by Jeff Sovern
A frequent claim by class action critics is that we don’t need class actions because we have regulators. For example. Alan Kaplinsky recently tweeted that class actions were not needed in the wake of the Equifax scandal because the CFPB is expected to act. But the truth is we need both regulators and class actions.
The CFPB arbitration study looked into the overlap between administrative actions and class actions. Here is an excerpt from the summary of the findings (section 9.1):
[F]or the private class actions for which we sought to find related public enforcement action, we were unable to do so in 68% of the cases. This was particularly the case with class action settlements of less than ten million dollars, where we were unable to identify a corresponding public enforcement action for 82% of the time.
When we did find overlapping activity by government entities and private class action lawyers, public enforcement activity was preceded by private activity 71% of the time. In contrast, private class action complaints were preceded by public enforcement activity 36% of the time.
President Trump will get to nominate a new CFPB director in less than a year, and it could happen in less than a month. I very much doubt that a Trump-nominated director will bring the enforcement actions that a Director Cordray would; indeed, from the White House’s perspective, the failure to bring some such actions would probably be a plus. Consequently, the CFPB may soon be much less protective of consumers, with the result that class actions may become even more important as a consumer protection device.
But what do class actions offer when an administrative agency also becomes involved? Take Wells Fargo, for example. By January 2010, the Office of the Comptroller had received 700 whistleblower complaints about Wells Fargo opening unauthorized accounts. The OCC raised the complaints with Wells, but then dropped the matter and Wells employees continued to open unauthorized accounts. Not much of a record for regulators there. At some point, the CFPB began investigating, but it was obviously after the OCC’s failed intervention because Congress had not even created the Bureau at that time and the Bureau didn’t open its doors until the summer of 2011. The first Wells class action was filed in 2015, and then in 2016, the CFPB, joined by the OCC and the LA City Attorney’s Office (which had sued Wells in 2015), entered into the famous consent decree. I will say more about the consent decree in a moment, but first, I want to point out that the CFPB, under a Trump-nominated director, might lapse into the kind of torpor that the OCC suffered from in 2010. Notice too that the class action antedated the CFPB consent decree. I have no reason to believe that the class action contributed in some way to the CFPB getting involved or helped in some way, but neither do I know that it didn’t.
The consent order directed Wells to pay redress to consumers who have “incurred fees or other charges.” Wells agreed to put aside $5 million for that purpose. So then, why do we need a class action?
Well, first, the class action settlement (assuming it is finally approved in the form in which it has been preliminarily approved) is for at least $142 million. I say “at least” because the settlement could grow by up to $25 million if it is determined that $142 million is not enough. Quite a bit more than the $5 million pool under the consent order. While I suppose Wells might have ended up paying more than that $5 million under the consent order (I’m not sure what would have happened if it was determined that Wells owed more than $5 million), I am skeptical that Wells would have ended up paying more than 28 times that number.
The settlement appears to provide injured class members several benefits they would not have received under the consent order. First, unlike the consent order, the settlement provides that class members will get at least $25 million in non-compensatory damages. Second while the consent order provided that Wells could recoup any of the $5 million that was not needed to compensate injured consumers, the class action provides that none of the $142 million is to revert to Wells. Any money left over after paying expenses, fees and the individual amounts due under the settlement will go to class members. Attorney’s fees are capped at 15%. Third, the settlement provides damages to those who suffered injuries because their credit scores went down. I’m not certain, but I don’t think that is true of the consent order because it seems limited to “fees or other charges,” and I think that means fees or other charges imposed by Wells, rather than, for example, higher interest rates charged by other lenders because of damaged credit scores. There may be other ways consumers benefit from the class action over the consent order as well, but those will do to make my point.
In short, class actions often do not overlap with actions by regulators, and are likely to do so even less frequently under a new CFPB director, but even when they do overlap, may still benefit consumers. To be sure, class actions do not always benefit consumers, but overall, consumers are better off with them than without them.
CORRECTION: An earlier version of this post referred to a letter Ted Frank published in the Wall Street Journal. Ted has indicated in a comment (below) that I misinterpreted his letter, and so I have omitted the sentence. I apologize for the error.