Arbitration vs class action lawsuits against banks: what consumers need to know

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The U.S. Senate vote to remove a rule that would allow consumers to bring class action lawsuits over disputes with banks, credit card companies and other financial services companies means those cases will now likely be resolved by arbitration .

President Trump is expected to approve the dismantling, inflicting a major setback on the Consumer Financial Protection Bureau, the federal watchdog created after the national financial crisis. The Office of Consumer Affairs finalized the rule in July after issuing a 2015 report on mandatory arbitration requirements.

Richard Cordray, director of the bureau, said the result “preserves a two-tier justice system” that could potentially benefit Wells Fargo, which faces a scandal over millions of potentially unauthorized consumer accounts, and the giant from the Equifax credit rating, which in September revealed a cyberattack that could compromise the personal data of nearly half of Americans.

Financial service providers disagree. The United States Chamber of Commerce called the watchdog’s report “faulty” and said in a alert published Tuesday that “the bureau’s own data shows class action lawsuits offer little or no benefit to consumers while providing lucrative wages to class action lawyers.”

Following:Senate overturns new rule allowing class action lawsuits against banks

Following:Bank customers paid more than $ 15 billion in fees in 2016, according to CFPB

Here are the answers to common arbitration questions:

What are pre-litigation arbitration clauses?

These are requirements that are typically found in the fine print of agreements that consumers sign for checking accounts, credit cards, various types of loans, and other financial products.

Are they widespread?

Just over half of all credit card loans are subject to arbitration clauses, according to the Consumer Bureau’s study. About 8% of banks, covering 44% of insured deposits, include clauses in their current account contracts, according to the study.

What do arbitration clauses say about class actions?

Almost all of the clauses investigated by the consumer office indicated that disputes with financial service providers “could not proceed on a class basis,” the watchdog’s report revealed.

How often have consumers filed for arbitration?

The consumer office studied American Arbitration Association data for 2010-2012 in cases involving credit cards; current account / debit cards; payday loans; prepaid cards; private student loans; and auto loans. In total, consumers filed an average of 411 cases each year. The average amount of disputed debt was nearly $ 16,000 and the median about $ 11,000, according to the report.

What were the results ?

A total of 78 of the 341 cases resolved by arbitrators over the two-year period resulted in judgments in favor of consumers. The total amount of affirmative debt relief and forbearance was $ 361,540, according to the report.

What about class actions?

The Consumer Affairs Office identified 187 lawsuits that sought class action status from 2010 to 2012 involving the same six financial products in its analysis of arbitration cases. The cases were brought in federal court or selected state courts by at least one person seeking to represent a similar group of consumers.

How did these cases unfold?

About 25% were resolved through individual settlements, and 12% of cases reached final approval of a class action settlement in February 2014, when the office of consumer review period ended.

How do the financial results compare to those of arbitration cases?

A total of 422 consumer class actions were approved by federal courts between 2008 and 2012. Most concerned debt collection, credit cards, checking accounts or credit reports. The annual average of the aggregate total of settlements was about $ 540 million per year, according to the Office of Consumer Affairs study.

What about individual consumers in class action settlements?

About 34 million class members had received or were expected to receive cash payments as a result of filing a claim or automatic distributions of settlements, the monitoring study found.

What Are Financial Service Providers Saying About Authorizing Class Actions?

Based on an analysis of the report from the Office of Consumer Affairs, the American Bankers Association, the Consumer Bankers Association and the Financial Services Roundtable said the challenged rule would prompt consumers to file an additional 6,042 class actions every five years. .

What is the potential financial impact of this number of new cases?

The cost of defending and resolving lawsuits would reach $ 5.23 billion every five years, and some of that financial burden would be passed on to consumers, the three financial associations said, again citing data from the office of the consumption.

What would be the financial impact for consumers?

Again citing data from the federal watchdog study, the three financial service providers said the average consumer relief in arbitration proceedings was $ 5,389, compared to an average of $ 32.35 in class action settlements. The cost of initiating arbitration is $ 200, compared with $ 400 for filing a federal class action lawsuit, the providers said.

Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc

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