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Wells Fargo Fake Accounts and Arbitration

posted by Adam Levitin

Jeff Sovern has an excellent new article about arbitration clauses and class action waivers that uses the Wells Fargo fake account scandal as a test case.  He also does a monster job knocking down the Johnston-Zwyicki arbitration study.  As Sovern points out, the Johnston-Zywicki study makes a big deal out of some data on a Texas bank's voluntary refunds of fees in consumer disputes.  But as Sovern observes, Johnston and Zywicki aren't able to differentiate between fees due to bank misconduct and fees due to consumer behavior (account inactivity, overlimit, etc.), much less why the bank refunded the fees in some cases.  Highly recommended and relevant in the run-up to the anticipated CFPB arbitration rulemaking.  

[Link corrected 6/15/17 at 4:04pm ET]


Can you check the link to the Sovern article? It appears to be a bad link.

In addition to all the other reasons that Sovern points out as to why the free market will not self-correct, I can think of a couple others that are probably significant:

1. It is not always easy for consumers to research whether any other banks have more consumer-favorable terms. To test this anecdotally just now, I went to the website of a regional bank I have never done any business with. Their checking account customer agreement was accessible through their website -- and the arbitration clause was on page 29. However, the full credit card agreement is NOT linked -- just the basic required disclosures of rates and certain fees. The website says customers will be provided the full agreement after they apply and are approved.

2. I suspect consumers are likely to assume that all banks are likely to have similar account terms. That belief (which has some justification) will deter consumers from a tedious and time consuming effort to find something they suspect may not exist. Financial institutions do sometimes compete on fees, but mostly on account-maintenance fees rather than penalty fees like late charges or bounced-check fees. And I do not recall ever seeing a bank advertise "CREDIT CARDS WITH NO ARBITRATION OR CLASS ACTION LIMITATION CLAUSES!"

Given that Zywicki delivers only what he's paid to deliver, it comes as no surprise that his "study" is Swiss cheese and pretzels.

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