Has your credit-card company ever overcharged you? Maybe you notice your credit card’s interest rate is higher than your state allows. Or perhaps your credit-card company is miscalculating your daily balance. It might not be a big error, but every month it costs you a little money. Suppose that after you complain, the credit-card company refuses to refund the money. You could sue, but given the amount at stake, it probably wouldn’t be worth the legal expense. But then you realize that lots of other customers were probably overcharged too. Bringing a class-action suit would not only cover the expenses of litigation, but could also return some money to the injured consumers, including you.

Unfortunately, you probably can’t bring the case as a class action. Many—likely most—credit-card contracts don’t allow customers to sue in court. They require disputes to be settled by arbitration. Never mind that the contract—written by the card issuer—may choose the arbitration service. An even bigger problem is that last year the Supreme Court ruled that if the credit-card agreement says you can’t bring a class action, you can’t—even if you live in a state that says credit-card contracts can’t do that (AT&T Mobility v. Concepcion).

And if your credit-card company is charging more interest than your state allows? You’re out of luck, even if you have never used the card in any other state. That’s because the bank subsidiary that issued the credit card is most likely based in a state like Delaware that allows credit-card issuers considerable latitude in the interest they charge. According to a federal law called the exportation doctrine, credit-card companies can use the law of the state where they’re incorporated, rather than the states of residence of their customers, to determine allowable interest rates.

Congress passed a credit-card-reform law in 2009 and created the Consumer Financial Protection Bureau in 2010. But the interest rules didn’t change. In fact, of the fifty-nine senators who voted to create the Bureau, twenty-four also voted to let credit-card issuers keep using any state’s law they want provided they establish operations there—irrespective of where their customers live.

Confused? That’s partly the point. These rules illustrate what economists call a market failure; that is, the failure of market transactions to reach the optimal result. Sometimes that happens in consumer transactions because few consumers pay attention to the contract in question, or because the contract itself is confusing. For example, consumers may pay attention to whether a credit card carries an annual fee, but not what happens in the case of a dispute. As a result, credit-card issuers have an incentive to offer no annual fee, but to provide dispute-resolution terms that strongly favor their own financial interests. If consumers paid more attention to arbitration clauses, perhaps more credit-card issuers would compete by permitting disgruntled consumers to go to court or bring class actions. But when consumers don’t understand how arbitration clauses hurt them, credit-card issuers can do what they want with such clauses.

Sometimes government protects consumers from market failures by regulating terms consumers disregard. But when it comes to credit-card transactions, it’s not just the market that fails consumers, it’s also democracy. Just as businesses get their way with contract terms consumers ignore, they can often achieve their legislative goals on issues voters disregard. Consequently, legislators were able to portray themselves as pro-consumer on an issue voters noticed—the Consumer Financial Protection Bureau—while voting for bills favorable to the financial industry on issues voters ignored, such as whether South Dakota law can apply to credit-card transactions in other states. Of course, you’re not going to find many legislators whose campaign slogans are “Vote for me; I voted against the exportation doctrine!” or “Support me because I oppose mandatory pre-dispute arbitration clauses!” But financial institutions know which legislators support their interests, and reward them accordingly.

When a market failure combines with a failure of democracy, solutions can be difficult. One remedy could be seeking the aid of an independent administrative agency. Such an agency, though born of the political process, is, at least theoretically, insulated from it, and can reach results without considering campaign contributions. Thus, the Consumer Financial Protection Bureau has the power to ban arbitration clauses in consumer-credit transactions, though it cannot do anything about the exportation doctrine.

The Bureau has, however, encountered roadblocks. Senate Republicans pledged to filibuster Obama’s nominee to head the Bureau, former Ohio Attorney General Richard Cordray, unless changes were made to the Bureau’s structure. But those changes seem designed to weaken the Bureau. For example, at present, the Bureau does not have to go to Congress each year to get its funding; like other bank regulators, its financing is independent of the legislature. Republicans want to change that. If Congress has to renew the Bureau’s money each year, it could cut the Bureau’s budget unless it goes easy on banks. Of course bank lobbyists support this proposal.

Indeed, that’s exactly what the mortgage giant Fannie Mae did to weaken its regulator. When Congress created an agency to regulate Fannie Mae, it persuaded Congress to set the regulator’s budget every year, rather than providing a nonlegislative source of financing. Then Fannie could lobby Congress to cut its regulator’s budget whenever the regulator tried to limit Fannie. The result: Fannie’s regulator had too little power, and Fannie bought loans it shouldn’t have, which led to its needing a huge bailout. Ultimately, Congress replaced Fannie’s regulator. If Republicans strip the Consumer Financial Protection Bureau of independent financing, banks will be able to rein in their regulator, just as Fannie did, with equally disastrous results.

Owing to the Republicans’ filibuster threat, President Obama had to appoint Cordray during a congressional recess. But that appointment runs only through 2013; studying and then banning arbitration clauses in credit-card agreements could take more time.

Market failures will persist in the consumer-credit marketplace. Consumers may still affect the things they understand—like annual fees—but more complex issues won’t be resolved to serve their interests. And the financial institutions that led us to the Great Recession will win. Again.

Jeff Sovern is a professor of law at St. John’s University in New York City.
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