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Wells Fargo Scandal Drives California to Block Mandatory Arbitration Clauses in Banking Contracts

In direct response to Wells Fargo’s vast false accounts fraud scheme affecting millions of bank customers, the California legislature has passed a bill “aimed at stopping banks from using arbitration clauses to shield themselves from lawsuits over sham accounts,” as reported by the Los Angeles Times. The California Assembly passed Senate Bill 33 earlier this week, and the California Senate quickly approved. The Bill’s fate now rests with Governor Brown.

The Times notes that even if the Governor approves the measure, California’s banks are very likely to challenge it — ironically, they will do so in court, not in front of an arbitrator. That’s probably a good thing, given critics’ widespread observations that arbitration doesn’t only bypass the justly established and public government courts, it lands disputes outside judicial evaluation on an uneven and private playing field where the ultimate deciders — the arbitrators — are paid by the banks.

The banks’ goal of driving disputes into arbitration has another goal — preventing consumers from banding together to bring their fraud claims in unison via the class action mechanism. Individual consumers have little leverage against a monolithic bank, nor do they have the deep pockets to maintain any significant lawsuit against a large bank’s well-armed and even more well-paid legal battalions.

Senate Bill 33 was written by Senator Bill Dodd and sponsored by State Treasurer John Chiang, designed “to block the legal tactic Wells Fargo successfully used to keep disputes over unauthorized accounts out of public court proceedings.”

Senator Dodd provided a statement on the bill, reading “The idea that consumers can be blocked from our public courts when their bank commits fraud and identity theft against them is simply un-American.”

Mandatory arbitration provisions in customer banking contracts prevented the nearly 3.5 million defrauded customers from suing Wells Fargo in public court, as the bank successfully convinced a series of courts that the contracts were binding. But as the extent of the bank’s illegal conduct became apparent, the resulting uproar led Wells Fargo to agree to settle several erstwhile class action lawsuits relating to the fraudulent accounts scandal for over $140 million.

Last week, the Times published an editorial unabashedly calling Wells Fargo “the biggest criminal enterprise in California.” Hopefully Senate Bill 33 will allow consumers to gain some ground against that enterprise.

Read the full article on the LA Times site.