Senate Banking Committee Hearing Sets the Stage for Pros and Cons of Arbitration Clauses

The committee examined mandatory arbitration in financial products with perspective from financial services and consumer advocate organizations. The House Rules Committee will review similar legislation on arbitration March 15.

03/14/2022 11:00 A.M.

4.5 minute read

Serving as a vehicle for Senate Banking Committee Chairman Sherrod Brown’s reintroduced Arbitration Fairness for Consumers Act (S.B. 3755)—cosponsored by 21 Democrat senators—the committee held a hearing March 8 to revisit proposed prohibitions on forced arbitration clause.

The hearing, “Examining Mandatory Arbitration in Financial Service Products,”  included witnesses Paul Bland, executive director, Public Justice; Remington A. Gregg, counsel for Civil Justice and Consumer Rights, Public Citizen; Todd J. Zywicki, professor of law at George Mason University Foundation, George Mason University Antonin Scalia School of Law; Steven Lehotsky, Lehotsky Keller LLP, on behalf of the U.S. Chamber of Commerce; and Myriam Gilles, Paul R. Verkuil research chair and professor of law.

In his testimony, Zywicki said that after 25 years in consumer finance, including as a former Federal Trade Commission and Consumer Financial Protection Bureau regulator, “consumers are not idiots,” and given the competitive consumer finance market, two-thirds of customer complaints result in full refunds. The CFPB found that fewer than 1% of consumers would seek to consult an attorney to address a financial product harm, he said.

“Arbitration is not the Wild West, as substantial judicial case law exists to ensure a fair and effective process, with minimum recovery amounts for consumers,” Zywicki said. “By contrast, class actions provide little to no consumer relief, despite drawn out litigation.”

Brown, D-Ohio,  reintroduced the Arbitration Fairness for Consumers Act to amend Title X of the Consumer Financial Protection Act of 2010 to prohibit predispute arbitration agreements and class-action waivers in contracts for consumer financial products or services, according to a news release from his office.

“ACA supports the use of arbitration as an alternative to addressing and resolving consumer complaints through formal legal proceedings,” said CEO Scott Purcell in a letter to Brown and the committee’s Ranking Member Pat Toomey, R-Pa. “Alternative dispute resolution through arbitration benefits consumers by reducing the time to achieve a resolution of claims brought by or against consumers, decreasing the expenses of all parties to the arbitral proceeding as compared to litigation, and limiting the legal and administrative fees of formal litigation.”

There is also evidence that consumers can pay less in the arbitration process compared to litigation, according to research by Zywicki and Jason Scott Johnston, “The Consumer Financial Protection Bureau’s Arbitration Study: A Summary and Critique,” which he referenced in his hearing testimony.

“The findings of that study led the CFPB to issue a rulemaking that barred consumers and providers of financial services from entering into contractual agreements to arbitrate any disputes that later arose pursuant to the contract,” Zwyicki said in his testimony. “In turn, that rule was later rescinded by Congress acting under the authority of the Congressional Review Act.”

He added that “consumer financial services markets are largely competitive and regulation such as the Truth in Lending Act operates to try to make the terms of consumer financial services products transparent and understandable to consumers.” The CFPB should update the arbitration study “to better understand the impact of contractual provisions requiring arbitration of any disputes,” Zywicki said.

Supporters of banning forced arbitration clauses discussed during the hearing said they present risks for consumers.

“Forced arbitration clauses abolish fundamental consumer rights,” Gregg said in his testimony. “Unpublished arbitration decisions are subject to limited judicial review, denying appellate processes available in the court system.”

However, Steven Lehotsky, partner at Lehotsky Keller LLP, speaking on behalf of the U.S. Chamber of Commerce, said empirical studies find consumers prevail as much or more often with arbitration than litigation, with plaintiffs succeeding on the merits 44% of the time in arbitration (versus 34% in litigation), with average case duration 299 days for arbitration, compared with 429 days for litigation.

“Elimination of bilateral pre-dispute arbitration clauses would ultimately be detrimental for consumers and the public,” Lehotsky said, adding that the chamber supports arbitration as a fair, less complicated, and lower-cost alternative to seeking dispute resolution in the overburdened court system.

S.B. 3755 is currently referred to the Senate Banking Committee for consideration.

Purcell notes in the letter to Brown that debt collection companies do not enter into arbitration agreements directly with consumers; rather, they can implicitly or explicitly flow through to a debt collector from an underlying creditor contract. Nevertheless, arbitration plays a crucial role in the resolution of debt collection disputes.

“The CFPB even recognized during its Small Business Regulatory Enforcement Fairness Act panel process for arbitration rules, which were later overturned by Congress, that small businesses are impacted when the arbitration process is eliminated,” Purcell said. “In instances when arbitration agreements contain class-action waivers, they play an important role by offering legitimate debt collectors, especially small businesses, a way to defeat inappropriate class-action lawsuits quickly and easily.”

FAIR Act – House Bill on Arbitration

Meanwhile, the House Rules Committee will hold a hearing on the Forced Arbitration Injustice Repeal (FAIR) Act at 2 p.m. EDT March 15.

This bill, introduced by U.S. Rep. Henry Johnson, D-Ga., prohibits a predispute arbitration agreement from being valid or enforceable if it requires arbitration of an employment, consumer, antitrust, or civil rights dispute.

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