Forced Arbitration Threatens Class Action Excessive Overdraft Fees Lawsuits

Washington, DCJPMorgan Chase, the country’s largest bank, is moving to require credit card customers, and by extension, checking account customers with a linked debit card, to settle disputes through arbitration. It would, reportedly, preclude class action excessive overdraft fee lawsuits like one that in 2012 led JP Morgan to settle with checking account customers for $110 million.

Furthermore, JP Morgan is not alone in the drive to forced arbitration. A 2016 report by the Pew Charitable Trusts indicated that, between 2012 and 2016, the largest banks’ use of mandatory binding arbitration clauses had expanded and with that, customers’ access to the legal system had declined.

Checking account overdraft fees hurt financially fragile customers

The basic excessive overdraft scheme works like this: when a debit card transaction is authorized on an account with positive funds, a bank or credit union immediately reduces the consumer’s checking account balance by the amount of the purchase and sets aside funds to cover the transaction when it settles, often a few days later. If, because of later card activity, that transaction pushes the account into a negative balance when it ultimately settles, the financial institution assesses an overdraft fee, even though it had already set aside the funds necessary to cover the transaction. Deposits during the gap may not be factored in.

Banking customers argue that this constitutes charging an overdraft fee when there is sufficient money in the account. The lawsuits often focus on whether the bank has adequately disclosed this practice when it marketed optional “overdraft protection” to consumers.

The customers who are assessed overdraft fees are the most financially vulnerable and the most likely to forego the opportunity for upward mobility that banking represents. More than 50 percent of the customers assessed overdraft fees earned less than $40,000 per year.

Class action successes

Plaintiffs now have a history of success against banks and credit unions on this issue. Navy Federal Credit Union, for example, recently agreed to settle a class action excessive overdraft fee lawsuit for $24.5 million. Washington State Employees Credit Union settled a similar lawsuit for $2.99 million. In 2011 Bank of America settled an excessive overdraft fee lawsuit for $410 million.

Banks fight back - mandatory arbitration favors deep pockets

The new agreements introduced by JPMorgan and other institutions generally require customers to arbitrate disputes individually rather than joining in class action lawsuits. JPMorgan’s arbitration agreement covers prior accounts, as well as current ones.

In the abstract, arbitration may seem like a quicker and cheaper way to settle disputes. In reality, however, arbitration favors the party with the deeper pockets:

• The final decision of an arbitrator, however unjust, may not be appealable in court;
• The process of choosing an arbitrator may not be objective. Arbitration is an industry. Many of the national arbitration groups actively market their services to companies that issue credit cards or sell goods to consumers. A favorable decision for a bank or credit card company may mean repeat business for an arbitrator (nb: Arbitrators like to make money. Old lawyers become arbitrators because it augments the retirement); and
• Arbitration hearings are generally held in private rather and do not create a public record that is accessible in future lawsuits.

Finally, an individual consumer who believes that she or he has lost a few hundred bucks in an unfair transaction may not believe that it is worth the time and expense involved in arbitration to recover it. The support and potential rewards of class action litigation may be the critical factor that makes it possible to address an industry-wide practice that violates the law. At their best, class action lawsuits serve a public purpose.

What should you do?

If you are a JPMorgan checking account customer, check your inbox for something that may be labelled “Account Agreement Update,” “Change in Terms and Conditions,” or something similar. You must sign and return a document opting out of arbitration by August 7. That is not bad advice for anyone with a checking account or debit/credit card. It may be too late, but it is better to preserve your choices by knowing your situation.

Remain aware. Many of the financial protections originally included in the Dodd-Frank law are being rolled back. This is particularly true in the case of the Congressional resolution that overturned Consumer Financial Protection Bureau rules prohibiting the inclusion of mandatory arbitration agreements in financial agreements, including credit card agreements.

Watch for forced arbitration agreements in any contractual agreements, including employment contracts. Arbitration has a useful function, but these agreements may seriously limit your legal rights. In any event, your agreement to submit disputes to arbitration should be made knowingly.