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SBC Hearing on Mandatory Arbitration

Senate Committee on Banking, Housing, and Urban Affairs

Examining Mandatory Arbitration in Financial Service Products

Tuesday, March 8, 2022

Topline

  • Aside from Toomey, only Democrats attended the hearing, which focused on banks and lenders, consumer choice, class action lawsuits, and the negative impacts of mandatory arbitration clauses.
  • The only discussion of securities came at the end of the hearing where Gregg used the securities market as an example of where both consumers and regulators policed the marketplace and Brown submitted a NASAA letter for the record.

 

Witnesses

Opening Statements
Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown characterized mandatory arbitration as a powerful tool that big corporations use to take away people’s choices, make it easier for them to scam customers and workers, and get away with it. He stated that in many financial services contracts, corporations will hide an innocent-looking clause in the fine print language stipulating that disputes between customers and companies must go through arbitration, causing Americans to sign away their rights to hold companies accountable. Brown also cited stories in which he described banks taking advantage of their customers through debt collection and account practices. He concluded by discussing his Arbitration Fairness for Consumers Act introduced last week to ban forced arbitration clauses in consumer contracts.

Ranking Member Pat Toomey (R-Pa.)

In his opening statement, Toomey characterized mandatory arbitration contracts as agreements between financial institutions and consumers to use arbitration instead of litigation to resolve disputes and leading to fair outcomes for consumers. He added that protecting consumers does not necessitate undermining consenting adults’ freedom of contract and that consumers have other options than companies using mandatory arbitration agreements. He then explained that consumers fair better in arbitration than in court and save money on legal costs because they do not have to hire a lawyer to participate in arbitration. Toomey said that, ultimately, trial lawyers and liberal advocacy groups are the winners from banning mandatory arbitration.

Testimony
Mr. Paul Bland, Executive Director, Public Justice

In his testimony, Bland stated that forced arbitration clauses by lenders are grossly unfair to consumers.

He then discussed how these clauses cheat consumers and how banning class actions enables lenders to break the laws. He continued that previous arbitration bans have helped consumers, most consumers do not choose arbitration, and the arbitration process is not transparent. He concluded by recommending that Congress ban forced arbitration in consumer financial services.

Mr. Remington A. Gregg, Counsel For Civil Justice And Consumer Rights, Public Citizen

In his testimony, Gregg stated that forced arbitration is an inherently unfair practice and that the Congress that passed the Federal Arbitration Act never intended arbitration clauses to extend to consumer and employment agreements. He then discussed how forced arbitration clauses dominate consumer contracts and consumers benefit more when given a choice between court and arbitration. He also said that the ability to band together in class actions is an important complement to public enforcement of consumer finance laws. Gregg recommended that Congress take action to protect consumers by restoring their rights to access the justice system by banning the use of forced

arbitration clauses in all contexts, including in consumer financial products and services.

Professor Todd J. Zywicki, George Mason University Foundation Professor Of Law, George Mason

In his testimony, Zywicki stated that, based on longstanding encouragement provided by federal law in support of arbitration, his prior research on the issue, and the importance of contractual choice in the

economy, legislation banning pre-dispute arbitration would be unwise at the current time. He added that litigation is expensive for both the parties and the public, and arbitration and other alternative dispute resolution procedures have been recognized for decades as providing a mechanism for resolving disputes inexpensively and expeditiously.

Mr. Steven Lehotsky, Lehotsky Keller LLP, on behalf of the U.S. Chamber of Commerce

In his testimony, Lehotsky stated the Chamber’s strong support for arbitration as a fair, less complicated, and lower-cost alternative to our overburdened court system. He added that empirical studies show that consumers do as well or better in arbitration as in litigation, prevail on their claims at the same rate or more frequently, and recover as much or more when they prevail. He also discussed faults of the Consumer Financial Protection Bureau’s (CFPB) past anti-arbitration rule, which the Bureau is barred from promulgating by the Congressional Review Act (CRA).

Professor Myriam Gilles, University Antonin Scalia School of Law, Paul R. Verkuil Research Chair And Professor Of Law

In her testimony, Gilles stated that companies keep consumers in the dark by burying forced arbitration clauses in the fine print of standard-form contracts or lengthy terms of service agreements, adding that forced arbitration provisions are an unfair and unjustified intrusion into the rights of consumers. She concluded that under forced arbitration, consumer claims simply vanish and that along with those disappearing cases, we sacrifice deterrence, public accountability and the development of the law.

Question & Answer

Consumer Financial Literacy

Brown asked if surveys saying consumers are not aware of their arbitration clauses are correct. Bland said the surveys are correct and that consumers do not understand what is in these contracts. Toomey asked whether consumers are capable of understanding what is in their best interest when choosing financial products. Lehotsky said consumers make choices based on what is in their best financial interest.

Impact of Mandatory Arbitration

Brown asked what the drawbacks are of the closed-door arbitration system. Gilles said sunlight is the best disinfectant and that closed door arbitration hearings should cause worry about whether that system is as fair and neutral as proponents of mandatory arbitration say it is. Sen. Tina Smith (D-Minn.) asked how secretive outcomes of arbitration proceedings perpetuate unfair corporate practices. Gilles emphasized that the typical arbitration contract limits the impact of any individual arbitration proceeding outcome compared to the broader relief available through a court proceeding. Smith asked what kind of impact forced arbitration has on low-income borrowers. Bland said the consequences on low-income borrowers are devastating, citing examples of certain loans getting rolled over, causing destitution.

Sen. Chris Van Hollen (D-Md.) recounted a story of a consumer having a fraudulent check drawn on her account made out to a Chinese technology company, inconsistent with the consumer’s prior practices, wiping out her savings and forcing her out of her home. He then asked how the case illustrates the unfairness of the arbitration clause in her contract. Bland said the arbitration clause would require her to choose between five industry-side arbitrators, as opposed to going to a jury of normal people. He added that the clause would also limit discovery, possibly cause her to pay the bank’s lawyer’s fees, and be a losing situation for her. Van Hollen asked how court cases would better incentivize firms to change their conduct. Gilles said court cases would better incentivize firms to change their behavior and that the deterrent function of litigation would be beneficial.

Consumer Choice

Brown asked if corporations should be able to decide for consumers how to decide disputes. Gregg said they should not get to decide the rules of the road and that consumers should have a choice, specifically calling out payday lending contracts. Toomey asked Zywicki if it is really true that consumers have no choice. Zywicki said only a small percentage of firms require forced arbitration. Toomey asked a clarifying question about if consumers who have a preference against forced arbitration can find an alternative. Zywicki said evidence suggests that consumers have other options. He added that just because there are not a lot of arbitrations does not mean that the system has failed and that consumers that complain to firms often have their situation remedied. Sen. Catherine Cortez Masto (D-Nev.) asked how many banks using forced arbitration use adhesion contracts. Gilles said nearly 100% of them do. Masto then asked about consumer choice. Gilles said there is no choice and questioned Zywicki and Lehotsky’s assertions to the contrary. Cortez Masto asked if consumers trying to limit costs might get stuck with arbitration clause contracts. Gilles said on the margins, Cortez Masto is correct and that there is not a lot of choice there, adding that low-income groups are more likely to be subject to services like payday loans where arbitration clauses are nearly universal. Cortez Masto followed up asking that free choice is about being able to choose arbitration or court. Gilles said yes and that no one is suggesting getting rid of arbitration all together, adding that the idea is to not force arbitration on consumers before a dispute has arisen and to give consumers a choice about how to proceed.

Costs of Banning Mandatory Arbitration

Toomey asked Zywicki to elaborate on the idea that banning arbitration would drive up costs of services for consumers. Zywicki said unleashing class actions would hurt consumers and that piling on litigation would raise costs that get passed on to consumers. He added that a CFPB analysis claiming that a short-term suspension of arbitration had a low-price effect was not a serious economic analysis.

Class Actions

Sen. Elizabeth Warren (D-Mass.) asked if a consumer would pay a lawyer, file court fees, and show up to work to recover $30 stolen by a bank employee from a consumer’s account in a bank that does not have a forced arbitration clause. Gilles said it would not be worth it. Warren then asked if it would be worth it to do the same but to instead show up for an arbitration proceeding. Gilles said it would still not be worth it. Warren then asked if class action would be a better way to address this situation. Gilles said yes because it is a more affordable way to address this issue when it happens to a large group of consumers. She added that the class action would deter the bank from taking the same action in the future. Warren followed up by asking if a forced arbitration clause would prevent the class action. Gilles said yes and that the impact on the bank would be to allow the bank to do whatever it wants with only the fear of the limited enforcement capabilities of a public enforcer. Cortez Masto asked Gregg about holding the financial services industry accountable through class action lawsuits. Gregg said that we cannot rely solely on regulators to hold firms accountable and that the best way to police the marketplace is both through government regulators and consumers, using the securities market as an example.

Securities

Brown said arbitration is also an important issue in other contexts, including securities, and, in that vein, included in the record a letter from the North American Securities Administrators Association (NASAA).

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.