Why You Might Not Be Able to Sue Your Bank

If a bank employee opens fake accounts and credit cards in your name, as recently happened at Wells Fargo, you may be charged fees for those fake accounts, which you didn't pay because you didn't know the accounts existed. And since you didn't pay those fees, your credit report and your credit score could be hurt.

And there may not be a whole lot you can do about it.

That's the problem now facing many Wells Fargo customers. Over the course of five years, Wells Fargo employees opened as many as 2 million fake accounts in the names of Wells Fargo customers and made millions in profits for the company by charging customers overdraft fees, monthly service fees, annual fees, finance charges, interest charges, and late fees on those phony accounts.

But customers lose their right to a trial in court over the creation of those phony accounts and the damage done to their credit if a pre-dispute mandatory arbitration clause was included in their customer agreement.

Such agreements, which also often block customers from banding together in a class action lawsuit with other similarly mistreated customers, are often inserted into account-opening agreements at big banks and credit unions. Those who are hurt have to seek justice on their own, through individual private arbitration proceedings.

Also troubling, as noted in a letter six Democratic senators sent to Wells Fargo CEO John G. Stumpf (shown above), is that "arbitration proceedings are kept secret, so that other customers are deprived of the knowledge that their experiences might be part of a more widespread problem." The letter went on to say that this forced arbitration system helps hide fraudulent schemes such as the sham accounts at Wells Fargo from the justice system, from the news media, and from the public eye.

Advocating for Change

The situation has led to heated discussion about mandatory arbitration agreements. The Department of Health and Human Services just issued a new rule that will prohibit long-term care facilities that accept Medicare or Medicaid from forcing residents into arbitration. And the Consumer Financial Protection Bureau has a proposed rule pending that would stop banks from blocking customers from joining class actions in cases of widespread abuse. But as of now, such rules don't yet exist for bank customers.

In cases filed in state and federal courts in California over the last two years, customers' attorneys have argued that arbitration clauses signed by customers when they opened genuine accounts should not prevent them from suing over fake accounts, notes Paul Bland, executive director of the consumer-rights law firm Public Justice.

But in a September ruling U.S. District Judge Vince Chhabria ruled that Wells Fargo customers must bring their complaints to arbitration, noting that the bank's arbitration clause is so broad that it covers "any unresolved disagreement between or among you and the bank."

During his testimony today and last week before the Senate Banking Committee, Wells Fargo CEO John Stumpf said that he accepted full responsibility for all unethical sales practices in the bank's retail banking business, and that he would take steps to "fix this issue, strengthen our culture, and take the necessary actions to restore our customers’ trust.”

One way to do that, the senators’ letter suggests, is to "immediately end Wells Fargo’s use of mandatory arbitration clauses" in its customer agreements.

CFPB Takes Action

Earlier this month, to help customers, the Consumer Financial Protection Bureau ordered the banking giant to pay more than $100 million in refunds to customers and another $85 million in additional penalties.

“Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses,” said CFPB Director Richard Cordray about the decision. “Because of the severity of these violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed." (Per the CFPB decision, customers will automatically receive their refunds, no action is required.)

Consumer advocates are also looking forward to the CFPB finalizing its pending rule. “If the CFPB rule was in place five years ago, Wells Fargo customers would have been able to file a class action lawsuit, which would have stopped what was happening a long time ago,” says Bland.

Monitor Your Accounts

In the meantime, the best thing consumers can do is to keep a keen eye on their bank accounts to spot fraudulent accounts that a financial institution might have opened in your name. You should also:

Check your credit reports. You're permitted to request a free credit report annually from each of the three national credit bureaus, Equifax, Experian, and TransUnion. Use annualcreditreport.com to get all your free credit reports. We recommend staggering the reports by requesting one about every four months. So, for example, you might request your Equifax report now, your Experian report in January, and your TransUnion report in May, then repeat. That way, you're keeping round-the-year tabs on your credit without paying a service to do so.

Report phony accounts. Contact all three agencies immediately and provide them with details about accounts you did not open.

You can also contact the law firm that filed the unsuccessful action against Wells Fargo last year to learn more about your legal rights. The law firm Keller Rohrback has announced it is also investigating allegations of similar practices at other consumer banks.

And let the CFPB know. It is continuing to look at fake account issues at bank and nonbank financial companies. You can submit a complaint on its website.

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