Mr. President, I suggest the absence of a quorum. Mr. President, we are having a very interesting and, obviously, intense debate tonight about arbitration clauses in financial contracts. Those who oppose the resolution that is on the floor…
Mr. President, I suggest the absence of a quorum.
Mr. President, we are having a very interesting and, obviously, intense debate tonight about arbitration clauses in financial contracts. Those who oppose the resolution that is on the floor tonight would have you think that the battle is over whether or not to stop what they call forced arbitration clauses in contracts.
The real issue is whether we will try to force the resolution of disputes in financial resolution into class action lawsuits. This is a question about whether we should force dispute resolution mechanisms into class actions. In fact, let me read the actual language of the rule that we are debating. It doesn't say anything about forced arbitration clauses. In fact, the rule doesn't stop arbitration clauses in contracts. It stops protections in arbitration clauses against class action litigation. Let's read what the actual rule says: The CFPB rule prohibits a company from relying in any way on a predispute arbitration agreement with respect to any aspect of a class action that concerns any consumer financial product or service.
In other words, the entire purpose of this rule is to promote class action litigation and to stop arbitration resolution when there is a dispute. Specifically, the rule requires any predispute arbitration agreement to include this specific language. In other words, people and companies are required to put this language into their agreements. This tells you what the dispute is about.
The language mandated by this rule is this: We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in a court. You may file a class action in court or you may be a member of a class action filed by someone else.
It is about as clear as it could be. The issue here is this: Do we force the resolution of disagreements or disputes in financial transactions into class action litigation?
This is a rule to benefit the plaintiff's bar.
The rule also requires that companies that go through arbitration must submit records of arbitration cases to the CFPB within 60 days of those records.
Some have raised the argument that arbitration agreements gag consumers, including, as was suggested, saying that, were it not for arbitration agreements, the Wells Fargo fake accounts scandal would have been discovered earlier. The only thing confidential in arbitration is what is brought as specific evidence in that arbitration proceeding. The clauses in the law permit people to discuss the claims they are bringing and the company and the individual, if they choose to discuss them.
Nothing stopped anyone from talking publically about what was going on at Wells Fargo. Arbitration keeps evidence confidential for the protection of consumers, but it does not keep them from speaking out about it.
Further, if judges believe that clauses do that, they often find them unconstitutional, as they stop consumers from speaking out. In fact, if you think about it, what generated the public understanding of the Wells Fargo circumstance, if I recall correctly, was a Los Angeles Times news article. It was the CFPB itself that failed, apparently, to read the news and understand what was going on at Wells Fargo. That was the reason that we saw it take so long for any action to take place-- not an arbitration agreement.
In addition, those who are attacking arbitration agreements seem to make the case that arbitration agreements stop consumers from having options. The CFPB's own study said: The clear majority of arbitration clauses within our review specifically recognize and allow access to small claims court as an alternative to arbitration.
Let's just be clear. Arbitration clauses don't gag consumers. They don't stop them from speaking out about what they see going wrong. They don't force them out of the courts if they want to go into a small claims court. The only thing they do that is being objected to here is that they try to force them to not agree to go into a class action lawsuit. It is literally that question that is the biggest issue that we are dealing with here.
Mr. MERKLEY addressed the Chair.
I haven't finished yet.
I am looking for more pages.
I will yield for a question.
I am familiar that they would still have the option of arbitration.
That is why, when those who criticize our effort to reject this rule say we are trying to stop forced arbitration, the rule itself still allows arbitration agreements. What it stops is allowing the company to reach an agreement with the consumer to avoid class action litigation.
That is not true.
Let me reclaim my time, and the Senator can respond on his own time.
Let me clarify. As I indicated, even the CFPB, in its own study, said that most of the contracts--not all companies use the same contract-- already allow two actions: No. 1, to go to small claims court or, No. 2, to go to arbitration. What the agreements don't allow is class action litigation. The specific and only restriction of the rule we are debating tonight is about whether class action litigation should be incentivized by taking out the ability of companies to insist that not be an alternative.
There is one restriction that we are debating here, and that is whether it is appropriate to allow companies to negotiate away class action litigation.
On July 10, the CFPB finalized its rule, as I have said, specifically prohibiting the use of predispute arbitration agreements that prevent consumers from participating in class action lawsuits.
The Dodd-Frank Act--the statute under which the CFPB was created-- also set forth when the CFPB was authorized to prohibit, impose conditions upon, or limit the use of such agreements; namely, if the CFPB finds--and this is what they are required by law to find--that any such action was, No. 1, in the public interest and for the protection of consumers and, No. 2, consistent with the CFPB study's findings.
It is clear that the CFPB failed the legal requirements on both counts. In 2015 the CFPB released its final study and report on predispute arbitration to Congress. To say that the study was flawed is an understatement. It was panned for its questionable analysis,
data, and conclusions by the public, by academics, by consumers, by businesses, by Federal regulators, and by Members of Congress who noted that it could make consumers worse off by removing access to an important dispute resolution tool.
I will spend a few minutes delineating some of the valid criticisms, since the study was the basis and the legal requirement for the final rule. First, the study only compared class action settlements with arbitration awards. By only looking at arbitration awards and not consumer recovery in arbitration settlements that occur before awards, the CFPB ignored substantial evidence of arbitration agreements benefiting consumers.
The analogy that comes to mind is thinking about how much money you have in the bank by looking at your checking account, while ignoring what is in your savings account. Given this methodological flaw, it is difficult to make apples-to-apples comparisons about class action versus arbitration, but the Wall Street Journal's editorial board made a helpful observation: ``Of the 562 class actions the CFPB studied, none went to trial.'' Let me read that again: ``None went to trial.'' Most were dismissed by a judge or withdrawn by the plaintiffs or settled out of class.
The putative class victims received benefits in fewer than
20 percent of the cases, and the average cash recovery was--
wait for it--$32. Lawyers took an average 24 percent cut of
the cash payments, about $424 million in cases that settled.
Meanwhile, consumers were awarded relief in 32 of the 158
arbitration disputes the bureau examined--
These are arbitration results now--
and rewards averaged $5,389--or about 57 percent of every
dollar claimed. Consumers who used arbitration received
relief on average in two months after filing their claim.
Class-action members had to wait two years.
Clearly, the CFPB cherry-picked the information it liked and omitted what it did not like. The CFPB and its advocates of the rule also argue that the rule restores a consumer's day in court. But, again, the CFPB's study explicitly states that no class actions filed during the time period that the CFPB studied from 2010 to 2012 even went to trial.
The study added that most arbitration agreements in consumer financial contracts contain a ``small claims court carve-out,'' which provides the parties with a contractual right to pursue a claim in small claims court.
The CFPB claims that the rule will deter companies from bad behavior in the face of an increase in class action lawsuits. Yet there is no evidence to that effect.
A report released by the Treasury Department this week notes that ``after years of study, the Bureau has identified no evidence indicating that firms that do not use arbitration clauses treat their customers better or have higher levels of compliance with the law.''
The truth is, rather than deterring companies from bad behavior, this rule will encourage frivolous lawsuits that companies feel compelled to settle, shifting hundreds of millions of dollars from businesses to plaintiff attorneys.
Many Members of Congress have weighed in on both the CFPB's arbitration study and how the final rule was developed. In 2015, 86 Members of the House and Senate wrote to Director Cordray asking that he reopen the arbitration study due to concerns about the Bureau's process. In 2016, 140 Members of the House and Senate again wrote to Director Cordray, raising concerns about the CFPB's proposed rule and asking the Bureau to reexamine their approach to arbitration. Unfortunately, the final rule was still issued without addressing any of the concerns identified.
Federal financial regulators have raised a number of concerns with the assumptions used in the development of the rule and the lack of consideration for alternative approaches. Recently, the Treasury Department issued an analysis that concluded that the CFPB did not sufficiently substantiate with any quantitative assessment its assumption that the current level of compliance in consumer financial markets is ``generally sub-optimal,'' which means that the CFPB has not adequately demonstrated the rule will solve the assumed problem it set out to fix.
Treasury also noted the CFPB could have considered less costly alternatives, including more effectively informing consumers, clearer disclosure, or more targeted regulation. However, it failed to do so, opting instead for an all-or-nothing approach, which, again, is specifically designed to generate a phenomenal increase in class action litigation.
The Acting Comptroller of the Currency has also raised serious concerns with the rule and asked for the opportunity to review the CFPB's data and analysis to determine the potential impact of the rule. According to a recent letter by the Acting Comptroller of the Currency:
Eliminating the use of this tool could result in less
effective consumer protection and remedies, while simply
enriching class-action lawyers.
At the same time, the proposal may potentially decrease the
products and services offered to their consumers, while
increasing their costs.
The CFPB attempted to estimate the increase in costs, albeit incompletely, that are associated with this final rule and that could be passed onto consumers. The CFPB estimates in its final rule that the companies will incur $2.6 billion of additional fees and settlements over the next 5 years, $330 million of which will go directly to plaintiff lawyers. As astounding as these numbers are, the estimate includes only Federal court cases and fails to include State court cases.
Treasury's analysis also notes that the CFPB appears to understate the share of class actions dismissed by the courts, thus failing to adequately consider the costs of meritless cases. According to Treasury, assuming that just 10 percent of class action cases are meritless, ``the Rule would have to reduce harm to consumers by $500 million per year to demonstrate any net benefit to society. The Rule does not come close to making that showing.''
The OCC recently shed more light on how the CFPB's final rule could impact the cost of consumer credit. While the CFPB said that it could not identify any evidence to that effect, it did concede that ``this does not mean that no pass-through [to consumers] occurred; it only means that the analysis did not provide evidence of it'' and that ``most providers will pass through at least portions of some of the costs.''
Using the same data, the OCC conducted its own analysis and found ``a strong probability of a significant increase in the cost of credit cards as a result of eliminating arbitration clauses.''
In fact, the OCC found an 88-percent chance that the total cost of credit will increase and a 56-percent chance that costs will increase by at least 3 percent.
As Acting Comptroller Noreika noted, that means that a consumer, living week to week, could see credit card rates jump from an average of 12.5 percent to nearly 16 percent. He correctly added that ``to the extent the CFPB's arbitration rule is being undermined, it is undermined by the CFPB's own data and the working paper on which the CFPB relied.''
Community banks and credit unions across this Nation are raising concerns with the rule. The Independent Community Bankers Association opposes the arbitration rule because:
Community banks are relationship lenders, many of which
have served their communities for multiple generations.
A reputation for fair dealing is essential for their
success, and abusive consumer practices have absolutely no
place in their business model. Community banks invest
heavily in resolving customer complaints amicably and on a
timely basis.
In addition, the Credit Union National Administration, or CUNA, opposes the arbitration rule because ``[a]mong the many consumer protections associated with the mission of credit unions is the high- quality service they provide to their members, which has prompted a successful system for quickly and amicably resolving disputes in the limited instances where they arise.''
While the CFPB claims that many community banks and credit unions do not even have these clauses, I have heard from many small financial institutions that this rule would have a significant impact on their operations.
On July 25, by a vote of 231 to 190, the House voted to overturn this rule. The administration weighed in on the House's efforts, saying: ``This legislation would protect consumer choices
by eliminating a costly and burdensome regulation and reining in the bureaucracy and inadvisable regulatory actions of the CFPB.''
It is alarming that the CFPB moved forward with a final rule in this manner, especially in light of the numerous concerns expressed. The CFPB could have made recommendations to improve the arbitration process or arbitration clauses if it identified concerns.
Aside from the substantive concerns about this specific rule, it brings the CFPB's own structure and accountability into focus. The CFPB is unlike any other Federal agency. Since its creation, we have argued that far too much power is invested in the CFPB Director without any effective checks or balances.
Last year, the DC Circuit Court of Appeals ruled that the CFPB, as it is currently structured, is unconstitutional. The ruling stated that Congress erred in creating a far-reaching agency that is led by a single Director. In particular, the ruling noted that ``the CFPB's concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from subtle historical practice, but also poses a far greater risk to arbitrary decision-making and abuse of power.''
The Director is further insulated by being able to automatically withdraw funds from the Federal Reserve, rather than being required to justify the CFPB's annual funding needs to Congress.
The court's decision mirrored arguments from Members of Congress that the Director has wide-ranging power with little oversight and is a gross departure from the settled historical practice of having multimember commissions at agencies to keep them in check. In fact, the Senate repeatedly urged the prior administration to impose checks on the CFPB.
In 2011, 44 Senators wrote to the administration expressing concern about the lack of accountability in the structure of the CFPB. In 2013, 43 Senators wrote to the administration once again. In each instance, we advocated for the establishment of proper checks and balances for the agency, which, had they been imposed, almost certainly would have avoided this crisis rule that we see coming out.
Some of the specific checks and balances for which we advocated included replacing the single Director with a bipartisan commission to run the CFPB, subjecting the CFPB to congressional appropriations, and establishing safety-and-soundness checks for prudential regulators. Nevertheless, despite our efforts, this agency remains just as powerful and unaccountable today, and this rule is just the most recent demonstration of its continued lack of accountability.
Now the Senate has the opportunity to take another step toward holding this agency accountable. The CFPB failed to demonstrate that consumers will fare better in light of its arbitration rule. In fact, they may be worse off.
I urge my colleagues to help ensure that consumers maintain access to quick, inexpensive, and efficient mechanisms of dispute resolution by overturning this rule.
Thank you.
Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
Mr. President, while we have a little bit of open time in between speakers, I thought I might respond to some of the things that have been said.
Those who are opposing this resolution tonight continue to put it as though this were a case of trying to stop consumers from having an adequate way to access dispute resolution and make it look like it is the big guys against the little guys. First of all, this rule we are talking about only applies to financial institutions. It doesn't apply in all the other kinds of cases that have been thrown out here tonight. If you want to look at the financial institutions that are the most concerned about this rule, it is the little guys. It is the credit unions. It is the local community banks that are pleading with us to stop this abusive rule. I just think that part of the record needs to be set straight.
Again, I am going to lay out what this debate is really about. This debate is not about trying to help facilitate banks and credit card companies and others in cramming down some solution on consumers. It is about trying to facilitate pushing dispute resolution into class action litigation. This is a very clear move to drive our dispute resolution in this country into class litigation.
I am going to give a little bit of history, but before I do that, I want to again read to the folks who are listening in on this debate what this rule exactly does. You would think from all of the debate that it stops consumers from going to court or that it forces consumers to use an abusive arbitration process. It is very clear. This rule
prohibits a company from relying in any way on a predispute arbitration agreement with respect to any aspect of a class action that concerns any consumer financial product or service.
The rule goes further. Remember that the ones that are the most worried about this are the credit unions and the small banks. Every agreement they enter into has to contain this language. This tells you what the fight is about.
We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court.
That is the rule we are talking about. You may file a class action in court or you may be a member of a class action filed by someone else. Are we fighting against a mandate--basically, a rule that is going to drive decisions and dispute resolutions into class action litigation? Yes, we are. We are fighting to protect the current system, which is one that has worked for years and years. I am going to get into that system. In fact, I will get into it right now. Let's compare class action litigation with arbitration as one of the alternatives.
In fact, before I make that comparison, let me point out that the CFPB's own study shows that the clear majority of arbitration clauses they studied allow access to small claims court as an alternative to arbitration. There is no effort to say to the consumer, if you want to, you can go to small claims court. In the United States, the limit in small claims is different in each State. It ranges from $3,000 to $15,000, but I would say the most common level is about $10,000 of a claim. So a consumer who has any kind of a claim up to about $10,000 can go to a small claims court.
Let's compare arbitration with class action litigation.
How much does the consumer recover? In a class action, the average is $32 per person. In arbitration, the average is $5,389 per person.
How long does it take to get the recovery? In a class action, it is 23 months, on average. In arbitration, it is 5 months, on average.
How many of them actually go to trial? Now, this is interesting because you think of a class action as your day in court. Remember that those who argued earlier tonight were telling consumers they were not going to get their day in court. The number of class action lawsuits that went to court were zero. Class action litigation is a mechanism to drive settlements. As for the number of arbitration suits that went to court, 32 percent reached a decision on the merits. That was not an actual court case, but it was a resolution by a decision maker. With regard to settlements, 12 percent classwide are made. In arbitration, 57 achieve settlement.
Here is one of the striking ones. How much is paid in attorneys' fees? In a class action, according to this study, which is the CFPB's study, $424 million goes to attorneys' fees. There were no attorneys' fees under the arbitration. There were some arbitration fees, and I will get to that in a minute, but they were nowhere close. By the way, this number, the $424 million that went into attorneys' fees, is the reason we are having our debate tonight. This rule seeks to drive this decision-making model into this zone.
As for estimated additional class action costs for covered companies, it is $2.6 billion for class actions and none for arbitration.
Some have said this is just an example of the Republicans trying to help Wells Fargo out. First of all, I am the chairman of the Banking, Housing, and Urban Affairs Committee. We have held hearings on the Wells Fargo situation and continue to look at it very closely. Senators from both parties take it very seriously and are working to find a resolution, but when it comes to the question of whether Wells Fargo used arbitration agreements to avoid liability, these are the facts.
Wells Fargo, which was found to have opened millions of unauthorized accounts in the names of its consumers, agreed to settle this for $142 million--twice as much as the projected consumer loss. They made that agreement because arbitrating them in individual disputes would have cost much more. The argument that Wells Fargo is the example of what we are working to try to facilitate here is just not true.
As I said, let's talk a little bit about arbitration. On the floor tonight, arbitration has been characterized as this terrible, devilish idea that has been designed by Big Business in America to try to push the little guy out of a fair chance at recovery in a dispute. The Acting Comptroller of the Currency, who heads the independent Bureau of the Treasury, which is in charge of supervising and regulating national banks, has raised serious concerns.
In his recent letter, he indicates that arbitration can be an effective alternative dispute resolution mechanism that can provide better outcomes for consumers and financial service providers without the high costs associated with litigation.
That is key. In fact, if you look at history, nearly a century ago, Congress made private agreements to resolve disputes through arbitration valid, irrevocable, and enforceable under a Federal law, which is called the Federal Arbitration Act. This was a decision by this Congress nearly 100 years ago that said we have to find a way that is fair to resolve disputes that is not so expensive as the current dispute resolution models we have, namely, litigation. This longstanding Federal policy in favor of private dispute resolution serves the twin purposes of economic efficiency and freedom of contract.
Some have said this just lets banks get away with cheating their customers, but the opposite is true. Eliminating the use of this tool could result in less effective consumer protection and fewer remedies while simply enriching class action lawyers. At the same time, the proposal may potentially decrease the products and services offered to consumers while increasing their costs.
The Wall Street Journal's editorial board similarly noted that arbitration has allowed consumers to easily resolve disputes by phone or online without their having an attorney.
As I have said, virtually every consumer who does not like this solution has the alternative to go to small claims court. The question here is whether we will facilitate pushing consumers out of the choice of arbitration. If the law is changed, which is what this rule seeks to do, then the disincentive for financial institutions to rely on arbitration will be seriously injured. The worry we have--and the intent of this rule--is that it will drive dispute resolution into class action litigation. That is what this whole dispute here tonight is about.
One of my colleagues tried to characterize arbitration as this system in which this company hires these decision makers, these arbitration judges, and that the judges are going to be biased because the judges are bought by the companies that use them for the arbitration. That is not an accurate description of what arbitration is.
There is actually a Federal law, which I have already referenced, which sets up the parameters in which arbitration operates, and there is an American Arbitration Association that administers it. When a person chooses to go into arbitration, what happens is that the whole system that takes over is administered not by the company but by the AAA, and under the American Arbitration Association's procedures, it appoints an arbitrator. The implication made earlier was that the arbitrator always rules for the company because that is the company that hires him.
Here is the truth. In the appointments of 1,847 disputes that the CFPB studied, arbitrators were appointed in 975 that involved 477 different arbitrators. In 704 of those disputes, the AAA appointed arbitrators who had also been in other financial disputes. Some of these arbitrators get picked a couple of times, but they are not picked by the company, and they are not beholden to the company. That is one of the reasons we set up the Federal arbitration system the way it is.
My point is, the effort to try to characterize this as some devious system that has been created to try to stop consumers from having access to fairness is simply false. We have a very fair system that has been working for over 100 years in this country. It has been litigated and litigated because those who want litigation to be the norm hate it. They do not want arbitration to work, but the reality is, it has worked wonderfully, and it has survived the litigation assaults.
Now those who want to drive decision making more into the courts and more
into class action litigation have been able to get a willing, listening ear in the Director of the CFPB, who, as I have said earlier, has no accountability to Congress, who does not even look to Congress for his budget, and is obviously on the side of the litigation bar, which wants to, once again, drive our decision-making system into a litigation mode.
That is the debate we are having. That is the argument tonight. Anyone who tries to say this is an effort by your local credit union, your local community bank, or your large credit card company to try to stop consumers from having adequate access to dispute resolution is mischaracterizing what the debate tonight is about.
I encourage all of my colleagues to reject this inappropriate and, frankly, expensive and dangerous rule.
Mr. President, just for everybody's information, I am going to speak for just 2 or 3 minutes and then yield back our time, and then Senator Brown will do the same, and then we will proceed to a vote.
I just want to make clear what we are talking about here. You have heard a lot of talk tonight about how this is trying to stop the forced arbitration. You have heard that word a lot. Let's make it really clear what the debate is about.
Using the CFPB's own study--I am quoting the CFPB now--``the clear majority of the arbitration clauses within our review specifically recognize--and allow--access to small claims courts as an alternative to arbitration.'' So this notion that we are here fighting tonight about whether people who have small claims don't have any outlet except arbitration is simply false. That is a false orchestration of what the argument is.
What is the argument? Well, why don't we look at the rule and see what the rule says again? And now I am quoting specifically from the CFPB rule. It prohibits a company from relying ``in any way''--it doesn't say forced arbitration--from relying ``in any way on a pre- dispute arbitration agreement . . . with respect to any aspect of a class action.''
It goes on, and the rule actually states specific language that people
have to put in their contracts. What is that language? This rule requires people to ``agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court.''
So the issue here, Mr. President, is not forced arbitration. Even existing arbitration clauses allow alternatives. The issue here is the CFPB's effort to force dispute resolution into class action litigation.
Some have talked here tonight about how we are trying to stop access to the courtroom. Well, first of all, I think that argument is belied again by the CFPB's own study that explicitly states that no class actions filed during the time period that the CFPB studied even went to trial. So this argument falls on its own face.
Meanwhile, let's look again at what the difference between arbitration and forced class actions does. In arbitration, a decision on the merits was reached in 32 percent of the disputes filed, where, as I indicated, zero of the class action cases even went to trial. In addition, according to the CFPB's own study, most arbitration agreements and consumer financial contracts contain a small claims court carve-out.
Given the methodological flaws in the CFPB's study, it is difficult to make apples-to-apples comparisons about class action versus arbitration, but the Wall Street Journal's editorial board made this observation:
Of the 562 class actions the CFPB studied, none went to
trial. Most were dismissed by a judge, withdrawn by the
plaintiffs or settled out of class.
I will conclude with just the numbers that we have already talked about many times tonight.
What is the comparison between arbitration and class action litigation? That is the issue tonight. What is the comparison? The average recovery for the consumer in a class action case is $32. The average recovery in an arbitration is $5,389. It takes 2 years for the class action to take place; 5 months for the arbitration. In 12 percent of the class action matters did they even reach settlements. In 60 percent, they reached them in arbitration. Attorneys' fees: $424 million in class action cases; virtually no attorneys' fees in arbitration cases.
The point here is exactly this: The debate tonight is not, as many would have you believe, over whether we are forcing arbitration. Even the arbitration clause in the current system creates options for consumers to go into small claims courts. The vote here tonight is whether to force dispute resolution into class action litigation, and that is what we need to decide with tonight's vote.
Mr. President, I also yield back our time.