This article was originally published on The Hill.
Wells Fargo’s scandalous practice of secretly opening more than 2 million sham deposit and credit card accounts dragged on for at least five years.
How did Wells Fargo get away with it for so long?
A big part of the story: Wells Fargo contract provisions blocked consumers from suing the bank in court. It’s past time to prohibit the “ripoff clauses” that prevent consumers from enforcing their most basic legal rights.
Like most big banks and many other corporations, Wells Fargo buries ripoff clauses in the fine print of its customer contracts. These provisions, also known as “forced arbitration” clauses, prevent consumers from suing over wrongdoing in court and prohibit consumers from banding together in class actions. Instead, ripoff clauses force consumers to seek redress in private arbitration, on an individual basis.
So when lots of consumers have suffered small harms — as was the case with Wells Fargo — there’s nothing they can do. It’s generally not worth the time and money to bring a case individually, and there’s a disincentive to proceed in arbitration, where claims are decided by a private firm handpicked and paid by the corporation rather than a judge or jury. Effectively, banks and other corporations are free to rip off their consumers without fear of being held accountable in court.
The problem isn’t just that aggrieved consumers don’t have access to a remedy. Keeping cases out of court means abuses are kept out of the spotlight.
That’s exactly what happened with Wells Fargo, and why the abuses could go on so long.
Indeed, more 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.
Had these early cases been allowed to proceed, others almost certainly would have followed, and Wells Fargo may have ended these pervasive abuses years ago.
Instead, it took until last week for the practices to be halted, and then only thanks to the efforts of the new Consumer Financial Protection Bureau (CFPB), the agency devised by Sen. Elizabeth Warren (D-Mass.) and adopted as part of the 2010 Dodd-Frank financial reform bill. State and federal regulators had notice of the problem at least as far back as 2013, when the Los Angeles Times first reported on Wells Fargo’s fraudulent accounts. Front-line Wells Fargo workers had drawn attention to the problem, too; in April 2015, at the bank’s annual shareholder meeting, Wells Fargo employees with the Committee for Better Banks submitted an 11,000-signature petition calling for an end to sales quotas that fueled fraud.
Private enforcement – individual lawsuits and class actions brought by harmed consumers — not only is a necessary complement to agency efforts, but it also often alerts agencies to the need for action.
Governmental agencies don’t have the resources to police every instance of fraud. And these agencies frequently face industry smears and congressional posturing that halts or slows their ability to act.
When consumers are blocked from suing, it takes longer for agencies to become aware of a problem and is much more difficult for them to gather evidence and build a case — particularly when companies use forced arbitration to keep victims silent.
The solution: Do away with ripoff clauses. The CFPB has proposed a rule that would end the worst ripoff clauses in the financial arena, restoring consumers’ right to join together in class actions to hold banks accountable for predatory behavior.
The big banks are trying to block the rule, but the Wells Fargo scandal shows exactly why the CFPB should prevail.
Weissman is president of Public Citizen. Donner is executive director of Americans for Financial Reform.