more about what happened than is already in the record, or that comes out during congressional hearings. 

Wells has suffered a public black eye from this.  To its credit, it has already tried to fix that by taking responsibility.  Mr. Stumpf could further help heal Wells' public image by agreeing to waive use of the arbitration clause to increase the likelihood that any consumers hurt by what Wells did will receive full compensation and that the public learns more about what happened. 

 

House Financial Services Committtee Votes to Cripple CFPB Right After CFPB Punishes Wells Fargo for Opening Phony Consumer Accounts

by Jeff Sovern

As has been widely reported, last week the CFPB fined Wells Fargo $100 million for setting up phony accounts in consumers' names.  But that didn't stop the House Financial Services Committee from voting yesterday on a largely party-line vote to adopt the Financial Choice Act, which would gut the Bureau. According to Law360, the bill has no "shot a[t] passage this year but it seen as a preview of Republicans’ 2017 banking legislation."  According to the Committee's Executive Summary, here is what the bill would do to the CFPB: 

•  Change the name of the CFPB to the "Consumer Financial Opportunity Commission (CFOC)," and task it with the dual mission of consumer protection and competitive markets, with a cost-benefit analysis of rules performed by an Office of Economic Analysis.
•  Replace the current single director with a bipartisan, five-member commission which is subject to congressional oversight and appropriations.
•  Establish an independent, Senate-confirmed Inspector General.
•  Require the Commission obtain permission before collecting personally identifiable information on consumers.
•  Repeal authority to ban bank products or services it deems "abusive" and its authority to prohibit arbitration.
•  Repeal indirect auto lending guidance.

 

 

Employer's Lawyer Explains That Arbitrators Favor Employers Out of Self-Interest

Irvine lawyer Greg Labate is quoted in the Orange County Register:

Labate advises clients to get their employees to sign arbitration agreements, waiving their right to sue in court, and sending disputes to privately hired arbitrators.

* * *

“People question whether arbitration tends to favor employers,” Labate told a [Professionals in Human Resources Association] conference session. “I believe they do. I use the same arbitrators over and over, and they get paid when I pick them. They know where their bread and butter comes from.”

 

Noll Article on Regulating Arbitration, including the CFPB's Proposed Regulation

David L. Noll of Rutgers has written Regulating Arbitration,  California Law Review, Forthcoming.  Here's the abstract: 

Arbitration is everywhere, as are calls to regulate its use in consumer and employment contracts. But when should Congress and federal administrative agencies do so? That is, what is the policy rationale for regulating arbitration through federal legislation and agency action? This Article reveals an overlooked set of consequences caused by the growing use of arbitration -- its impact on the implementation of federal statutory policy -- and argues that these effects should be a focus of policymakers' efforts to regulate arbitration through legislation and agency action. In hundreds of statutes, Congress has created financial incentives for private litigants to enforce the law through civil litigation. The enactment of such incentives allows litigants to assert claims that would be too expensive to prosecute under ordinary procedural rules, and, more importantly, allows Congress to calibrate enforcement of federal law. By mandating specific forms of dispute resolution procedure, arbitration can dramatically alter the returns from enforcement of statutes with incentives for private, civil litigation, and, in so doing, subvert or completely undermine congressional efforts to mobilize and calibrate private statutory enforcement. These "enforcement effects" threaten Congress's ability to accomplish substantive regulatory objectives through private, civil litigation but have received little attention. To illustrate how greater attention to them would affect efforts to regulate arbitration, the Article analyzes the Consumer Financial Protection Bureau’s proposed arbitration regulation under section 1028 of the Dodd-Frank Act and explains how it falls short of ensuring that consumer financial protection laws are enforced in the manner contemplated by Congress.

Reuters: U.S. consumer agency faces heat on financial arbitration rules

Here.  Excerpt:

Thousands of angry consumers and business representatives have flooded the Consumer Financial Protection Bureau with comments on its May proposal to block companies from forcing customers to take disputes to arbitration instead of joining group lawsuits.

Sentiment in the unusually high number of comment letters, more than 8,380 have already been filed though the deadline still is a week away, seems roughly divided between supporters and critics of the proposed rule.

Arbitration Clauses Onstage

by Jeff Sovern

Recently I saw an off-Broadway play by Norman Shabel, A Class Act.  Shabel is a longtime practicing lawyer and the play is about negotiations to settle a toxic waste class action case (not a consumer case).  Nevertheless, the lawyers note that the case can proceed as a class action because the victims--people who have consumed water tainted by the toxic waste--have not agreed to an arbitration clause.   I don't know if a non-lawyer would like the show, and I found the first half slow-going, but I definitely enjoyed the second half.  And I didn't have to agree to an arbitration clause to see it. 

Szalai Article on the Federal Arbitration Act's History

Imre S. Szalai of Loyola of New Orleans has written Exploring the Federal Arbitration Act Through the Lens of History, Journal of Dispute Resolution, Vol. 2016, No. 1 (2016).  Here's the abstract:

My initial interest in the history of the Federal Arbitration Act (FAA) arose out of my experiences representing clients and seeing how the FAA could be a game-changer for dispute resolution. In light of the broad and powerful use of the statute today and how the statute impacts access to justice in connection with so many different areas of law, I went in search of a deeper history regarding the FAA because I wanted to understand why the statute was enacted. Through years of research, I encountered a rich history behind the statute’s enactment during the Roaring Twenties. The individuals who were involved had passionate, sincere beliefs about the use of arbitration to resolve commercial disputes. The campaign for the FAA involved celebratory parties fitting for the Great Gatsby, invitations to an exclusive Hollywood hangout, and stump speeches at movie theaters, synagogues, and churches. Many different people, factors, institutions, and beliefs helped shape and contribute to the development and passage of the FAA, including progressivism, the First World War, a changing national and international interconnected economy, Prohibition, and a larger movement for procedural reform in the legal system, to name a few. Diving into the history stunned me and fascinated me more than I ever expected.

I have received many questions about the FAA’s history from attorneys, other law professors, and my students, such as why is this history important, or isn't the history just an interesting footnote to the statute? This Article explores several important lessons I learned from studying the history of the FAA's enactment. First, in light of this history, it is clear that the Supreme Court has grossly erred in interpreting the FAA. Second, the history can help one better understand current controversies regarding arbitration law. Finally, this history provides different perspectives on the role of arbitration in our legal system, such as the dynamic relationship between litigation and arbitration, the relationship between the government and its people, and hidden values of arbitration.
 

103 Members of Congress Endorse CFPB's Arbitration Rule

by Jeff Sovern

The Senate letter, signed by more than a third of the Senators, is here, and the House letter with 65 signers, is here.  The letters are more than pro forma expressions of support. They are extensively footnoted (and the House letter cites the law professor letter joined by more than 200 professors). Some excerpts from the Senate letter (with footnotes omitted):

The CFPB's study and proposal underscore the importance of class actions as a powerful tool to help consumers effectively vindicate their rights by returning billions of dollars to millions of consumers, in addition to achieving important non-monetary relief in the form of changes to harmful business practices. Because the majority of individual claims against consumer financial services companies are worth only small amounts of money, as Judge Richard Posner of the Seventh Circuit Court of Appeals once put it, "the realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30."The CFPB's data confirms this: although millions of financial consumers are covered by forced arbitration clauses and class action waivers, the CFPB found that only a few hundred consumers file arbitration claims each year and that very few file individual claims in court, particularly when compared to the 32 million consumers who benefit from class actions each year.