Recently, the Consumer Financial Protection Bureau issued a request for information in connection with a study it is conducting about pre-dispute arbitration clauses, for a study that is required by the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010.  In response, we have submitted the following comment that details the experiences of Joshua G. Fensterstock, who is represented by our firm in Fensterstock v. Education Finance Partners. As soon as this comment is posted to the CPFB’s website, we will provide a link. In the meantime, you can see the request for information here and read all the comments submitted to the CPFB here.

My comment focused primarily on the harm that pre-dispute arbitration clauses and class action waivers have on individuals. Here it is:

I am an attorney in New York City. I’m writing to tell the story of my client, Joshua G. Fensterstock (“Josh”), who has spent the last four years trying to assert his rights in federal court against a student loan servicing company that moved to compel arbitration based on a forced-arbiration clause.  Josh’s case has gone to the Supreme Court and back, solely on the issue of whether the arbitration clause is enforceable. Josh’s story follows.

In 2006, Josh consolidated his law school loans with a company called Education Finance Partners (one of the companies that was later sued by the New York Attorney General for paying schools to steer students toward its loans).  Josh’s contract was with Education Finance Partners only.  Shortly after signing his promissory note, Josh received a notice from Affiliated Computer Services (“ACS”), stating that ACS would be the “servicer” of the loan. ACS is not the legal holder of the loan.

After making payments on his loan for several months, Josh noticed that almost none of his payments were going to principal. The entire amount of his payments was going to interest and the balance wasn’t being paid down at all; in certain instances, the loan balance actually increased even though the promissory note contains no mention of a negative amortization feature.  However, Josh’s payments were on time and he was never charged a late fee or notified of any other penalty. Josh contacted ACS, and ACS admitted that it has a policy (the “Amortization Penalty”) where, if student loan payments are received more than 30 days apart, the payments are diverted toward interest. To illustrate the effect of the Amortization Penalty:

Mr. Fensterstock’s payments are due on the 14th of each month.  Some months, he paid early, we’ll use May 10th as an example.  Even if Mr. Fensterstock paid early again the next month–on the 13th of June–the two payments were received more than 30 days apart and thus some or all of the payment was diverted to interest. As a result, Mr. Fensterstock’s balance was not declining at all. His loan was not being amortized properly, and at the end of his 30-year payment plan he would have to make a large balloon payment to pay off the loan.

In April, 2008, Josh filed a class action against Education Finance Partners and ACS; he is represented by our firm and co-counsel.  ACS moved to compel arbitration, and its motion was denied. The motion was denied because Josh’s promissory note chose California law which, at the time of signing, followed the Discover Bank decision that was later overturned by the Supreme Court in AT&T Mobility v. Concepcion.  ACS appealed, and the Second Circuit affirmed. See Fensterstock v. Educ. Fin. Partners, 611 F.3d 124 (2d Cir. 2010).  However, just a few months later, in Concepcion, the Supreme Court held that the Federal Arbitration Act preempted California’s contract law as applied to arbitration clauses. The Supreme Court then vacated and remanded our case in accordance with Concepcion. Our case is currently on remand and we are awaiting decision on ACS’s renewed motion to compel arbitration in the district court.

In addition to any legal infirmities under the current Supreme Court rule, I want to stress the toll that arbitration clauses have on consumers like Josh and how they benefit large companies.  If Josh’s case is thrown out of court, he will now have to arbitate–on an individual basis–against a $6 billion company. Josh is essentially powerless: ACS is not a cell phone company, with an expendable product, as was the defendant in Concepcion but rather ACS is a company that controls over $50,000 of Josh’s debt. Debt is a very powerful tool; the debt is not paid off until the creditor says so. And, in a situation where Josh may be left on his own to fight a $6 billion company, Josh is at the mercy of ACS which he believes mishandled his student loan debt, with little or no recourse.

Josh’s case also has some history outside the courtroom.  In 2010, after the Second Circuit affirmed Josh’s victory under then-governing law, a San Francisco television station asked to interview Josh about his case; in the interview he essentially repeated what was in his complaint.  ACS then threatened to sue him for defamation. No suit was ever filed and the statute of limitations has now run on any potential defamation claim.

Josh is not the only person who has had trouble with ACS. I  have received emails and phone calls from borrowers who are having similar problems to what Josh encountered.  Unfortunately, the only thing I can do for these people is tell them to find their promissory note so I can see if it has an arbitration clause/class action waiver.  If there is an arbitration clause or class action waiver, there isn’t much I can do.  Any potential claims in these cases are relatively small on an individual basis. Therefore someone who has been harmed is not likely to be able to spend much time or money pursuing an action in an individual arbitration, even though the consequences of failing to do so may be serious.

I hope this statement has given some insight into the disparities in power between multibillion dollar companies on the one hand, and the consumers they deal with on the other.  I’m more than happy to speak to anyone who has questions about Josh’s case, and Josh is also willing to speak about his experience.

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.