It Just Got Harder to Sue Your Bank for Excessive Overdraft Fees

Washington, DCOn October 24,2017, the Senate voted to overturn a Consumer Financial Protection Bureau (CFPB) rule that limited banks’ ability to enforce mandatory arbitration clauses in consumer contracts. While this change is unlikely to alter the course of existing excessive overdraft fee lawsuits, it will make it much harder for consumers to join class actions against giant financial institutions like Wells Fargo, Capital One or Fifth Third in the future.

In July, the CFPB rule announced an administrative rule that limited companies’ ability to impose arbitration agreements on customers in financial contracts, thus making it easier for aggrieved consumers to join together in class action lawsuits. Supporters of the rule argued that it gave individual plaintiffs an important protection against mistreatment by banks. Banks lobbied vigorously against it.

Last week Congress voted with the banks, tossing out the new rule under the provisions of the Congressional Review Act. That statute allows lawmakers to undo administrative regulations within 60 working days of the date they are announced. Congress also blocked the CFPB from establishing a similar rule in the future. Reaction on both sides has been swift and passionate.

Few bank customers are even aware that they have agreed to arbitrate disputes when they sign (generally without reading) a checking account or credit card application. Not all banks include this clause in the fine print; some make arbitration optional. But banks that do not require arbitration can certainly be counted on to do it now.

For consumers who believe that their bank overdraft fees are unfair because Wells Fargo, Capital One or Fifth Third have reordered charges to maximize the fees they can collect, the problem is practical. The cost of individual arbitration, like the cost of an individual lawsuit, can be huge. It makes no sense to fight when the size of the potential recovery is small. So the abusive practice continues. Collective action is the only realistic option for redress against a deep-pocketed opponent, like a bank.

The rule change is very bad news for bank customers. As CFPB Director Richard Cordray told CNBC, "This vote means the courtroom doors will remain closed for groups of people seeking justice and relief when they are wronged by a company.”

The damage is likely to be mostly prospective. To the extent that courts have already reviewed mandatory arbitration provisions in existing consumer agreements, those rulings are likely to stand. The problem is what will happen in the future when consumers complain that they are being hit with excessive overdraft fees.