‘Most revealing’ CFPB evidence on class actions? Overdraft fee case study

March 13, 2015

After my initial take Tuesday on the 728-page report by the Consumer Financial Protection Board on mandatory arbitration clauses in consumer contracts for financial products and services – which found that class actions deliver vastly more money to vastly more consumers than arbitration – I heard from some critics of the CFPB’s process and analysis.

They’re gearing up, of course, for protests of the anti-arbitration rule the CFPB is widely expected to propose in the next several weeks. Among the arguments against the CFPB’s evidence that mandatory arbitration deprives consumers of meaningful rights are these: The study didn’t adequately track $1.1 billion in cash payments from consumer class actions to find out if that money actually went to class members; the study is misleading about the resolution of small claims outside of litigation because many consumers are able to get relief just by calling customer service representatives; and the CFPB’s consumer survey, which showed that people know pretty much nothing about mandatory arbitration, would have found the same ignorance of every other provision in the financial services contracts consumers sign. Overall, detractors assert that the CFPB overstates the benefits of consumer class actions and underestimates consumers’ opportunity to resolve disputes outside of the court system.

But within the reams of information the CFPB released is a sort of controlled experiment on class actions versus mandatory arbitration as a means of compensating consumers. Deepak Gupta of Gupta Beck pointed it out to me, and to him it’s “one of the most revealing aspects of the CFPB report.” Keep in mind that Gupta represents plaintiffs in consumer class actions, so he’s hardly an unbiased analyst of the report. But he’s indisputably on to something here.

The Litigation v. Arbitration experiment involves the fees banks charged debit card holders when they overdrafted their accounts. As you may recall, debit card issuers across the industry adopted more or less the same business practice of shifting the order of users’ transactions to maximize the overdraft penalties the issuers could charge. More than two dozen consumer class actions over the allegedly improper overdraft fees were eventually consolidated in a multidistrict proceeding in 2009.

Some of the bank defendants in the MDL did not have mandatory arbitration provisions in their contracts with consumers. Those that did have such clauses didn’t use uniform language. As a result, according to the CFPB’s case study of the overdraft litigation, only five banks in the MDL won rulings entirely dismissing class actions against them because all of their account holders were compelled to arbitrate.

Account holders from one of those five banks brought a classwide arbitration before the American Arbitration Association. According to the CFPB, they were permitted to proceed as a class – but in 2014, the arbitrator dismissed their contract and tort claims.

Four banks ended up settling with debit card holders while their motions to compel arbitration were unresolved. (Three of those motions had been revived after the U.S. Supreme Court issued its pro-arbitration decision in AT&T Mobility v. Concepcion in 2011.) Three other banks with arbitration provisions reached settlements without filing motions to compel arbitration.

In all, debit card holders reached 18 settlements in the MDL, granting total cash relief of $1 billion for 29 million account holders. All of the settlements delivered at least some portion of that cash directly to account holders without a claims process.

Account holders who believed they could have obtained better relief by calling their banks’ customer service department or arbitrating on their own could have opted out of overdraft class settlements. The CFPB analyzed opt-outs in overdraft settlements with three banks – JPMorgan Chase, M&I Bank and Compass Bank – whose arbitration provisions directed cases to the AAA. A total of 242 of the more than 6 million account holders in the class actions opted out. According to the CFPB, no more than three opt-outs brought overdraft claims before the AAA. And because it wasn’t completely clear whether the three were opting out of overdraft fee or other class actions, it’s possible, in fact, that no account holder who opted out of an overdraft settlement brought an individual arbitration before the AAA. In any event, the three possible overdraft fee opt-outs lost their arbitrations.

Gupta said the CFPB report shows that debit card holders at banks that successfully invoked mandatory arbitration provisions “got nothing.” I’m not sure we can draw quite so definitive a conclusion from the data. It’s clear that the one overdraft fee class arbitration hasn’t delivered cash to those account holders, and account holders who opted out haven’t exactly rushed to bring arbitration claims. But we don’t know for sure that card holders at the five banks entirely dismissed from the overdraft MDL didn’t negotiate private agreements with customer service reps.

And maybe some of them were among the few hundred consumers a year who brought affirmative claims in individual AAA arbitrations against bank defendants. Who knows? Maybe all 32 of the consumers who won money awards from AAA arbitrators in 2010 and 2011 (of the 341 cases in which arbitrators reached a ruling) were victims of shady overdraft fee policies. Maybe a big chunk of the $173,000 that AAA arbitrators awarded to consumers in 2010 and 2011 went to account holders penalized by unfair overdraft fee practices, though considering that consumers tend to bring claims over large amounts of money, that’s a doubtful proposition.

But the best possible spin that arbitration proponents can put on the overdraft fee data in the CFPB report is that consumers at banks with mandatory arbitration clauses may have been able to persuade those institutions to reimburse some of the overdraft fees they charged, and a handful – no more than 32 – may have won individual AAA arbitrations. Meanwhile, we know for sure that 29 million account holders received $1 billion through class actions.

It seems to me that those are tough numbers to argue against.

(Reporting by Alison Frankel)

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