Consumer Law & Policy Blog

Wells Fargo Debacle Increases Visibility of Arbitration Clauses in National Politics

Hillary Clinton gave a speech today in which she hit Wells Fargo's use of arbitration clauses, among other things.  Some excerpts:

[T]he Wells Fargo scandal shed light on another threat to consumers that we have to address. When the scams victims, people like you and me who had accounts there tried to sue, they were shocked to learn there was a provision in the very fine print of their contracts that kept them from going to court to sue the bank for being cheated. Instead, they are forced into a closed-door arbitration process without the important protections that you get in a court of law.

We are not going to let corporations like Wells Fargo use these fine-print gotchas to escape accountability.

 

And in fact, this is now common practice across a lot of industries, from nursing homes — nursing homes that mistreat seniors, to for-profit colleges that defraud students. You know, who reads all that fine print? I don’t. And you get defrauded or you get mistreated and then all the sudden they, well you can’t sue us. So we’re going to rein in that abuse across everybody.

More on the speech from USA Today and Reuters. Text here.  (nice to see another prominent official admit to not reading fine print). Meanwhile, Senator Sherrod Brown, ranking member of the Senate Banking Committee, plans to introduce a bill that would enable consumers for whom Wells opened unauthorized accounts to sue in court, notwithstanding arbitration clauses. More on that from The Hill

LA Times: Republicans say there's another villain in the Wells Fargo scandal

by Jeff Sovern

Here.  The article reports GOP criticism of the CFPB in connection with the Wells scandal. Excerpt:

“Why does it take the L.A. Times to break this story, when we’re paying federal investigators to investigate?” [House Financial Services Committee Chair Jeb] Hensarling recently told Fox Business Network.

“Where was the CFPB? Why did they come in so late to the game?” he continued. “They have immense powers and this is their job to enforce these basic consumer laws and it appears they were asleep at the switch.”

Hensarling also has criticized regulators for the $185-million settlement with the bank, which allowed Wells Fargo to avoid admitting any wrongdoing.

 * * *

Democrats and consumer advocates said that the recent settlement Wells Fargo agreed to pay  — including a $100-million fine by the CFPB, the agency’s biggest ever — shows the value of the bureau in holding banks accountable for abusing consumers.

And for that reason, those supporters say Republicans, and Hensarling in particular, are hypocrites for trying to use the Wells Fargo scandal to reduce the bureau’s power.

“Hensarling reminds me of the kid who kills his parents and then wants to collect orphan benefits,” said Sen. Sherrod Brown (D-Ohio), one of the CFPB’s biggest backers. “He’s tried to underfund it. He’s tried to undercut. He’s done all he could to  block bank regulations.”

Never mind that the CFPB knew about the problem before the LA Times story.  Will Hensarling also attack law enforcement for the fact that we still have bank robberies and murders despite centuries of efforts to stop them?  Does he also blame the Bush administration for 9/11?

Media Reports on How Wells Fargo's Arbitration Clauses Might Block Consumers from Obtaining Compensation

Here is the Consumer Reports story.  Excerpt:

If a bank employee opens fake accounts and credit cards in your name, as recently happened at Wells Fargo, you may be charged fees for those fake accounts, which you didn't pay because you didn't know the accounts existed. And since you didn't pay those fees, your credit report and your credit score could be hurt. 

And there may not be a whole lot you can do about it.

That's the problem now facing many Wells Fargo customers. Over the course of five years, Wells Fargo employees opened as many as 2 million fake accounts in the names of Wells Fargo customers and made millions in profits for the company by charging customers overdraft fees, monthly service fees, annual fees, finance charges, interest charges, and late fees on those phony accounts. 

But customers lose their right to a trial in court over the creation of those phony accounts and the damage done to their credit if a pre-dispute mandatory arbitration clause was included in their customer agreement.  

Wells may end up being the poster child for the CFPB's arbitration rule. WaPo weighs in with an article headlined Why Wells Fargo customers won’t be able to sue the bank over fake accounts.  An excerpt:

One major group directly affected by the Wells Fargo scandal — the customers who had fraudulent accounts opened in their names — may have their hands tied.

As lawmakers pointed out at congressional hearings Thursday and last week, many Wells Fargo customers are blocked from suing the company because of arbitration clauses, little-known contracts that often ban customers from taking part in class action lawsuits. They are regularly included in the fine print for checking accounts, credit cards and other consumer products. 

In the case of Wells Fargo, the arbitration clauses that customers agreed to when they opened their real accounts are being used to keep them from suing about the fake accounts opened in their names.

In a terse exchange during Thursday’s hearing, Rep. Brad Sherman (D.-Calif.) pushed John Stumpf, the chief executive, on whether the bank would waive the clause for affected customers.

Stumpf defended the arbitration process, calling it “fair” and saying that consumers would be directed to mediators.

But Sherman asked the executive to be more direct about whether customers have the ability to challenge the company in court.

“If they want to go to court are you going to let them go to court? Yes or no?” Sherman asked.

“No, but …” Stumpf responded before being interrupted by Sherman, who said he understood that the answer was no.

Debate Moderators: Don't Forget About Consumer Protection

by Jeff Sovern

The country faces many issues which merit attention during the debates. Among them is consumer protection.  Failures of consumer law contributed to 2008's Great Recession.  Consumer protection is regularly in the headlines (just ask Wells Fargo or Volkswagen).  The choice of the next president is likely to have a huge impact on consumer protection.  One party generally supports the CFPB, its proposed arbitration rule, and a variety of other consumer protections; the other party wants to limit regulation in general and the CFPB in particular.  I very much hope one or more moderators asks about consumer protection.  If a moderator wanted to ask about the candidates' views of regulation, the moderator could make the question more concrete by asking whether the CFPB has been a positive force by, for example, fining Wells Fargo and returning billions to consumers, or if it should be limited or restrained, and how.

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.

HuffPo: Here’s Why Republicans Are Suddenly Demanding Tougher Bank Regulation

Here.  Excerpt:

Republicans don’t like the Consumer Financial Protection Bureau. They opposed the very idea of the watchdog when Elizabeth Warren first proposed its creation, and they have been trying to defang and defund it ever since Congress made her vision into a reality.

* * *

But CFPB is still facing heat from Republicans ― ironically, this time, for not regulating Wells Fargo hard enough.

* * *

“Why did it take an LA Times reporter to uncover what should have been uncovered by Wells Fargo’s regulators? If there were ever a textbook case where consumers needed protection, this was it,” [Senate Banking Committee Chair and] senator [Richard Shelby] added. “How many millions of unauthorized accounts does it take before the CFPB notices?”

* * *

[CFPB Director Richard] Cordray said Tuesday, however, that the CFPB knew about the abuses before the Los Angeles Times, first learning about them from whistleblowers in mid-2013.

 

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.

 

 

Senator Brown, Top Dem on Senate Banking Committee, Wants to "Beef Up" CFPB

From Morning Consult's How Would Democrats Run the Senate Banking Committee?:

Remarks over the last year from Sen. Sherrod Brown of Ohio, the committee’s top Democrat, make it clear that Democrats think they stand a chance at facilitating bipartisan legislation in the financial sector if they take back the Senate for the 115th Congress. Brown, as the ranking member, is the top candidate to lead the panel if Democrats win a majority in November. He has not formally prescribed a specific agenda of how Democrats would run the committee, but he hinted at some priorities last week in a brief interview with Morning Consult.

There’s “a whole host of questions,” Brown said. “What do we do with capital standards? What do we do with the Fed? What do we do to beef up the consumer bureau?”

 

American Banker: Trump's Call to Freeze New Banking Regs Would Be Tough to Deliver

Here (free access).  Excerpt:

Republican presidential nominee Donald Trump called for a temporary suspension of all new federal regulations during a speech Tuesday, but even if he wins the White House, stalling or rolling back financial rules may prove to be beyond his reach.

* * *

"I don't think a full-on moratorium is even plausible," said Ian Katz, a policy analyst Capital Alpha Partners. "There are independent agencies that don't need to ask the president's permission to pass new regulations."

* * *

Still, some academics argued Trump's plan could have an impact. J.W. Verret, an associate law professor at George Mason University and senior scholar with the school's Mercatus Center, said Trump could use the Office of Management and Budget to slow down or block new regulations.

"The White House OMB's Office of Information and Regulatory Affairs has authority to review regulations and impose a temporary moratorium," Verret said. "According to many legal scholars, including former Obama OIRA head Cass Sunstein, this includes authority over independent regulatory agencies."