[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]








                     EXAMINING THE CFPB'S PROPOSED
                     RULEMAKING ON ARBITRATION: IS
                     IT IN THE PUBLIC INTEREST AND
                    FOR THE PROTECTION OF CONSUMERS?

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 18, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-89





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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

                   RANDY NEUGEBAUER, Texas, Chairman

STEVAN PEARCE, New Mexico, Vice      WM. LACY CLAY, Missouri, Ranking 
    Chairman                             Member
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL POSEY, Florida                  RUBEN HINOJOSA, Texas
MICHAEL G. FITZPATRICK,              DAVID SCOTT, Georgia
    Pennsylvania                     CAROLYN B. MALONEY, New York
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
MARLIN A. STUTZMAN, Indiana          STEPHEN F. LYNCH, Massachusetts
MICK MULVANEY, South Carolina        MICHAEL E. CAPUANO, Massachusetts
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANDY BARR, Kentucky                  DENNY HECK, Washington
KEITH J. ROTHFUS, Pennsylvania       KYRSTEN SINEMA, Arizona
FRANK GUINTA, New Hampshire          JUAN VARGAS, California
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
MIA LOVE, Utah
TOM EMMER, Minnesota























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 18, 2016.................................................     1
Appendix:
    May 18, 2016.................................................    45

                               WITNESSES
                        Wednesday, May 18, 2016

Bland, F. Paul, Jr., Executive Director, Public Justice..........     9
Hong, Dong, Vice President and Regulatory Counsel, Consumer 
  Bankers Association............................................     6
Johnston, Jason Scott, Henry L. and Grace Doherty Charitable 
  Foundation Professor of Law, University of Virginia School of 
  Law............................................................     4
Pincus, Andrew, Partner, Mayer Brown LLP, on behalf of the U.S. 
  Chamber of Commerce............................................     7

                                APPENDIX

Prepared statements:
    Bland, F. Paul, Jr...........................................    46
    Hong, Dong...................................................    69
    Johnston, Jason Scott........................................   102
    Pincus, Andrew...............................................   112

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Written statement of Cause of Action Institute...............   158
    Written statement of the Credit Union National Association...   165
    Paper written by Jason Scott Johnston entitled, ``High Cost, 
      Little Compensation, no Harm to Deter: New Evidence on 
      Class Actions under Federal Consumer Protection Statutes''.   168
    Mercatus Working Paper entitled, ``The Consumer Financial 
      Protection Bureau's Arbitration Study, A Summary and 
      Critique,'' by Jason Scott Johnston and Todd Zywicki.......   219
    Written statement of the National Association of Federal 
      Credit Unions..............................................   275
Royce, Hon. Ed:
    Written statement of the Credit Union National Association...   276
Scott, Hon. David:
    Written statement of Americans for Financial Reform..........   279
    Written statement of the National Association of Consumer 
      Advocates..................................................   287
    Written statement of Public Citizen..........................   292
Westmoreland, Hon. Lynn:
    Written statement of the Electronic Transactions Association.   295
Williams, Hon. Roger:
    Written statement of the National Independent Automobile 
      Dealers Association........................................   297

 
                     EXAMINING THE CFPB'S PROPOSED
                     RULEMAKING ON ARBITRATION: IS
                     IT IN THE PUBLIC INTEREST AND
                    FOR THE PROTECTION OF CONSUMERS?

                              ----------                              


                        Wednesday, May 18, 2016

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Pearce, Lucas, 
Posey, Westmoreland, Luetkemeyer, Stutzman, Mulvaney, 
Pittenger, Barr, Rothfus, Guinta, Tipton, Williams, Love, 
Emmer; Clay, Scott, Maloney, Velazquez, Sherman, Lynch, 
Delaney, Heck, Sinema, and Vargas.
    Ex officio present: Representative Hensarling.
    Also present: Representative Royce.
    Chairman Neugebauer. The Subcommittee on Financial 
Institutions and Consumer Credit will come to order. Without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    Today's hearing is entitled, ``Examining the CFPB's 
Proposed Rulemaking on Arbitration: Is it in the Public 
Interest and for the Protection of the Consumers?''
    Before we begin, I would like the thank our witnesses for 
making themselves available today. And without objection, the 
Chair is authorized to declare a recess of the subcommittee at 
any time, and that will be subject to our voting schedule.
    Also without objection, members of the full Financial 
Services Committee who are not members of the subcommittee may 
sit on the dais and participate in today's hearing.
    I will now recognize myself for 5 minutes to give an 
opening statement.
    Good afternoon. Today's hearing will examine the CFPB's 
proposed rulemaking on arbitration. Arbitration has long been 
recognized as an important form of alternative dispute 
resolution for consumers that encourages efficiency, 
expediency, and lowers the barrier to bring disputes. In fact, 
in 1925 Congress passed the Federal Arbitration Act, which 
states that agreements to arbitrate are valid, irrevocable, and 
enforceable.
    Since then, the Supreme Court, on numerous occasions, has 
upheld the broad use of arbitration agreements in contract law 
and highlighted the clear Federal policy favoring these 
agreements.
    In 2010, the Democratic-controlled Congress passed the 
Dodd-Frank Act, which mandated that the Consumer Financial 
Protection Bureau study the use of arbitration agreements in 
consumer products and services. Section 1028 requires the 
Bureau to study these agreements, and then, consistent with the 
findings of the report, the Bureau may limit or ban these 
agreements if the findings of the study satisfy two legal 
standards. Those standards are: Is it in the public interest 
and for the protection of the consumers?
    Last March, the Bureau released its mandated study on 
arbitration. Unfortunately, rather than performing a thorough 
analysis of arbitration, as required by the statute, the Bureau 
instead simply compared arbitration and class action. The 
Bureau failed to adequately compare arbitration programs across 
the industry or examine the best practices that produced the 
greatest consumer outcome.
    However, if the congressional intent was for the Bureau to 
compare arbitration and class actions, the study clearly 
demonstrates a more favorable outcome for consumers using 
arbitration as compared to class actions. For example, 
arbitration produces a significantly higher recovery for 
individual consumers and has a shorter resolution timeline for 
recovery.
    In testimony before this committee, the agency had stated 
that banning the use of class action waivers in arbitration 
agreements, the main provision of the Bureau's rule, would 
achieve the primary Bureau objective to giving the consumers 
their day in court.
    Actually, nothing could be further from the truth. Let's 
take, for example, the 2013 U.S. Chamber of Commerce study on 
class actions. None of the class actions studied ever went to 
trial before a judge or a jury. Additionally, not a single 
class action ended in a final judgment on the merits for the 
consumers.
    Now let's compare that to the CFPB's arbitration study. Yet 
again, we see the same thing. Not a single class action was 
decided by a judge or a jury. Remarkably, though, class action 
attorneys recovered over $400 million in the Bureau's study.
    After my own review of the material, I have serious doubts 
that the Bureau has met the statutory requirements set forth in 
section 1028. Further, I fear a single unelected Bureaucrat has 
directed an agency action that is both arbitrary and 
capricious. The Bureau has failed to articulate a rational 
connection between the facts found in the May 2015 study and 
the agency's action before us today.
    In my view, the proposed rule is a clear error in judgment 
by the Bureau. It will perpetuate a justice gap by taking away 
the legal forum for low-income individuals and those with small 
and individualized claims. That outcome would certainly not be 
for the protection of the consumers.
    Today, we have a distinguished panel of experts who have 
spent considerable time studying this issue. I hope our 
witnesses will walk our members through the Bureau's report and 
provide their perspective on the proposed rulemaking, including 
whether the Bureau has satisfied its statutory requirements in 
section 1028 of Dodd-Frank.
    I now recognize the ranking member of the subcommittee, Mr. 
Clay, for 5 minutes.
    Mr. Clay. Thank you, Chairman Neugebauer.
    And thanks to each of the witnesses for today's testimony.
    Fair, enabling, cost effective--those are the words that 
corporate proponents use to describe the arbitration fine print 
buried at the end of a majority of the financial contracts that 
American consumers sign. But here is the truth: Adjectives like 
fair, enabling, and cost effective are false descriptions of 
what consumers actually experience when they are forced to 
individually arbitrate their claims against the financial 
services industry.
    Instead, if we want to accurately describe this process, we 
should be using words like unfair, biased, expensive, opaque, 
and discouraging. Surely, forced arbitration is unfair when it 
is shown that consumers win only 9 percent of the time. Surely, 
forced arbitration is biased when it is shown that consumers 
recover an average of 12-cents-per-dollar claim while companies 
recover 98 cents per dollar. Surely, forced arbitration is 
expensive when, on top of the administrative fee paid by the 
consumer, forums add on charges like $1,500 just for a consumer 
to get a written copy of the decision in their case.
    These are the types of concerns that motivated Congress to 
include a requirement in Dodd-Frank that the CFPB study the 
impact of the arbitration clauses and how they have impact on 
the rights of consumers of financial products and services.
    These are also the concerns that motivated our decision to 
empower them, based upon that study, use their rulemaking 
authority to modify or even prohibit the practice for the 
benefit of consumers and to protect the public interest.
    The proposed rule recently issued by the CFPB does just 
that, by banning class action waivers in arbitration clauses 
and increasing transparency through public and government 
reporting of information on the outcomes of individual 
arbitration cases.
    I applaud the CFPB's efforts in this area and welcome this 
important proposal to better protect the rights of American 
consumers.
    And, Mr. Chairman, I would like to yield the balance of my 
time to my friend from California, Mr. Sherman.
    Mr. Sherman. The choice is not between arbitration and 
litigation. The choice is between litigation as a class action 
and absolutely no remedy. When a consumer has a claim of $10 or 
even $5,000, what are they supposed to do? Go hire a lawyer to 
go through the arbitration process? Who is going to take the 
case? How much are they going to charge? And if it is a fee for 
service attorney, how are they supposed to pay for it?
    So you cannot compare the litigation process, which is not 
a joyful experience, versus arbitration. The choice is a class 
action lawsuit in which a single firm can represent dozens or 
hundreds of consumers who have been mistreated, or at least 
believe they have, and no remedy at all. Because I don't think 
any of our witnesses will be able to identify a law firm that 
will take, on a contingent basis, an arbitration claim of a 
consumer who has been harmed to the extent of $10, or even to 
the extent of $5,000.
    The issue here, though, is not just for the litigants 
involved and the individual consumers. If we create a 
circumstance in which everyone in the financial services 
industries knows that if there is a harm to consumers of $10 or 
$5,000 there is absolutely no remedy, then you are going to 
have--some businesses will change their business model and will 
say, well, when we take $10 or $5,000 per consumer away, it 
benefits our bottom line, and there is no remedy, the system is 
broken. If business is going to act in consumers' interests, we 
need a remedy when it doesn't.
    I yield back.
    Chairman Neugebauer. The time of the gentleman has expired.
    Today, we welcome the testimony of these witnesses: Dr. 
Jason Scott Johnston is the Henry L. and Grace Doherty 
Charitable Foundation professor of law at the University of 
Virginia School of Law; Mr. Dong Hong is the vice president and 
regulatory counsel for the Consumer Bankers Association; Mr. 
Andrew Pincus is a partner at the law firm of Mayer Brown, LLP, 
testifying on behalf of the U.S. Chamber of Commerce; and Mr. 
F. Paul Bland Jr., is the executive Director of Public Justice.
    Each of you will be recognized for 5 minutes to give your 
oral presentation of your testimony. And, without objection, 
each of your written statements will be made a part of the 
record.
    Dr. Johnston, you are now recognized for 5 minutes.

STATEMENTS OF JASON SCOTT JOHNSTON, HENRY L. AND GRACE DOHERTY 
CHARITABLE FOUNDATION PROFESSOR OF LAW, UNIVERSITY OF VIRGINIA 
                         SCHOOL OF LAW

    Mr. Johnston. Chairman Neugebauer, Ranking Member Clay, and 
other members of the subcommittee, I want to thank you for 
inviting me to testify today on the CFPB's proposed rulemaking. 
I will begin by clarifying briefly what I will talk about, and 
I am really going to make three points in my testimony.
    The first is to set the stage, and it is important that we 
understand the significance of arbitration versus class actions 
in creating incentives for firms to avoid wrongful behavior. 
Then I will talk about the data that the CFPB reported on both 
arbitration and class actions. Finally, I will make a few 
comments about how the data was interpreted by the CFPB in its 
rulemaking proposal of May 5. And then I will conclude.
    Now, let me say at the outset that I am not representing 
any organization. I am here as an individual. These are my 
views based on research that I have done.
    The first point is to understand why the choice between 
arbitration and class actions matters as much as it does. 
Accuracy in an ex postdispute resolution system is absolutely 
crucial to the incentives it creates for firms to avoid harmful 
conduct. If we have a system, which class actions are, where 
liability is more or less random and has no relationship in the 
bulk of cases to whether or not the firm has caused harmful 
conduct, then we are not creating incentives for firms to avoid 
the harmful conduct. We are either creating a situation in 
which firms can't do anything to avoid liability or in which 
they simply try to reduce the volume of transactions with 
consumers who they screen out ahead of time as potentially 
likely to be part of class actions. Those are not good 
incentives.
    If, on the other hand, we have an accurate ex postdispute 
resolution system in which firms are made to pay only if they 
have actually done wrong and caused harm, as arbitration is, 
you have a good system, you have a system that deters firms 
from causing harm. So that is why this is so important.
    Now, the question is, what did the CFPB study show about 
class actions versus arbitrations? What it showed about 
arbitrations is really quite remarkable. It showed, among other 
things, that 63 percent of the consumers that it studied who 
filed arbitrations either got a likely settlement or an 
arbitral award. They did so usually within a really short 
period of time, 5 months, and the average award was about 
$5,400.
    It also is important to realize arbitration is cheap, it is 
informal. Most of these arbitrations are resolved just over the 
phone or just based on documents. And lots of consumers, the 
majority had counsel, but you don't really need counsel in 
arbitration because the CFPB's own numbers showed that 
consumers without counsel do just about as well as consumers 
with counsel.
    What about class actions? Well, the CFPB has a lot of 
numbers on class actions, but it is really important to 
remember that in this rulemaking all of the benefits from class 
actions that the CFPB advances are based really on one class 
action settlement--one. They go over and over emphasizing the 
terms of the settlement in what is called the overdraft fee 
multidistrict class action litigation. That is their one data 
point for the argument that class actions actually deter firms 
from causing harmful conduct. That is it.
    And I should note also that as for nonmonetary relief--
consumers got money in the overdraft fee litigation--as for 
nonmonetary relief, the big case there was TransUnion, 350 
million consumers, but the relief was what, 6 months of free 
credit monitoring and 6 months of free credit reports, but 
credits reports are free anyway under the Fair Credit Reporting 
Act. That was it.
    Now, there is more general data on class actions that the 
CFPB put in its study, but when you look at the rulemaking, 
very little is made of the general data by the CFPB. Why? The 
general data shows that attorney's fees are about 20 percent of 
the relief that consumers get, and about 20 percent of the 
consumers in a class actually get any money.
    Well, those are not really good numbers if you are trying 
to argue what the class does is give compensation to lots of 
consumers at a very low cost. I think, and I won't have time in 
my first remarks to mention it, based on my own ongoing 
research, that attorney's fees are much higher on average than 
the CFPB reported, so the class actions are very costly and a 
difficult way of awarding compensation and likely not to be a 
very good instrument of deterrence either.
    So the conclusion I have is that if you look at the CFPB's 
own study it is really surprising that what they are doing is 
proposing to ban arbitration clauses that prohibit class 
actions. At most, one would have thought, you know, the bottom 
line here is more study is needed, we need more evidence, we 
don't have enough evidence yet, but the evidence we do have 
does not seem in any way to support the purported benefits and 
costs of what the CFPB did.
    [The prepared statement of Mr. Johnston can be found on 
page 102 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Hong, you are now recognized for 5 minutes.

STATEMENT OF DONG HONG, VICE PRESIDENT AND REGULATORY COUNSEL, 
                  CONSUMER BANKERS ASSOCIATION

    Mr. Hong. Chairman Neugebauer, Ranking Member Clay, and 
members of the subcommittee, thank you for the opportunity to 
discuss the CFPB's activities related to arbitration agreements 
for consumer financial products and services. My name is Dong 
Hong, and I am vice president and regulatory counsel at the 
Consumer Bankers Association.
    CBA is the voice of the retail banking institution, 
representing 69 depository institutions whose products and 
services provide access to credit for consumers and small 
businesses. Our members operate in all 50 States and serve more 
than 150 million Americans.
    Banks have strong business incentives to maintain mutually 
satisfactory relationships with their customers. When disputes 
do arise between our member banks and our customers, they are 
overwhelmingly resolved through informal channels. Only a 
fraction of the time does a dispute rise to the legal of a 
formal action in court or arbitration. When it does, 
arbitration is an efficient alternative to litigation.
    Since the Federal Arbitration Act was passed in 1925, 
Federal law has protected--and the Supreme Court has 
confirmed--the benefits of arbitration as a faster and higher 
recovery alternative to class action litigation for consumers. 
On average, arbitration results in nearly $5,400 in consumer 
relief within 2 to 7 months.
    In contrast, litigation can be complicated, time consuming, 
expensive, and generally requires a lawyer to navigate. Class 
actions can take nearly 2 years and result in just 32 bucks on 
average for the consumer, the equivalent of a tank of gas.
    Despite the Supreme Court's support of arbitration and the 
clear consumer benefits it offers, as noted by the CFPB's own 
study, the CFPB has issued a proposed rule which could reduce 
the ability of consumers to take their disputes through 
arbitration and would subject covered companies to a higher 
risk of class action lawsuits.
    The Consumer Bankers Association believes the proposal 
fails to provide a sufficient basis for restricting the use of 
arbitration as required by the Dodd-Frank Act. Specifically, 
the law directs the CFPB to conduct a study on arbitration 
relating to consumer financial products and services. It also 
authorizes the Bureau to restrict or even prohibit the use of 
mandatory predispute arbitration agreements for such products 
or services if, and only if, it is ``in the public interest and 
for the protection of consumers'' and is consistent with the 
results of their study.
    On March 15, 2015, the CFPB released its study. In its 
press release, the Bureau was highly critical of arbitration 
and unabashed in its preference for class action lawsuits. 
Experts at the Mercatus Center in their independent review 
found that the CFPB study, ``fails to support any conclusion 
that arbitration clauses and consumer credit contracts reduce 
consumer welfare or that encouraging more class action 
litigation would be beneficial to consumers and the economy.''
    While the Bureau's study is the most extensive arbitration 
study conducted to date, it remains incomplete and fails to 
prove that restricting arbitration is in the public interest or 
for the protection of consumers.
    Despite its incomplete nature, the CFPB's own study shows 
consumers are better served taking their disputes to an 
arbitrator rather than participating in a class action lawsuit.
    A number of the facts seem to get lost in this debate. The 
study shows 60 percent of class actions produce no benefits for 
putative class members. In class settlements that required 
putative class members to submit a claim form, 96 percent of 
the class received nothing since they did not file a claim. 
Consumers obtained cash payouts of a mere 32 bucks on average, 
and cases took roughly 2 years to settle.
    In comparison, consumers who went through arbitration 
received nearly $5,400 in cash payments in just a third of the 
time.
    What seems absent from the CFPB study was the full impact 
of public supervision and enforcement on consumer welfare and 
protection. The study limits its examination of such regulatory 
action to the years between 2008 and 2012. This seems to be an 
odd choice since the CFPB, the agency established to supervise 
the consumer financial markets, has only been operational since 
July 21, 2011.
    In addition, the study failed to gather any significant 
data on arbitration settlements, which is a critical element of 
any fair evaluation of arbitration. To make matters worse, the 
study shows the Bureau does not have a complete understanding 
of consumers' experience with arbitration.
    The CFPB is required to provide a sufficient basis for 
restricting the use of arbitration and must demonstrate that 
doing so would benefit consumers. It has failed to do so, so 
far.
    Mr. Chairman, thank you for the opportunity to testify. The 
Consumer Bankers Association appreciates the subcommittee's 
interest in the proposed rule on arbitration. We encourage the 
CFPB to conduct a more complete analysis of this alternative 
dispute resolution process before finalizing a rule which could 
seriously harm consumers.
    [The prepared statement of Mr. Hong can be found on page 69 
of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Now, Mr. Pincus, you are recognized for 5 minutes.

STATEMENT OF ANDREW PINCUS, PARTNER, MAYER BROWN LLP, ON BEHALF 
                OF THE U.S. CHAMBER OF COMMERCE

    Mr. Pincus. Thank you, Mr. Chairman, Ranking Member Clay, 
and members of the subcommittee. It is an honor to appear 
before you today on behalf of the U.S. Chamber of Commerce.
    I would like to focus on a couple of points. First of all, 
the Bureau's study process; second of all, the practical effect 
of its rule; and third, address some of the questions about the 
ability to vindicate small claims in arbitration.
    First of all, the study process. Members of this committee, 
other Members of Congress, interested members of the public 
repeatedly asked the Bureau for the opportunity to provide 
meaningful input on this study. Except for a threshold request 
for suggestions about how to conduct the study at the very 
outset, there was radio silence from the Bureau for 3 years--no 
indication of the subjects it was studying, no request for the 
public to comment, no indication of what topics would be 
useful.
    The result, not surprisingly, is a flawed study that has 
preordained results that are principally focused on deprecating 
arbitration and inflating the benefits of class actions. Most 
importantly, the Bureau never addressed the key policy question 
underlying its rule: Will consumers be better off if 
arbitration is eliminated in favor of class actions?
    The Bureau probably avoided confronting that question 
directly because it knows the only possible answer to that is 
no, as indicated by some of the things my colleagues have said 
about the relative benefits of arbitration and class actions.
    For the CFPB, only the court system will do, even though in 
the real world the cost, complexity, and crowded nature of our 
court system makes it impossible for consumers to access courts 
for the kinds of claims they suffer most.
    The facts show that arbitration empowers consumers through 
the use of technology and gives them the ability to vindicate 
their rights without dependence on lawyers. So the proposal 
here will harm the very consumers that the Bureau is charged 
with protecting by eliminating access to justice through 
arbitration and relegating them to lawyer-controlled class 
actions that provide, as you have heard, little benefit to real 
people, but are great for lawyers. And I have to say plaintiffs 
lawyers and defense lawyers love class actions.
    They will also increase the cost to consumers of financial 
goods and services without any corresponding benefit, because 
all of those costs associated with litigation of class actions 
will, of course, be passed along to consumers.
    I think it is important to note that although the Bureau 
says its proposal is just to require that class actions be 
permitted, the practical effect of that will be to eliminate 
arbitration in its entirety because right now companies 
subsidize arbitration programs. They pay for consumers to file 
complaints, and the vast majority of arbitration agreements 
require companies to pay all, or all but maybe 100 or 200 
dollars, of all of the costs associated with arbitration.
    The Bureau's rule, if it were adopted, would impose on 
companies the huge defense cost associated with class actions. 
So the rational company is going to say: Well, if the Bureau is 
forcing me to pay this money over here, I have to eliminate 
this voluntary payment over here, much as I like the 
arbitration system, because I can't do both and keep my costs 
down. No economically rational company is going to finance two 
dispute resolution systems.
    I think it is important, although arbitration gets 
demonized, to clarify how it works. It is pretty simple. 
Parties make commonsense arguments before an impartial 
decisionmaker. There are not complicated procedures. You don't 
need a lawyer. You can file your complaints online, have the 
decision made based on the papers, based on a telephone 
conference, or in person at the consumer's option. And as I 
said, companies pay the cost. The fairness is overseen by the 
courts, and they do invalidate unfair clauses.
    I think we have seen in some of the testimony and certainly 
some of the debate about arbitration lots of scare tactics 
about terrible arbitration clauses. The fact is courts 
invalidate them.
    The other important fact is the Bureau didn't even study as 
an alternative requiring the elimination of unfair clauses or 
putting some fairness protections in place because it was bent 
on adopting a rule that was going to eliminate arbitration in 
its entirety. It didn't even look at those alternatives.
    Now, the critical thing about the tradeoff we are talking 
about is that most of the claims consumers have are 
individualized: ``There was an overdraft charge on my bill. My 
check didn't get deposited in time. I have a bad charge on my 
credit card bill.'' Those are not the kinds of claims that can 
be brought in class actions. They are exactly the kind of 
claims that can be brought in arbitration. So by taking away 
arbitration and leaving people in the hands of class action and 
class action lawyers, you are significantly reducing access to 
justice.
    One last point, if I may, Mr. Chairman. I am so happy to 
elaborate on it. There are arbitration clauses, including the 
one that was at issue in the AT&T against Concepcion case, that 
provide very strong incentives for contingency lawyers to take 
even a $10 claim and litigate it because they get a huge bonus 
in arbitration if they win. Thank you.
    [The prepared statement of Mr. Pincus can be found on page 
112 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And, Mr. Bland, you are recognized for 5 minutes.

  STATEMENT OF F. PAUL BLAND, JR., EXECUTIVE DIRECTOR, PUBLIC 
                            JUSTICE

    Mr. Bland. Thank you, Mr. Chairman and all the members of 
the committee, for this honor to appear here.
    It is way too common in America for large banks and payday 
lenders to break important consumer protection laws in ways 
that cheat people out of money. In my testimony, I describe a 
series of cases where I represented hundreds of thousands of 
people who had all been cheated in identical ways out of tens 
of millions of dollars. In one case, a bank promised all of its 
customers they would never raise their interest rate over 24 
percent, never, and then of course it did raise their interest 
rates quite a bit more. Another case, payday lenders blatantly 
violated State laws and significantly overcharged people.
    Using class actions, which are often the only meaningful 
way to actually represent and meaningfully vindicate people's 
rights, we recovered tens of millions of dollars in refunds. We 
sent checks to hundreds of thousands of people. We stopped the 
illegal practices. We erased illegal debts. We got false 
information off of consumers' credit records.
    Now, what the banks are says to you is that instead of a 
single case that will resolve all these identical cases in the 
same way, that instead what would be better for consumers is to 
be forced to each go it alone on their own.
    So if a bank cheated 100,000 people in an identical way, 
what these guys are saying is the better system is every single 
consumer has to separately figure out how they have been 
cheated. So go through their records and figure out what their 
interest rates were and so forth. Second, they have to go 
figure out what their rights are under the consumer protection 
laws. Third, they have to go to the Internet to figure out how 
arbitration works. Four, they have to file a claim with the 
arbitration company. Five, they have to pay a filing fee with 
the arbitration company. Six, they have to take time off of 
work and arbitrate each case individually for 100,000 people.
    Now, if that really was the system, if it was in fact that 
consumers were going to use individual arbitration, think how 
unbelievably inefficient that is, the idea that you would have 
100,000 people making the identical arguments again and again 
and again, getting 100,000 different secret decisions in 
arbitration.
    But of course that is not the actual system that we are 
talking about here. What the banks and payday lenders actually 
want is for the cases to go away.
    What the CFPB study proved is in the vast majority of cases 
forced arbitration works as it is planned, that consumers can't 
jump through all the hoops, that cases just disappear.
    So I want to give a couple--I have given a couple of 
examples of cases where I got relief for hundreds of thousands 
of people. The CFPB study looked at every single case that 
anyone in America filed in arbitration on an individual basis 
with the American Arbitration Association over 3 years. In over 
3 years, the average total number of cases was 411 for everyone 
in America for every lender, 411, okay, as opposed to hundreds 
of thousands of people where we sent them checks and fixed 
their credit records.
    So what the banks and the payday lenders want is they want 
a system where if they cheat 100,000 people, maybe a couple of 
them, 3, 4, maybe 5 of them will actually find their way 
through arbitration, fight their way through, and get a 
resolution. But the other 99,995 or so, they are going to get 
nothing.
    So it is easy to see why the banks and payday lenders hate 
the CFPB and spend all this time demonizing the agency with 
these crazy TV ads and so forth, because the CFPB is saying it 
is not okay for you to cheat 100,000 people and keep all of the 
money except for three or four of the people.
    And it is the same reason the banks and payday lenders hate 
the lawyers who represent consumers. So there is all this money 
demonizing trial lawyers. And what trial lawyers means, it is a 
code word, it means anyone who represents an individual against 
a corporation, and so therefore, I guess, you are bad.
    If you cut through the smokescreen here, the issue is 
incredibly simple: Should banks that cheat people be able to 
use fine print contracts that nobody reads or understands to 
take away consumers rights to band together?
    And the cases I handled are not that unusual. The CFPB 
study studied over 400 class actions. They found that many 
millions of consumers, not 411 a year, but millions of 
consumers recovered more than $2.2 billion in class action 
settlements after all the attorney's fees were paid, $2.2 
billion in people's pockets without spending any government 
money.
    Now, the total amount of all the recoveries for all the 
consumers in individual arbitration in the same period, in 3 
years, was 172,000, not million, not billion, 172,000. So you 
hear all this talk about, well, arbitration is such a great 
system and consumers really love arbitration, and if you don't 
let us ban class actions, we are going to take our arbitration 
ball and go home because we are going to be so upset.
    Keep in mind the real truth. The real truth here is that in 
class actions you actually get millions of people billions of 
dollars, and in arbitration 411 people struggled through this 
system, and of the 411 people who went through, only 32 of them 
actually got rulings from arbitrators. In 3 years, 32 
individuals.
    So you are really talking about, it is almost like if you 
had a virus that comes from outer space and it killed 99 
percent of all the plants on the Earth. What they are saying 
is, well, what we should do is we should see whether the 1 
percent of plants left are happier after the virus or not, but 
let's ignore the 99 percent that were wiped away. That is what 
forced arbitration is doing. It is wiping away nearly all of 
these cases.
    [The prepared statement of Mr. Bland can be found on page 
46 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And now members will be recognized for 5 minutes for 
questions. The Chair now recognizes himself for 5 minutes.
    Mr. Pincus, as you know, the Dodd-Frank section 1028 sets 
clear statutory thresholds for the Bureau to meet before 
promulgating a rule. One of those thresholds requires the 
limitation or ban of the arbitration to be in the public 
interest. It would appear that congressional action and legal 
precedent, including a lengthy Supreme Court jurisprudence, has 
dominated the Federal policy posture to encourage arbitration.
    Can you discuss how you see the Bureau's effort with this 
rule coinciding with the lengthy Federal policy of encouraging 
arbitration?
    Mr. Pincus. Thank you, Mr. Chairman.
    There is 90 years, as you say, of policy and of Supreme 
Court decisions recognizing the benefits of arbitration. That 
law was enacted, of course, because of attitudes very similar 
to the attitude you just heard here. Courts in the 1920s 
thought they had a monopoly on dispute resolution, and they 
were angry that arbitration was coming along, and they refused 
to enforce arbitration agreements in order to keep their 
monopoly because they thought courts were the only place where 
you could possibly get the right answer.
    And I think what we have learned in 90 years is that is 
just not true, that arbitration works, and that it is fair. It 
has to be supervised, but courts do supervise it, and plenty of 
unfair arbitration provisions are invalidated.
    Fast forward to today when our court system is under more 
pressure than ever because of budget constraints, overcrowding, 
and a lack of judges, the inability to fill empty seats, and 
you have a situation where it is critical that there be 
alternatives that work and alternatives that mean don't work 
just in the imagination of lawyers at law schools but in the 
real world. Real people can't take time off to work to go to 
small claims court to file their claim.
    If they can pursue their claim online, if they can have a 
video--a telephone conference to plead their case and they 
don't have to take time off for work or leave their kids, that 
empowers the consumers to vindicate the claims that they care 
about as opposed to claims that lawyers care about.
    Chairman Neugebauer. Thank you.
    Dr. Johnston, in your testimony and in your academic work 
you highlighted an important point I want to explore a little. 
In the testimony before the committee and in statements in its 
proposed rule, the CFPB highlighted class actions serve as a 
deterrent against bad behavior by financial firms. If the 
Bureau's own study and your scholarship shows that the majority 
of the class actions in the financial services don't allege 
individualized harm but rather statutory violations, isn't the 
CFPB better positioned as an enforcement agency to bring 
actions for violations of consumer protection statutes?
    Mr. Johnston. Yes, I think it is. And I do want to clarify 
that the unpublished but posted online paper of mine that looks 
at class actions under Federal consumer protection statutes 
looks at all class actions, just not those involving the five 
financial products that the CFPB looked at in its class action 
study. I do want to clarify that.
    But the thing that emerges really from their data set and 
even more clearly from mine, because I break things down in a 
much finer way so you can really see what is going on, is when 
Congress passes a statute and it says to trial lawyers you can 
create a class of people who get statutory damages of between 
$500 and $1,500 per person without any need to prove harm, and 
then you aggregate up that class, and sometimes it is on a 
transactional basis, like under the Telephone Consumer 
Protection Act, you create an enormous incentive for the 
plaintiffs bar to go out and find these cases and create these 
classes and pursue them through class action settlements 
without regard to what? Without regard to harm.
    I mean, this is exactly what you predict from an economic 
point of view, a class counselor behaving exactly as an 
economic model would predict. But how does that relate to the 
public interest and the protection of consumers? There is no 
necessarily relationship at all. It would be arbitrary. It is 
wonderful when it turns out that these class actions do involve 
cases where there is actual harm to the consumer, but that is 
just happenstance.
    The CFPB is an agency that has a lot of information about 
what is going on out there and it is perfectly situated to make 
an enforcement decision and a calibrated enforcement decision, 
an enforcement decision that is based on the agency's 
determination of the amount of harm being caused to consumers.
    So when you talk about the public interest and the 
protection of consumers, the preference, the tremendously clear 
preference, as Mr. Pincus mentioned, of the CFPB for class 
actions doesn't seem to be consistent with that standard.
    Chairman Neugebauer. I thank the gentleman.
    And I don't have time to start another question. I 
recognize the gentleman from Missouri, Mr. Clay, the ranking 
member.
    I will say, right after Mr. Clay's questions, then we are 
going to recess. They have just called votes.
    Mr. Clay. And I will go through this as quick as possible, 
Mr. Chairman.
    Mr. Bland, Professor Johnston released a paper last week in 
response to the CFPB's findings where he acknowledges at 
multiple points that class actions have the ability to benefit 
consumers by broadly changing industry behavior. Can you 
provide us with an example of how class action litigation of a 
small dollar claim was able to shift industry practices to the 
benefit of consumers?
    Mr. Bland. Absolutely, Congressman.
    In North Carolina, payday lending--payday lending is legal 
in some States. It is illegal in some States. It is regulated 
in some States. In North Carolina, the payday lenders were 
operating illegally, and the attorney general told them that, 
but the attorney general didn't have the resources to go after 
them. And they just continued to operate despite the fact it 
was illegal, because they had these class action bans in their 
arbitration clauses and they thought they were good to go.
    When class actions were filed, and this was before the 
Concepcion case, so if you could prove to a court that the 
class action ban meant that it was going to gut the consumer 
protection laws, courts at that time would throw out the 
arbitration clause. So we got the courts to follow it, and the 
payday lenders shut down in North Carolina. And what has 
happened since then in that State is a lot of much better, less 
predatory, less debt cycle kinds of loans have become available 
to people. It changed the practice.
    Mr. Clay. It changed the practice.
    Mr. Bland. Absolutely.
    Mr. Clay. For consumers.
    I want to ask Mr. Hong and Mr. Pincus a hypothetical. And I 
know this may be difficult for you to imagine yourself as Mr. 
Cordray or one of the people at the CFPB promulgating this 
rule. And on this side of the table, it is up to us as 
legislators to come up with compromises and to figure out what 
is in the best interests of consumers.
    Hypothetically, where would you find the sweet spot? Where 
would you find the balance of protecting, and erring on the 
side of protecting consumers, if you were promulgating this 
rule?
    Start with Mr. Hong.
    Mr. Hong. Sure. Thank you for the question, Ranking Member.
    One of the things that I found very surprising about the 
proposal that I looked at from the CFPB is how aggressive it is 
based upon--the tenor of the proposal seems to be somewhat 
inconsistent with the study findings that the CFPB has put out.
    As I mentioned earlier, I found the study to be one of the 
most extensive ones ever done on arbitration class actions. But 
one of the elements that seemed to be missing from that study 
was how are consumers--what are their actual experiences with 
the arbitration process, right.
    So the CFPB has not conducted a survey of consumers that 
have actually gone through class actions or through that 
arbitration process, so we don't really understand if they are 
satisfied with those delegants. And another component that was 
missing from the CFPB study was maybe what the impact of the 
CFPB has had on the consumer financial markets and compliance. 
And, you know, the other aspect I was kind of surprised not to 
see was maybe any consideration of what a cap on attorney's 
fees might do into promoting consumer benefits on the class 
action side of the coin.
    But going to your question more directly, if I was in 
Director Cordray's position I would take a more moderate 
approach with their proposal. I would try to collect more 
information using their rulemaking authority from perhaps in 
class action suits and from arbitration.
    Mr. Clay. And keep them both.
    Mr. Hong. Yes. And see how that information helps improve 
their process.
    Mr. Clay. Let me give Mr. Pincus a chance, just quickly, 
and then we have to go.
    Mr. Pincus. Sure. Thank you for the question.
    I think the problem here is arbitration is being ended. And 
I think the question is, what the Bureau didn't study is: Is 
there a way to deal with some of the perceived abuses? Is there 
a way to make arbitration even more user friendly than it is? 
And is there a way, given the fact that, as Mr. Hong said, the 
Bureau's study of the relevance of enforcement didn't take into 
account the Bureau's own existence and its $660 million budget, 
to link the Bureau's enforcement authority to claims that 
people think might be better remedied on some broader basis?
    So you could see, for example, a rule that--I think courts 
already do it, but Mr. Bland worries about fees being charged--
that makes sure consumers don't have to pay fees, that has a 
provision like the AT&T provision.
    Mr. Clay. You are erring on the side of protecting 
consumers here.
    Mr. Pincus. I am about to get--that includes a includes a 
provision like the AT&T provision that says if the company 
settlement offer doesn't make you happy, you get a minimum of 
$10,000, double attorney's fees, all your expert costs paid. 
That is enough of an incentive for any contingent fee lawyer to 
take the case.
    Mr. Clay. All right. Thank you.
    Mr. Pincus. Then what about saying--
    Mr. Clay. No, thank you. We are going to have to--I yield 
back.
    Chairman Neugebauer. We are going to have to bring this to 
a conclusion. I am sorry. We will have other opportunities, I 
think, Mr. Pincus, to do that.
    We are now in recess until after votes. I think there are 
five votes.
    [recess]
    Chairman Neugebauer. The committee will come back to order. 
We will resume questioning by our members.
    I call on the gentleman from Oklahoma, Mr. Lucas. I 
recognize him for 5 minutes.
    Mr. Lucas. Thank you, Mr. Chairman.
    Mr. Pincus, I am not an attorney by trade, so could you 
discuss with me for a moment the nature of what some supporters 
of this rule have argued that arbitration is inherently unfair 
and deprives consumers of their constitutional rights? And 
let's talk about--I understand the Supreme Court has ruled on 
that issue on various occasions. Could you expand on that just 
a moment?
    Mr. Pincus. Certainly, Congressman. The Supreme Court--
first of all, Congress itself in 1925 enacted the Federal 
Arbitration Act. So it--which specifically--
    Mr. Lucas. So this is not a recent statute on the books. 
This has been here for--
    Mr. Pincus. Ninety-one years. And that statute says 
arbitration agreements are enforceable according to their terms 
unless there is a flaw in them that would make any contract 
unenforceable. In other words, you can't discriminate against 
arbitration, which was what was going on. And the Supreme Court 
in a whole series of decisions has upheld and applied that 
statute in a whole bunch of contexts, consumer context, 
employment context, business to business, many, many contexts. 
So I think the constitutional argument really just doesn't have 
any--hold any water.
    Mr. Lucas. Can you explain for a moment these rulings have 
come over the life of the case or early on--or life of the 
statute or early on?
    Mr. Pincus. There was some early on. There have been a 
number of rulings in the last, I would say, 10 or so years. 
There have been a number of cases which the Court has heard on 
them. After granting review, oral argument, and decision on the 
merits, there have been a number of arbitration cases where the 
court has enforced the statute in a summary fashion. It 
sometimes takes cases just on the cert papers without even--the 
error of the lower court is so clear that they don't even have 
to have a full briefing and argument.
    So I would say certainly more than a dozen, probably closer 
to 15 or 20 cases in the last 10 or 20 years applying the FAA.
    Mr. Lucas. So from a layman's perspective, it is fairly 
hashed-out law? It is not just one ruling. It is not just one 
decade. It is a well-established set of case law.
    Mr. Johnston, can you describe the judicial checks and 
balances which are in the nature of the arbitration program? 
Again, to a nonlawyer trying to understand the nature of where 
we have been.
    Mr. Johnston. Well, there are two ways that the fairness of 
arbitration clauses is ensured. And one is, I guess, you would 
call it ex ante, through the rules that the AAA and the other 
major consumer arbitral forum have, procedural safeguards that 
firms, arbitration systems have to meet for them to be willing 
to arbitrate the claims. And then the other thing is what 
courts do ex post. So if you look at the AAA, American 
Arbitration Association, which is the one studied by the CFPB, 
they have a code of procedural fairness that has to be in place 
before they will accept arbitrations. And among other things, 
consumers can't bear the fees; they have to be fair to 
consumers; the arbitration has to be located within a 
reasonable distance of the consumers' residence.
    And, by the way, the CFPB found that most of the 
arbitrations it studied were--the arbitration was 15 to 30 
miles away from where the consumer was. So it is not like it 
was across the country and a huge expense to go there or 
anything like that. So there are these rules that make 
arbitration fair that the arbitration providers themselves have 
adopted.
    Second, courts have for many, many decades, really, looked 
very closely at arbitration clauses, and there are certain 
things that they just won't do, that won't be enforced. Courts 
have set up very clear rules about certain--what is a fair 
arbitration clause and what is not. And you see over time that 
firms that want to actually have an effective arbitration 
system conform to what the courts say they have to do.
    Mr. Lucas. So, once again, it is essentially a process that 
has evolved over the decades, well thought out, well discussed, 
well debated, well considered?
    Mr. Johnston. Absolutely.
    Mr. Lucas. I think my questions have been answered.
    Mr. Chairman, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Georgia, Mr. Scott, is recognized.
    Mr. Scott. Thank you, Mr. Chairman.
    This is indeed a very, very important issue, and I want to 
really get my arms around this. So I really want to hear both 
sides of this story.
    So, Mr. Hong, Mr. Bland, Professor Johnston, Mr. Pincus, 
could each of you very briefly tell me, in your opinion, what 
about this did the CFPB get right, and in your opinion, what 
did they get wrong?
    Mr. Johnston, you can start.
    Mr. Johnston. I guess I will start, Congressman.
    Well, what they got wrong was the evidence that they found 
does not justify what they did. In fact, when in the body of 
the rulemaking proposal, they start to try to talk about why 
this is necessary, why they have to ban arbitration clauses 
that preclude class action relief, they end up saying things 
like ``economic theory suggests,'' ``the expertise and 
experience of the Bureau with this leads us to believe.'' There 
is no economic theory cited by the CFPB. The papers they cite 
are general. They have nothing to do with this particular 
issue. And the only evidence that supports what they did--the 
only evidence they have doesn't support what they did.
    Mr. Scott. Let me see if I can get more specific here, 
because I have been looking over this issue. It is a classic 
issue of arbitration versus class action.
    My concern is this, and each of you will--could this rule 
by the CFPB effectively eliminate the availability of 
arbitration for our consumers? That is my major concern.
    Mr. Johnston. I think it could, and the reason it could--
and this is picking up a bit and elaborating a bit on what Mr. 
Pincus said, I believe, is firms invest in these arbitration 
systems. They pay consumers' fees. They pay the arbitrators, 
and even in front of the AAA. And why would a firm invest in 
that? And the reason they do so is because they want to make 
sure that the only kind of claims that consumers can succeed on 
are ones that are actually valid claims, and therefore, they 
are going to pay the claims before you ever get to arbitration. 
If you are going to say that any consumer can bring a class 
action regardless of an arbitration clause, then why would 
firms continue to make that investment in a costly arbitration 
system?
    Mr. Scott. So to get to your point--I only have 2 minutes. 
I want to get Mr. Hong as well.
    Mr. Johnston. I am sorry.
    Mr. Scott. So your answer is yes, it could effectively 
eliminate the availability of arbitration to our consumers?
    Mr. Johnston. Correct.
    Mr. Scott. Mr. Hong, how do you feel about this?
    Mr. Hong. I would have to agree with those remarks. As I 
pointed out earlier, I thought I was very surprised when I saw 
the proposal from the CFPB, because like I said, based upon the 
findings and their own study, I thought their position on 
promoting class action lawsuits was not well supported. And so 
you could potentially see--if this rule goes final, you could 
potentially see the class action litigation risk dramatically 
rise for some financial institutions.
    Mr. Scott. Okay. Thank you. I want to get the other side of 
this.
    Mr. Bland, do you feel the way, or do you have a different 
opinion?
    Mr. Bland. This is the scare tactic. It is not true. You 
look at the securities industry. So if you have a problem with 
your broker, your broker sells you Enron stocks, you have to go 
to individual arbitration under FINRA's rules. If you want to 
bring a class action, you can go to court. FINRA operates 
exactly along the way that the CFPB is operating, which is to 
say you can have an individual case in arbitration, let a class 
action go to court. The securities industry did not take their 
ball and go home. They didn't say: Oh, we don't want 
arbitration at all. The only thing we wanted to be able do is 
strip people of the right to bring class actions. It didn't 
happen.
    Besides, even if it did happen and individual arbitration 
went away, then the entire United States, remember, only 411 
people a year go into arbitration. The total amount of all 
arbitration awards for consumers in 3 years is $170,000. It is 
not much of a loss.
    Chairman Neugebauer. And, Mr. Pincus--
    Mr. Pincus. I think there is about a 99-percent chance that 
it will go away. In fact, in my testimony, I cite a brief that 
was filed in one of these Supreme Court cases where businesses 
explain that that is just what will happen. And to Mr. Bland's 
example, the reason securities brokers have the system is 
because FINRA forces them to have arbitration clauses. It is 
not voluntarily. The rules of FINRA require them to have 
arbitration and prohibit class waivers. If they had a voluntary 
option, I think you would see a very different world.
    Mr. Scott. And so I think, Mr. Chairman, the question 
really raises itself as to why? Why is the CFPB putting forward 
this rule as a result of the study? If, in fact, the 
information that you all have shared is true, that the average 
return to the consumer for class action is, somebody said, $53, 
whereas the average return under arbitration is $5,400? Is that 
right?
    Mr. Johnston. That is about right.
    Mr. Scott. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Missouri, Mr. Luetkemeyer, is recognized 
for 5 minutes.
    Mr. Luetkemeyer. That you, Mr. Chairman.
    I am kind of curious. If the gentleman believes that the 
arbitration goes away, and there is more risk for class action 
suits, would that not increase the cost of doing business? 
Would that be a normal thought process, professor?
    Mr. Johnston. Yes.
    Mr. Luetkemeyer. Okay.
    Mr. Hong?
    Mr. Hong. That is correct.
    Mr. Luetkemeyer. Mr. Pincus?
    Mr. Pincus. Absolutely.
    Mr. Bland. No, actually, that is not true.
    Mr. Lucas. Not true?
    Mr. Bland. No.
    Mr. Luetkemeyer. Three to one. You get outvoted.
    So if it--
    Mr. Bland. --it happened, and it didn't happen--
    Mr. Luetkemeyer. So if it is the case that is going through 
as a businessperson, there is more exposure, and it is going to 
be more cost, then how do you pass those costs on? That means 
if you are going to have to--you want to continue business, 
those costs are going to have to be absorbed at some point, 
have to be reserved for or whatever. Therefore, you are going 
to have to charge more for your services, I would think.
    Also, we are talking about financial institutions here, 
which means that they are regulated by prudential regulators. 
That means that there is more risk in the system. So are the 
regulators going to come down and look at your book of 
business, complete a different result of this?
    Professor Johnston, what do you think?
    Mr. Johnston. I don't know if the regulators would, but 
certainly, there is risk in large class actions. Under the 
Telephone Consumer Protection Act, for example, some of the 
largest financial institutions in the country, such as Capital 
One and Chase, have entered into very, very large class action 
settlements, many, many millions of dollars. And you add those 
up across the country and over time, and, again, these are very 
large financial institutions, so we are not talking about a 
magnitude of size here that is destabilizing. But it has to fit 
into the risk profile somehow, and--
    Mr. Luetkemeyer. Mr. Hong.
    Mr. Hong. If I could just add to that subject. One of the 
things that, you know, I fear is that if the proposal goes 
final the way it looks like today, there is a potential of 
dramatic increase in class action lawsuit exposures. And if you 
take a look at some of the prudential regulatory guidance on 
safety and soundness, one of the things that they ask financial 
institutions to do is maintain controls and to mitigate the 
litigation exposure risk. If they see an increase in that type 
of risk, then they will have to have--you know, institutions 
will have to have a conversation with the respective financial 
institution prudential regulator to figure out if they have to 
hold and walk away more capital to control that risk.
    Mr. Luetkemeyer. Okay.
    Mr. Pincus, I see you are chomping at the bit.
    Mr. Pincus. I was just going to make the same point as Mr. 
Hong, but I will elaborate on it, which is if reserves have to 
be taken because of the massive class actions, that is 
obviously capital that is not available to support lending. So 
that--the only option for the institution is to reduce loans, 
and it may even have to both reduce loans and find more capital 
in order to meet these higher capital requirements.
    Mr. Luetkemeyer. Mr. Pincus, in your testimony, I think you 
were the one that said--you asked the question that CFPB should 
be asking, is, will consumers be better off with class action 
lawsuit ability versus arbitration? And then I think you were 
the one that also came back and said that there are 
alternatives for arbitration. So I think those two comments, I 
think, lend themselves to my question, which is: Okay. If they 
are not better off with this, is there a better way to do 
arbitration? Are there other alternatives to arbitration versus 
civil litigation that should be available or could be 
available?
    Mr. Pincus. Well, I think nobody doubts that arbitration is 
a superior vehicle for the claims that can't be brought in 
class actions. It is faster, cheaper, and every study indicates 
that when you compare apples and apples kinds of cases, 
consumers do at least as well, if not better, in arbitration. 
So the whole question here is, is there some kind of case that 
is going to slip through the cracks because you don't have 
class actions in court? And I think there are two answers to 
that.
    One is, as I mentioned earlier, some companies have 
included innovative provisions that provide an incentive for 
people to litigate in arbitration even the smallest claims. 
AT&T has this provision, for example, that says--
    Mr. Luetkemeyer. I apologize. I am running out of time 
here. I have one more comment I want to make.
    Mr. Pincus. Sure.
    Mr. Luetkemeyer. It looks to me as though if you are an 
individual--and we are talking about financial institutions 
here now, so if you have a financial institution that took 
advantage of an individual without the ability to go to 
arbitration, that individual is left holding the bag, that it 
really is limited. I asked the question if there are 
alternatives, and I didn't get an answer to it. There are, 
apparently, no other alternatives, if you take that away from 
them, or they go to civil suit. If there are not enough other 
people that have been offended, you can't go to a civil--a 
class action suit. So, therefore, I think we have really 
restricted the ability of the average consumer who is on--in 
one, maybe for one situation got wronged, to be able to have an 
opportunity to be righted, have their situation righted.
    So I thank the chairman, and I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from New York, Ms. Velazquez, is recognized 
for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Bland, would you care to comment on the question that 
Mr. Scott made before regarding the average reward of $53 
compared to arbitration of $5,200? Is that comparison unfair, 
given the fact that the numbers are based on 32 arbitration 
compared to thousands of litigation cases?
    Mr. Bland. And that is absolutely right, Congresswoman. You 
could not be more correct. It is not just an apples and oranges 
comparison. It is like comparing frogs and ball bearings. They 
are completely different.
    There are types of cases which can't be brought as a class 
action: if someone is individually defrauded, someone does 
something that is going to make you lose your home, something 
like that.
    The numbers that they are using as being such a big number, 
supposedly, that people are getting in arbitration, it was 15 
percent of what the consumers asked for. So if a consumer came 
in and asked for $100,000, saying that they have been 
defrauded, they are only getting $15,000. So the idea this is a 
great deal is really not fair.
    Ms. Velazquez. Thank you, Mr. Bland.
    And can you explain how class action provides a more 
effective means of securing significant consumer relief and 
changing a company's potentially illegal behavior than an 
individual formal adjudication or informal efforts to dissolve 
disputes?
    Mr. Bland. Yes, of course. Not only does the class action 
deal with everybody in the class--so if 100,000 are cheated, 
all 100,000 get a remedy--also, there are a lot of types of 
scams in which the vast majority of consumers won't detect 
them. So I described in my testimony, we had a case in which 
American Express was underpaying people on rebates. They 
promised people you would get a rebate on your charge card of 
up to 5 percent. So our client is a bookkeeper who figured out 
and went and did all the math to figure out how he was cheated, 
but almost no other consumers would do that. So what happened 
was, when the case was thrown out because of the arbitration 
clause, they simply get to keep all the money. They walked away 
without paying anybody anything.
    Ms. Velazquez. And as a followup, can you explain how 
arbitration agreements are being used by companies to block a 
significant portion of class action claims that are filed and 
suppressing the findings of others?
    Mr. Bland. That is the entire reason that the arbitration 
clauses came out, was because they were trying to block cases. 
So, for example, in the early 2000s, there was litigation 
against auto finance companies, which showed that over many 
millions of people, African Americans were being charged twice 
as much as White people in order to get on finance charges to 
borrow on a car. And so there was litigation in these class 
actions that got that changed, that got injunctive relief to 
change that for everybody, and that is when the auto finance 
companies leaned on the car dealers, and you suddenly saw the 
arbitration clauses that banned class actions everywhere, was 
precisely because they had been effective.
    Ms. Velazquez. Thank you.
    Mr. Hong, proponents of arbitration support its use, 
because they say it provides a quicker resolution on a lower 
cost to the consumer. Has the use of arbitration reduced the 
price and expanded the availability of credit for consumers?
    Mr. Hong. I thank you for the question, Congresswoman.
    So when you take a look at the CFPB's own study, you will 
see that consumers are actually benefiting through these 
arbitration processes. And so, you know, you have to ask 
yourself, if a company is forced to lock away capital that 
can't go for useful purposes, is that a net benefit for 
consumers? You know, is the lack of innovation or ability to 
innovate and produce more tools and services for consumers a 
win for consumers? And I have to say that is incorrect.
    Ms. Velazquez. Mr. Bland, will you comment on that?
    Mr. Bland. Yes.
    There is really not an innovation here. The use of the 
arbitration clause is just a use of power right now. There are 
companies who simply want to able to break the law and get away 
with it. And what they want to do is they want to be able to 
opt of the civil justice system and just sort of give 
themselves a get-out-of-jail-free card. It is not a 
particularly imaginative, creative, or unusual thing. It is not 
like we are talking about devising a new way to get to Mars or 
something like this. These are fine print contracts that are 
sent past consumers in ways that almost nobody reads, almost 
nobody understands, but they strip people of their important 
rights to be able to protect themselves, and they gut the 
enforcement of the consumer laws.
    Ms. Velazquez. Thank you.
    I yield back.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentlewoman.
    Mr. Rothfus is recognized for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    I have a couple of questions for Mr. Hong. Has the Bureau 
ever approached your members and the Consumer Bankers 
Association to discuss potential ways that the current 
arbitration system could be improved, or did the agency 
undertake this process already knowing the end in mind, and 
that is ending arbitration?
    Mr. Hong. Thank you for the question. So we have had 
multiple opportunities to engage with the CFPB in this 
rulemaking process. Early on, during the RFI process that the 
CFPB put out, what they were trying to think through exactly 
what they should be studying, we made similar comments that 
we--I have made today about the need to get a comprehensive 
study done before they make any decision on rulemaking.
    And so, you know, I was very surprised when I took a look 
at their study, and I didn't see any of our recommendations go 
through.
    Mr. Rothfus. Did the CFPB respond to your entreaties?
    Mr. Hong. No. You know, we have had discussions with them, 
and we have made suggestions again and again. And often I just 
don't see where the dialogue has led to any results, and I 
didn't see that in the study itself.
    Mr. Rothfus. Would your members be willing to work with the 
Bureau to improve financial literacy among consumers concerning 
arbitration and, if necessary, improving how information is 
communicated to consumers about when they are agreeing to 
arbitration when choosing among products and services in the 
marketplace?
    Mr. Hong. Absolutely.
    Mr. Rothfus. But the Bureau never had that kind of 
discussion?
    Mr. Hong. You know, that is one of the things that came out 
of the study pretty clearly, that consumers do not have a full 
understanding of arbitration. And we have suggested to the CFPB 
that they should use their authority and powers and the funding 
at their disposal to do more to educate consumers about the 
benefits of arbitration.
    Mr. Rothfus. The Bureau did not respond to that?
    Mr. Hong. I have not heard a response yet.
    Mr. Rothfus. Well, it ties into another question. The 
Bureau clearly believes that class action lawsuits are 
necessary to deter companies from violating the law. However, 
the Bureau itself was created--and I am quoting directly from 
the Bureau's own website here, ``to provide a single point of 
accountability for enforcing Federal consumer financial laws 
and protecting consumers in the financial marketplace 
including, quote, 'rooting out unfair, deceptive, or abusive 
acts or practices by writing rules, supervising companies, and 
enforcing the law.''
    Isn't the Bureau's position on the need for class action 
lawsuits to deter bad behavior also an implicit admission that 
the agency is failing in its other duties?
    Mr. Hong?
    Mr. Hong. So, you know, one of the things that I do think 
that there is a big gap in the CFPB study here is the fact 
that, as I mentioned, in some earlier remarks, I thought the 
Bureau really should supplement their report by including their 
own impact on consumer financial markets. Since they closed the 
study during the year 2012, that means that most of the 
activities that the CFPB has engaged in have not really shown 
up in the research. And so I would suggest to the CFPB that 
more research needs to be done in this particular area before 
they engage in any rulemaking on the benefits of arbitration.
    Mr. Rothfus. Mr. Pincus, I am particularly concerned about 
the practical impact that the Bureau's proposed rule will have 
on consumers, both those trying to vindicate claims and those 
who are simply trying to obtain products and services in the 
marketplace.
    With respect to the former, I worry that, contrary to what 
the Bureau claims, the proposed rule will disproportionately 
harm lower income consumers by eliminating, rather than 
enhancing, avenues of resolution by increasing the costs to 
bring a complaint.
    For example, there is generally no financial barrier to 
arbitration proceedings because the programs are often 
subsidized by the companies. However, the Bureau's rule will 
essentially end arbitration and force consumers to seek 
individual resolution paying costs out of their own pockets 
because most claims will be too small to attract the attention 
of the trial bar. Where does the Bureau expect these consumers 
to go to obtain relief?
    Mr. Pincus. I don't know, Congressman. This really is about 
selling out consumer empowerment and favoring lawyer 
empowerment.
    Mr. Rothfus. Because there are going to be many claims that 
the consumer might have that are not going to fall within the 
class action metric, whether numerosity, commonality, whatever. 
So is that consumer left having to retain an attorney?
    Mr. Pincus. That consumer is left with no good choices, 
having to retain an attorney, but as you say, the claims are 
going too small. As I note in my testimony, most studies 
indicate the amount at issue has to be at $200,000 to attract 
contingent fee lawyers these days, or the consumer is on his or 
her own with complicated procedures, having to take days off of 
work to deal with overcrowded courts. They are not going to do 
that. So they are just going to be left with no real avenue to 
vindicate their claims.
    Mr. Rothfus. And I would suggest that might be more 
difficult and complicated than looking at arbitration 
provisions. Yes?
    Mr. Pincus. Absolutely.
    Mr. Rothfus. I yield back.
    Chairman Neugebauer. The time of the gentleman has expired.
    The gentleman from Washington, Mr. Heck, is recognized for 
5 minutes.
    Mr. Heck. Thank you, Mr. Chairman.
    I would like to ask all the witnesses to answer this 
question, perhaps beginning with Professor Johnston and going 
down the line.
    It seems like there are two large points being made here. 
One is that arbitration is more efficient and less expensive. 
Another is that acting as a class allows a more efficient way 
of dealing with lots of similar kinds of claims.
    So what is the argument against classwide arbitration? Why 
should or would contracts bar that?
    Mr. Johnston. I would--the problem with classwide 
arbitration is that there is no way to do classwide arbitration 
without replicating the procedural complexity and cost of class 
actions in actual court. And since the entire point of 
arbitration is to have a simple, low-cost, and accurate system, 
you wouldn't be realizing those benefits through classwide 
arbitration.
    Mr. Hong. I would agree with those remarks. Talking with 
our membership, they find that--you know, they created that--
you know, they participate in the arbitration system to provide 
an informal convenient hearing forum for their consumers. And 
so to input a classwide system into the arbitration system, I 
don't think is a natural fit for that particular forum. And I 
don't think many financial institutions or other companies 
would be willing to give up the protections--some of the 
protections that the litigation rules would apply in a 
classwide setting.
    Mr. Pincus. I agree with my copanelists. And I would say I 
think in the balance that you are suggesting, one question that 
has to be asked is, what are class actions really providing? 
And when the Bureau itself finds that 87 percent of them result 
in zero benefit to the class and the ones that--the other 13 
percent that are settled, only about 4 percent of the class 
members pick up a check, I think it tells you that they are not 
providing a lot of benefits. And I think to the extent they 
are, I think, as some other members of the subcommittee have 
said, the question is, isn't the Bureau supposed to address 
just those kinds of cases, where there are broad impacts on a 
lot of people through either its enforcement or its supervisory 
function?
    And it is a shame that the Bureau's study was sort of 
purposefully, I think, cut off so that it couldn't examine the 
overlap between its enforcement authority and class actions, 
because it stopped the study before its enforcement authority 
got up and running. But it seems to me that is exactly what 
Bureau is supposed to focus on, practices that have a broad 
impact on a lot of people.
    Mr. Bland. Congressman, I would say that actually you have 
a bunch of class actions in arbitration that worked perfectly 
well, and there were some cases that got millions of dollars 
distributed to consumers on class actions that were handled in 
arbitration and run by arbitrators. The American Arbitration 
Association set up special rules for how class actions could be 
handled. And there have also been some class actions and 
arbitration that led to injunctive relief, that led to 
significant changes that stopped illegal practices by 
companies.
    I think what you are hearing is that the purpose of these 
arbitration clauses is not actually to have a case in 
arbitration, because arbitration can handle class action as 
well as the court pretty much, and you still have some judicial 
review in the end. What you are hearing is that they want to 
make sure that if they cheat 100,000 people, that only 5 of 
them are going to show up or something like that. They don't 
want to have a system in which if you cheat 100,000 people, all 
100,000 of them can actually get a remedy, which is what a 
class action arbitration would create the possibility for.
    Mr. Heck. Mr. Bland, are you suggesting that the National 
Arbitration Association, or whatever it is called, actually has 
rules, guidelines, and/or structure for classwide arbitration?
    Mr. Bland. It absolutely does, and there have been quite a 
few cases. And I have handled arbitrations on a class action 
basis myself.
    What you see, though, is that the vast majority of 
companies in their fine print contracts banned the consumers 
from going on a class action basis in court or in arbitration. 
They say you can just never have a class action. They are 
actually willing to let you go to court for small claims court. 
The one thing that they are trying to do is make sure that each 
individual consumer is atomized and isolated.
    Mr. Heck. So I have just one last question. It is my 
recollection, please correct me if I am wrong, that the 
inclusion of class action waivers began approximately within 
the last decade? And on the happy assumption that that is 
correct, can anybody cite any studies, research, analysis about 
a material drop in cost to consumers, because there can be no 
other conclusion if you are suggesting that that which existed 
for all time was stopped but was now to be returned would 
increase, significantly increase, cost and product 
availability? I am assuming somebody documented that costs went 
down and product availability went down?
    Mr. Pincus. Well, if I can respond to that. The reason 
there is no such study is that it wasn't until the Concepcion 
decision, which was just 4 years ago, that it was clear that 
those arbitration clauses could be enforced. In many States, 
like California, they were not enforced.
    Mr. Heck. So there has been no verification that it has 
resulted in reduced costs?
    Chairman Neugebauer. The time of the gentleman has expired.
    Mr. Heck. Thank you, Mr. Chair. I yield back the time I 
clearly don't have anymore.
    Chairman Neugebauer. I thank the gentleman.
    And I now go to the gentlewoman from Utah, Mrs. Love, for 5 
minutes.
    Mrs. Love. Thank you.
    I have been in and out of votes, and this question may have 
been covered. And if it has, I apologize. I certainly think it 
is worth repeating, if it has been.
    But I wanted to ask a question to Mr. Hong. Can you tell us 
a little bit about how your member companies have set up the 
arbitration process and what that looks like for a consumer?
    Mr. Hong. Well, if you wouldn't mind, if I took a step back 
and just talked a little bit more broadly about how financial 
institutions deal with disputes more generally? Would that be--
    Mrs. Love. If you can do it in a quick manner, that would 
be easiest. Obviously, I know it is complicated, but go ahead.
    Mr. Hong. Okay. I will try to be quick. So the banking 
industry is a customer service business. So the primary 
function that you should think about, all of us should think 
about, is that financial institutions have business incentives 
to keep their customers happy.
    The second line, layer, that you will see in dealing with 
disputes is the compliance management systems that financial 
institutions are required to keep, you know, to ensure that 
they comply with the law. And on top of that, they have devoted 
millions of dollars in their consumer dispute resolution 
processes to ensure that they can cover those types of disputes 
that might pop up every now and then between a business and a 
customer.
    Mrs. Love. Right.
    Mr. Hong. For the institutions that offer arbitration, you 
know, they believe the arbitration provides a better forum for 
their consumers to have their stories heard by a mutual third 
party. And so, you know, when you take a look at the process, 
you see a lot of--a majority of financial institutions use 
American Arbitration Association to provide that forum. And I 
believe that the CFPB study has shown that consumers are doing 
well through that process.
    Mrs. Love. Okay. So, in other words, I mean, you mentioned 
customer service, business-oriented. Obviously, customer 
retention is a big issue in making sure that their customers 
stay with them.
    Mr. Hong. That is right.
    Mrs. Love. Okay. So a followup question to Professor 
Johnston. It is my understanding--sorry. I can't see you. But 
it is my also my understanding that in many class action cases 
that are filed, there is just a statutory violation, no actual 
harm to consumers.
    Can you explain that for me a little bit?
    Mr. Johnston. Well, many of--yes, Congresswoman. I can, and 
I am happy to do so.
    Many of the consumer protection statutes under which the 
class actions in the CFPB's study arose and in my more recent 
and more comprehensive study, those statutes award statutory 
damages without proof of harm for a violation.
    For example, the most common Fair Credit Reporting Act kind 
of case, in my sample, and probably the CFPB's--although, it is 
hard to say, because they don't break things down at this level 
of detail--is a case alleging that the expiration date was 
printed on a credit card receipt. There is the four digits. You 
can print the four digits of a credit card but not the 
expiration date, despite years and years and years of evidence 
that there is no increase in the chance that somebody's credit 
card information, you can figure it out just because the 
expiration date is there. These cases are brought all of the 
time.
    Mrs. Love. Yes.
    Mr. Johnston. These are credit card cases that also would 
appear in the CFPB's database, which by the way, for the very 
first time, we can actually--after they promulgated this rule, 
this is the first time they have even given us a list of the 
class actions that they have studied. Up until now, they have 
viewed--this is supposedly evidence-based policy, right? Well, 
up until now, they have viewed this as sort of like secret data 
that no one gets to see.
    Mrs. Love. Okay. I would assume that that information would 
be important?
    Mr. Johnston. I am sorry?
    Mrs. Love. I would assume that that information would be 
important?
    Mr. Johnston. Yes, absolutely. My point is this is a 
typical kind of case that would be in their database and my 
database. And it is really important to look at a big sample of 
class actions and class action settlements, because when you 
do, you see that the cases that Mr. Bland is talking about--I 
am not denying their reality, but they are few and far between.
    Mrs. Love. Okay. Okay. One more question.
    Mr. Pincus, you mentioned in your testimony that 
arbitration consumers aren't reliant on hiring lawyers. In 
other words, they can seek redress on their own through 
arbitration process. I heard through other testimony that they 
have to go through and understand the arbitration process, and 
that is a difficult process to understand. Can you just talk 
about that just a little bit? I only have 10 seconds, but I 
just wanted to--
    Mr. Pincus. There is an online--almost everything is online 
these days, including arbitration provisions and how to use 
them. So the AAA, we have been talking about the American 
Arbitration Association, has very understandable procedures for 
consumers to use if they want to file--commence an arbitration 
proceeding.
    Mrs. Love. Thank you.
    Chairman Neugebauer. I thank the gentlewoman.
    The gentleman from Georgia, Mr. Westmoreland, is recognized 
for 5 minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    And before I begin, I would like to ask unanimous consent 
to submit a letter to the record from the Electronic 
Transactions Association.
    Chairman Neugebauer. Sorry?
    Mr. Westmoreland. Okay. I would like to ask unanimous 
consent to submit a letter for the record from the Electronic 
Transactions Association.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Westmoreland. I have used 30 seconds of my time 
already.
    Mr. Bland, just a couple of questions. I noticed your 
history of lawsuits on the back here suing these, I guess, 
various banks in some form or fashion. Do you remember what 
your total fees were when you would sue a bank? I mean, was 
that a percentage, or who paid you, and who were these suits on 
behalf of?
    Mr. Bland. So every case that I have handled where we have 
won and received a settlement, we have gotten some attorney 
fee--I mean, I am with a nonprofit. But we have received some 
attorney fees based on a percentage of what we recovered.
    For example, in the case against Chevy Chase Bank where 
they misled people about their credit cards, we got a $16.1 
million recovery. I think the attorney fee in that case was 20 
percent. It was approved by a court. There was a big argument 
about whether that was fair. We had to come in and show that we 
worked more hours and that it was based on a percent.
    In the cases in North Carolina involving payday lending, on 
my resume, where we recovered $45 million for consumers and 
sent it out in checks, I think in that case the court approved 
a 30 percent fee in the first case because there was a lot of 
work and, in the other cases, approved a lower percentage. I 
think it was 25 percent and was approved by a court, and there 
was a lot of debate and discussion about it. So it is generally 
done on a percentage of the case. But then you also have a 
cross-check of what your hours are. So before a court will 
approve it--you can't just come in and say: I want 20 percent, 
you know, of whatever.
    Mr. Westmoreland. I assume part of your cost is mailing out 
all these letters to the different people. I get a letter 
almost once a week asking me to join some type of class action 
lawsuit. Is that what you do, solicit business that way?
    Mr. Bland. No. I have never engaged in advertising. People 
come to us and ask--
    Mr. Westmoreland. Well, that sounds like pretty good pay 
for a nonprofit. But, you know, I just had a case where I had a 
problem with a charge on my credit card. I called, told them 
what the problem was.
    And she said: Well, I am sorry you didn't read the fine 
print, whatever.
    I said: Fine. I am just going to take it to the credit card 
company.
    I was talking to the retailer. And they said: Well, would 
you pay 30 percent?
    And I said: Yes, I would.
    And so she said: Do you agree to that knowing blah, blah, 
blah, blah?
    I said yes. So we settled it, because it was a 
misunderstanding.
    And this class action thing, to me, is taking that right 
away from somebody that is trying to do something or arbitrate 
or mediate their problems. But whether it is a woman trying to 
get--that is got an error on a $25 prepayment card or small-
business owners, if any of these situations--I would like to 
get my problem solved as soon as possible so I could go ahead 
and pay my debt.
    Professor Johnston, I know you have looked at data on how 
companies handle customer issues. Can you describe why 
companies may want to resolve a claim quickly?
    Mr. Johnston. Yes. The reason is, by sometimes admitting 
they made a mistake and refunding a charge, what the companies 
do, they basically make their customers happy; they do the 
right thing, and that builds business.
    The CFPB, in the report, in their study, and also in this 
proposed rulemaking, continually asserts that the only reason a 
company would ever refund a charge is because it is a super 
profitable customer.
    Now, this assumes that they have really, really fancy 
algorithms or something. But the important point for present 
purposes is the CFPB has no evidence of that. They simply say, 
they assert, economic theory suggests that the only reason you 
would refund a customer is because profitability demands it. In 
the CFPB's world, fairness to consumers is opposed to 
profitability. In the real world, as far as we know, by being 
fair to consumers, companies build profitability.
    Mr. Westmoreland. Well, that seems to be the CFPB's MO.
    Just to make sure, Mr. Pincus, you mention in your 
testimony: But not every problem or claim like the ones I just 
mentioned are able to join a class action lawsuit.
    Is that correct?
    Mr. Pincus. That is exactly the problem. Those people--
those claims are individualized, and so they can't be litigated 
in class action.
    Mr. Westmoreland. Unless somebody like Mr. Bland mails them 
a letter and asks them to join a class action lawsuit, because 
they may not even know there is a class action lawsuit?
    Mr. Pincus. Although even if they do, the court will 
likely--that will be one of the 87 percent that is thrown out, 
because it is not common--it is not a common issue among a lot 
of people. It is your particular problem that you want to 
resolve, but isn't common to the other 100,000 people or 
whatever it is.
    Mr. Westmoreland. Thank you, sir.
    And I yield back.
    Chairman Neugebauer. Let the record reflect I gave the 
gentleman his 30 seconds back.
    I now yield to the gentleman from California 5 minutes.
    Mr. Westmoreland. I tell you what; I am just going to be a 
sport and just yield it back.
    Mr. Sherman. Mr. Johnston, I think you are right, an awful 
lot of companies hear complaints, make an allowance, but that 
doesn't mean we don't need a CFPB and a court system for those 
companies that don't or those consumers who are unaware. I 
think that if you were to send out bills to a lot of, you know, 
credit card holders in my district, and it said, ``We are 
charging you 18 percent,'' but the computer was programmed to 
charge them 22 percent, very few of my constituents would whip 
out their financial calculators and realize that they were 
being charged more.
    So there are times when the consumer doesn't know, and 
there are times when the company will not make an adjustment.
    Mr. Hong, I think, in my opening statement, I laid out the 
fact that you can't just deal with these matters one at a time. 
If you have a bunch of consumers, each one of those lost $100, 
there is no lawyer who is going to represent them one at a 
time.
    Does your organization support a requirement that if there 
are arbitration clauses imposed on the consumer, that they 
provide for class action arbitration so that when there are 
1,000 consumers, each one of whom $50, that some lawyer can 
bring the action?
    Mr. Hong. I thank you for the question, Congressman. So the 
first point I--
    Mr. Sherman. I mean, that was really just a yes-or-no 
question. I have very limited time.
    Mr. Hong. I would suggest that the CFPB examine that issue 
by doing, conducting supplemental research, which is what we 
have been asking them to do. Maybe they can study the 
effectiveness of doing, conducting class arbitration.
    Mr. Sherman. Would your organization fight against a rule 
that required that whenever there was a financial services 
company that had an arbitration clause in their provision, that 
they provide for class action arbitration?
    Mr. Hong. What we want is the same thing that Congress 
asked--
    Mr. Sherman. I am just asking, what is the position of your 
organization? Because you can come here and fight against the 
rule but also fight against class action arbitration.
    Mr. Hong. What we asked for is the same thing that Congress 
has asked the CFPB to do, which is to study that fairly 
excessive arbitration.
    Mr. Sherman. Okay. So, right now, you retain the freedom to 
fight against any kind of class action arbitration or class 
action lawsuit. And I will point out, according to the material 
I have here, there have only been 32 relevant arbitrations in 
the whole country for a number of years, which proves that one 
case at a time is not going to do the job.
    Mr. Bland, there is this idea that consumers will know that 
they have been taken advantage of. Again, I think I could--you 
could probably--you could send out statements charging 22 
percent interest and put in big letters, ``We are only charging 
you 18 percent interest,'' and maybe all the CPAs in the 
district might notice, probably not even there.
    So other than finding out that there is a class action 
lawsuit, how is an individual consumer supposed to know that 
they are being taken advantage of?
    Mr. Bland. You are exactly right, Congressman. The vast 
majority of the time, scams are cleverly done in ways that most 
consumers won't pick up, both for the kind of reason that you 
give, but also a lot of the people don't know what their legal 
rights are as well as calculating interest rate.
    So, for example, with the payday lenders, who are operating 
illegally in a number of States, they are operating with 
stores. They get someone with a name tag on their shirt. The 
consumers go in there, and they don't realize what the usury 
State laws are and so forth. So your point is true both from a 
matter of fact and from a matter of law. Consumers don't know 
what their rights are, and that is one of the reasons why class 
actions can be so crucial.
    Mr. Sherman. One argument made by those in support of this, 
because I think if you just had arbitration, you are basically 
saying there is no private right of action, is that the CFPB 
should be the police person, not the trial bar.
    Is the CFPB cable of creating a system of fairness such 
that no financial institution would ever do anything that is 
harmful to consumers and, if they did, that the CFPB would 
recover, and we wouldn't need any private trial lawyers?
    Mr. Bland. They clearly do not have the resources to 
replace private enforcement of rights. I mean, I think it is a 
great agency. I think they are doing terrific enforcement work, 
but they are getting so many calls from people that they only 
have so many people they can handle. And a lot of the cases 
that are being filed by private individuals who feel that they 
have cheated been are ones where they couldn't get someone at 
the CFPB, because the agency was too busy.
    Mr. Sherman. Let me point out, the tip of the iceberg is 
when, any kind of case, arbitration, litigation, governmental 
enforcement is there. The number one reason for this is to make 
sure that care is taken at every financial institution not to 
do anything wrong. And 99 times out of 100, they don't do 
anything wrong, and you are part of what inspires that care.
    I yield back.
    Chairman Neugebauer. The time of the gentleman has expired.
    I now recognize the gentleman from New Mexico, the vice 
chairman of the subcommittee, Mr. Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Mr. Hong, you have heard--I mean, I am sure you read the 
testimony, and Mr. Bland mentioned several times, that only 411 
cases have really gone to arbitration. So why is that number 
low? Do you have anything in your experience that would 
indicate that?
    Mr. Hong. So it is in the interest of the financial 
institutions to keep their customers satisfied. So that is--the 
primary thing we should keep in mind is that this is a 
business, and it is a customer-centered business that is very 
competitive with over 6,000 banks in the United States.
    Mr. Pearce. Okay. So it is in their interest.
    Mr. Bland, as I am reading your report, I see on page 12 
that you had a case settled with Wells versus Chevy Chase Bank. 
You settled for $16 million. Basically, if you could describe 
for us, what was that money for?
    Mr. Bland. Okay. So they had advertised and had in their 
contract a statement that they would never--and they used the 
word ``never''--
    Mr. Pearce. I understand. I read your--so if you could sum 
it up, what is the settlement for?
    Mr. Bland. So the settlement was we got cash sent to 
people.
    Mr. Pearce. I mean why?
    Mr. Bland. Because they had been lied to, because they had 
been promised one thing--
    Mr. Pearce. So it is offering redress for damage?
    Mr. Bland. Yes.
    Mr. Pearce. Okay. How did you arrive at the figure of $16 
million?
    Mr. Bland. It was a hotly negotiated thing between the 
sides. I mean, I wish it had been more. I think it should have 
been more like $25 million, but--
    Mr. Pearce. Could you have gotten more if you had went to 
trial?
    Mr. Bland. There is some possibility, and there is also 
some possibility we would have gotten nothing if we had gone to 
trial.
    Mr. Pearce. So--
    Mr. Bland. It was a hard-fought case.
    Mr. Pearce. You didn't have to confer with the class action 
folks. You were able to--the lawyers. I am not a lawyer, so I 
don't know. So the lawyers get to make a decision that you 
didn't have to refer it out to the people who had been damaged?
    Mr. Bland. We had a number of clients who we conferred with 
and told them what--where the settlements--
    Mr. Pearce. Okay. How many checks did you send out?
    Mr. Bland. In that case, we sent out over 100,000 checks.
    Mr. Pearce. The Wall Street Journal--I mean, the Washington 
Post, July 28, 2006, said out 200,000 checks. You said 100,000, 
more or less. Did you send out 100,000 requests for input?
    Mr. Bland. No, we didn't--well, we did. We sent out a 
notice to the class, and everyone in the class had an 
opportunity--
    Mr. Pearce. Input on the $16 million?
    Mr. Bland. Yes. They had an opportunity to object or 
express any kind of concerns about it. And I fielded a whole 
bunch of phone calls from class members.
    Mr. Pearce. So the same article, July 28, says that you all 
took one quarter, approximately one quarter. I guess that the 
article was enough right that you didn't take issue with it in 
the comment section. So when I am doing the math, 16 million, 
so you take out a quarter; that is 4.025 million. Then it says 
another million goes to the law firm--goes to finding the 
people to distribute the money to them. Then the article says 
you gave out 200,000 checks; you are saying 100,000 checks. In 
the big scheme, the math doesn't change much. How much money 
did you not distribute, just roughly?
    Mr. Bland. I think you are right, that the attorney--so I 
think it was $11 million that went out to the class and $5 
million end up being used--
    Mr. Pearce. About a million probably left over after the 
deal. So as I am doing the math--now, I am just trying to make 
this make sense to me.
    So, recently, the American--excuse me--some airline, 
unnamed, lost a bag of mine. Sorry. It is on national TV. So I 
asked them: Can you give me 5 bucks where I can wash my 
clothes, because all of my clothes were in the luggage?
    They said: No, we will do better. We will give you a 
voucher for 150 bucks, so you just go down there.
    So I took the voucher for 150. Now, I assume that was some 
sort of a settlement to somebody who had problems before. But 
to me, it was very easy. It was extremely fair. Like Mr. Hong 
says, they wanted my business back, so they cured the problem 
up front.
    So it might be when we only see 411 circumstances that many 
companies are doing it like that. They are intercepting the 
problems. They are saying: Look, we caused it.
    I was willing to settle for $5, a soap, and the dryer fee. 
They gave me $150 to go buy new clothes. Now, I could have 
brought it to your firm and been a part of a class action, in 
which case you would have made $4.025 million, and I would have 
gotten a check for 55 bucks. That is what you paid. That is 
what the average that went--that is the average that went to 
the claimants in your case.
    Now, that is if there is 200,000. If there is actually 
100,000, like you say, you can jack it up to 110.
    So my--I am just sitting here trying to reason why the 
CFPB, looking out for consumers, would decide against a process 
that gives consumers basically $5,000-plus for every solution 
in order to send it over to you, who is going to get an 
average--average of all the cases, 32 bucks, 32 versus 5,000, 
and we are claiming that to be consumer protection. And for the 
life of me, I think I will just settle for 150 bucks worth of 
free clothes, because it is easy and simple, and I don't have 
to be in court for 2 years.
    Thank you, Mr. Chairman. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Texas, Mr. Williams, a small-
business man.
    Mr. Williams. Thank you, Chairman Neugebauer.
    And thank all of you for your testimony.
    In full disclosure, I am a small-business man.
    And, Mr. Bland, I am one of your favorite people. I am a 
car dealer for 44 years. And I can tell you: arbitration works 
a lot better than lawsuits.
    I have a question for you, though, Mr. Bland. You are a 
trial attorney, correct?
    Mr. Bland. I represent consumers--
    Mr. Williams. Trial attorney. And you have litigated as a 
lawyer in class action suits, correct?
    Mr. Bland. On many cases, yes.
    Mr. Williams. So you consider yourself pretty much of an 
expert?
    Mr. Bland. Under the bar rules, you are not allowed to call 
yourself an expert in most States, but I have a lot of 
experience.
    Mr. Williams. In your testimony, you note that the CFPB 
studied more than over 400 private class actions over a period 
of several years and found, in your words, that these class 
actions delivered very substantial benefits to more than 13 
million Americans. Remember saying that?
    Mr. Bland. Yes.
    Mr. Williams. Section 1028 of Dodd-Frank doesn't talk about 
class actions. It talks about producing a study on the use of 
arbitration agreements.
    So, Mr. Bland, as a trial lawyer, I am sure you know the 
answer to this question before I ask it, but let me ask it to 
you. The substantial benefits that these Americans receive, the 
lawyers do pretty well too, don't they, like 30 percent?
    Mr. Bland. Actually, the CFPB studies show that 15 percent 
of the economic benefit in these cases went to the lawyers. So 
the 85 percent of the economic benefit went to the consumers in 
that study. And then a former Justice Scalia clerk, Professor 
Fitzpatrick, did a study, which found basically the same 
numbers.
    Mr. Williams. I think the study put the number around 21 to 
25 percent, or $425 million of all cash recoveries. But in 
reality, I think that that number, and most of us believe, can 
be much higher, and you stated that with what you have talked 
about some of the things you have gotten.
    So I guess section 1028 should not only read that 
eliminating these clauses has to be in the public interest and 
protection of the consumers but the trial lawyers as well.
    So, Mr. Bland, how much settlement recovery would you need 
to expect to bring in in order to actually bring in a lawsuit 
for a consumer? In other words, when does a lawsuit to you 
become worth your while?
    Mr. Bland. I am in a nonprofit. I handle lots of cases for 
people who have a $3,000 claim, but it is important interest. I 
do a ton of work on a pro bono basis. Probably 80 percent of 
the work that firm does has no expectation of receiving a fee 
whatsoever.
    Mr. Williams. Some of those numbers you talked about 
earlier are not too pro bono.
    Mr. Bland. Well, I have been doing this work for 25 years.
    Mr. Williams. Okay.
    Mr. Pincus, would you mind providing your insight on this 
topic that we have talked about.
    Mr. Pincus. Well, a couple of points. I do think when you 
are looking at class actions, it is important to look at the 
costs and the benefits. And it is important not to assume, as 
some of the discussion has, that every class action that is 
filed is meritorious. If every class action that is filed were 
meritorious, we probably wouldn't have a problem. The problem 
is that we know from the studies that 87 percent of them didn't 
provide any benefit to the class. The 13 percent were settled, 
so we don't know if they were just settled for litigation value 
and maybe they, too, could have been fought if the company 
wanted to spend a lot of money on legal fees.
    So we really don't know that the class action system is 
vindicating rights that have been wronged as opposed to just 
being a system that is very good for lawyers to bring cases 
and, to be frank, very good for the lawyers who defend them, 
but doesn't really do much for people except for transfer money 
around. And I think that is the major problem.
    I think the other problem with class actions is someone was 
asking before about, you know, how would consumers know that 
they have been injured? Well, I think one of the problems in 
the class action system is often these are injuries that 
lawyers find that might be easy to litigate, but that real 
people may not care that much about. But once the litigation is 
started, if you can find one plaintiff, it obviously has a 
value. And I think that is another problem that we have.
    Mr. Williams. Well, the bottom line, you said in your 
testimony: It is bad for business. It is bad for the consumer. 
And it is bad for mainstream America.
    I am concerned that this rule, as proposed, could result in 
the loss of important products that actually help educate 
consumers, products such as credit monitoring, products that 
protect consumers from identity theft. I am concerned that 
these products that are beneficial to all of us would go away 
under the proposed arbitration rule. Do you agree with me?
    Mr. Pincus. I think it is a real problem, because there are 
some companies where the underlying statutes are so draconian 
in terms of the risk of liability that they can't risk the 
litigation because the costs will put them out of business, and 
there is a real problem about whether they can continue if they 
have to face that threat.
    Mr. Williams. Okay.
    I am down to my time. And I turn it back over to the 
chairman. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Kentucky, Mr. Barr, is recognized 
for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    Thanks to our witnesses for your testimony.
    I want to just kind of ask a very kind of basic question 
about these arbitration clauses. None of these consumers are 
compelled in any way to enter into these contracts? Is that 
correct? I mean, if they want the service, they are free to 
enter into these contracts, or they are free to not take the 
product or services. Is that correct, Professor Johnston?
    Mr. Johnston. Correct.
    Mr. Barr. So, Mr. Pincus? Mr. Hong? Mr. Bland?
    Mr. Hong. Absolutely.
    Mr. Barr. So maybe Mr. Bland would argue there are adhesion 
contracts, or there are no other choices out there in the 
marketplace. But the fact of the matter is that if arbitration 
was so heinous or despised as a dispute resolution method, 
presumably the marketplace would reject these contracts.
    Is that a fair analysis, Mr. Pincus?
    Mr. Pincus. I think that is absolutely right, Congressman. 
And, you know, it is no different than every other--we are in a 
world of form contracts. Huge economies of scale. We get the 
benefit of those, but it is a take-it-or-leave-it basis. And 
just like I can't negotiate with my provider about the other 
terms, they say this one is take it or leave it too. If it were 
terrible, I would do it. And in all of the markets, there are 
providers that don't have arbitration.
    Mr. Barr. I suspect Mr. Bland is going to disagree with you 
and me and my line of questioning, so I will give Mr. Bland an 
opportunity to chime in on that.
    Mr. Bland. I mean, just briefly I would say that there are 
some markets in which every single company in the market has 
the same arbitration clause that bans class action, so your 
choice is to just have no cell phone, for example. But also, it 
is not much consumer choice when the studies show that almost 
no consumers know about this.
    Mr. Barr. Mr. Bland, what is the problem that we are trying 
to solve?
    Mr. Bland. The problem that we are trying to solve is that 
right now banks are putting into their fine print contracts 
provisions that say if they break the law, that consumers can't 
do anything about it.
    Mr. Barr. Okay. So as a trial lawyer, as a class action 
plaintiff's attorney, you say we need to preserve or enhance 
access to the class action process. Doesn't that imply or 
suggest that the CFPB is either not doing its job in consumer 
protection or incapable of doing it?
    Mr. Bland. I think the CFPB does a great job. I don't think 
it is capable of doing the entire job. I think people should be 
able to have their own rights under the private rights of 
action that Congress passed for a bunch of these different 
statutes.
    Mr. Barr. Okay. Well, if a private right of action is the 
solution, why should Congress empower the Bureau to have any 
regulatory power since you can solve it through the class 
action process?
    Mr. Bland. Well, I think what we have had in America, prior 
to the forced arbitration systems, you had a sort of a public-
private partnership in which you have State attorney generals 
and the FTC handle certain types of cases, and then had private 
lawyers who represent people who don't want a government agency 
but want to be able to go forward on their own.
    Mr. Barr. So this, I think, is the American people's 
frustration with Washington and the explosion of law.
    Professor Johnston, I would love for you to chime in here 
on this point. It seems to me that if we have a problem, we are 
trying to solve it through both administrative law and through 
private right of action and through class actions. Wouldn't we 
prefer, wouldn't it be better consumer protection if we chose 
one course over the other as opposed to a layering of law?
    Mr. Johnston. I think the best course is to combine market 
incentives with a public enforcement mechanism.
    And to get back to what you were mentioning earlier, 
remember, the CFPB found, true, 2 percent, very few people know 
about arbitration clauses or would ever talk to a lawyer if 
they found that a firm didn't refund a charge they thought had 
been unfairly assessed against them; 60 percent, almost, of the 
consumers said they would take their business elsewhere.
    Arbitration supports that mechanism, the market mechanism.
    Mr. Barr. Right.
    Mr. Johnston. A supplement to that is public enforcement.
    Mr. Barr. And isn't it safe to assume that under the 
Bureau's proposed rule, the number of consumers injured without 
restitution will increase because of the cost associated with 
filing a lawsuit to address what may be a very small claim?
    Mr. Johnston. Oh, yes, they certainly can. You know, 
individual litigation in court, with or without an attorney, is 
very complicated and very costly compared to arbitration, 
orders of magnitude more costly, so it will preclude a lot of 
consumers from getting relief of any kind. And it will also 
interfere with the incentives of firms to invest in dispute 
resolution mechanisms.
    Mr. Barr. Well, in my remaining time, if I could just say, 
I would agree that Dodd-Frank says that the Bureau should 
promulgate a rule if it is in the public interest and for the 
protection of consumers. I do not believe it is in the best 
interest of consumers to make it more difficult for arbitration 
which provides average relief of $5,389, in contrast to class 
action suits where consumers recover an average of $32.35 and, 
obviously, the attorneys take 20 percent of the award.
    So I appreciate your testimony.
    Yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Colorado, Mr. Tipton, is recognized for 
5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman.
    Panel, thank you for being here.
    Professor Johnston, I am coming a little later on a number 
of the questions we have somewhat covered, and I just want to 
be able to have an actual understanding. And I will refer back 
a little bit to my colleague from New Mexico's line of 
questioning to Mr. Bland.
    I think they were citing that the attorneys in that 
particular case got about $4 million that went out. The 
consumers received $55. Public justice. I think you have 16 
attorneys on, so that came out to a quarter of a million 
dollars per attorney that went through. I know you have some 
other costs that you have to be able to pay for out of that.
    But I am trying to get my arms really around the fairness 
issue literally for the consumers. I think you had cited that 
85 percent of the award did go to the consumers that were out. 
And since, Professor Johnston, you have done some analysis on 
this, does 100 percent of those dollars actually reach the 
consumers' pockets?
    Mr. Johnston. I have to say in the category of cases that I 
have looked at that overlaps with what the CFPB did, the 
typical thing is that there is a very small amount of the 
actual nominal settlement goes to class members. And it is 
typical to find that attorney's fees dwarf the amount that the 
class as a group, not individually, but as a group gets.
    For example, in the expiration date cases I mentioned 
earlier, on average--this is an unweighted average--attorney's 
fees are 895 percent of what the class gets, nine times what 
the class gets. Even in Telephone Consumer Protection Act cases 
where the amounts are much bigger, these are debt call 
settlements, so they would be covered by the CFPB's database, 
attorney's fees are 92 percent of what the class gets.
    And I can compare the attorney's fees with individual class 
recoveries, and it is even more outrageous, because in a lot of 
these cases individuals are getting very small amounts of 30, 
40, 50 dollars each. It is a system in which the cost of making 
these transfers is exorbitant. Essentially we are running this 
system just to transfer money from defendants to class counsel 
and kind of almost as an afterthought class members get a 
little bit.
    Mr. Tipton. I would like to drill down on that just a 
little more, I guess, to the point I want to be able to get. 
The 100,000 or 200,000, I think, in the exchange that we had 
had earlier where money was actually allocated by the court to 
the consumers, real dollars, some of that is undeliverable. 
Somebody isn't going to cash the check. It is not going to be 
received.
    Mr. Johnston. True.
    Mr. Tipton. What happens to that money? Where does it go?
    Mr. Johnston. Oh, where it goes, it depends. In a minority 
of class settlements, that money does not revert back to the 
defendant. That is a small number. In every case in my sample, 
that will go as a cy-pres award to a nonprofit, every case, a 
nonprofit legal organization such as Mr. Bland.
    Mr. Tipton. So the money that is not collected actually by 
the consumer may well go back to Mr. Bland?
    Mr. Johnston. Yes, and that is in a minority, and in most 
cases the defendant just keeps it, it doesn't go anywhere.
    Mr. Tipton. It just doesn't go anywhere.
    Mr. Bland. Can I tell you what happened in that case, since 
you keep bringing it up?
    Mr. Tipton. Sure.
    Mr. Bland. So the money that was left over was largely give 
to Legal Aid of Maryland, which also represented a lot of the 
people who had the same kinds of issues. And we also, we fixed 
everybody's credit record. There was false information on all 
of these people's credit records that we eliminated. We had 
expert testimony before the court that that was worth many 
millions of dollars to the class members.
    Mr. Tipton. Okay. Great. Thanks for some clarity on that.
    Mr. Johnston, I would like to go back to you a little bit, 
actually back to the CFPB in terms of their calculations, in 
terms of relief versus expenses in some of these class action 
lawsuits. How did they get their calculation off so far in 
terms of--I think the number you had cited, attorney fees, 21 
percent, according to CFPB, you are putting that number at 75 
percent. How is the CFPB so far off?
    Mr. Johnston. Well, that is a real number. They just 
aggregated up, added up all the attorney's fees paid and 
divided that by all the money that was paid to class members in 
all of their class action settlements that they studied.
    The problem is those are swamped, those numbers of theirs 
are swamped by five huge class action settlements, the biggest 
of which is the checking account overdraft class action 
settlement, but then there is a few others.
    In those giant settlements, courts will not approve 
attorney's fees that are much above 20 percent. I mean, if you 
have a $250 million settlement, the court is not going to 
approve, I don't know, a $125 million attorney's fee award.
    But if you take those out and look at the run-of-the-mill 
class action settlement, courts approve attorney's fees, which 
when you compare it to the nominal settlement, they look 
reasonable, like 33 percent maybe, or 40 percent. But when you 
compare it to the amount the class actually gets, like I said, 
they are astronomical. Sometimes the fees are three, four, 
eight times what the class actually gets.
    And the problem with that kind of system is, who would ever 
hire a lawyer--imagine if it was an individual lawsuit instead 
of a class lawsuit--who would hire a lawyer and say: Yes, I am 
going to recover $100, but I am going to pay you $800. I am 
going to pay you $800 to recover 100.
    That is what we are doing. You take away the gigantic class 
action settlements where, again, judges are not going to 
approve $125 million for a $250 million settlement. But these 
other ones, this is what happens.
    Chairman Neugebauer. The time of the gentleman has expired.
    Mr. Tipton. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Indiana, Mr. Stutzman, is recognized 
for 5 minutes.
    Mr. Stutzman. Thank you, Mr. Chairman.
    And thank you to the panel for being here. It has been an 
interesting discussion today.
    And I am not an attorney. I am not a professor. I am a 
small-business owner. And so we may not find ourselves in these 
situations very often, but I can approach it from the 
standpoint of being sued as a small-business owner and what 
options do we have rather than going to court. Is there an 
arbitration process that we could enter into to try to solve an 
issue sooner rather than later?
    And because I know, Mr. Bland, I know the folks in your 
industry, and I believe that the intentions are good. But in 
the long run it costs the economy, it costs consumers, it costs 
businesses more in the long run than it does if we can solve a 
problem, you know, face-to-face meeting, and what does it take 
to make both sides satisfied? Because, especially as a small-
business owner and you are facing some sort of litigation, you 
want to handle the problem correctly, you want to handle the 
problem as quickly as possible, and you want to handle it to 
where you are being fair.
    I mean, as I said, as a small-business owner, we found 
ourselves in that spot, and we wanted to make sure that those 
who were offended were made whole, and we did that. And it was 
cheaper to do it outside of a process in court rather than 
actually going through court and actually doing it through an 
arbitration process.
    And so I guess that is what I am, you know, I am trying to 
wrap my mind around this in a class action situation. And I 
think we have all seen them. We get the envelope in the mail 
that says you are going to be eligible for some sort of 50-cent 
claim on some sort of class action lawsuit. And I throw them in 
the trash. I don't do anything with them. And I am not trying 
to say that that is every case, but in a lot of different 
cases.
    And, Professor Johnston, I would like to ask you in regards 
to the Bureau's proposed rule, is there any evidence to suggest 
that it considered less severe regulatory alternatives to 
eliminating arbitration entirely? And I don't know if you 
touched on that earlier.
    Mr. Johnston. Congressman, we haven't talked about that, 
and that is an interesting, important question. Having just 
looked, once again, through the whole proposal very early this 
morning, I can say the answer is no. There is no evidence that 
they thought about any other regulatory approach than this, 
because they insist over and over again, with very little 
empirical evidence and no rigorous theoretical basis, that we 
have to have class actions to have deterrence in compensation. 
They didn't think about really any other alternative.
    Mr. Stutzman. Would you suggest anything else?
    Mr. Johnston. Well, the evidence that the CFPB did uncover 
shows that arbitration works really well, but there aren't very 
many of them. We have heard that is the complaint today. There 
are only 411.
    What about having the CFPB advertise the availability of 
arbitration? What about them help in informing consumers about 
their rights under these arbitration provisions? That seems to 
me like an agency that was trying to protect the interests of 
consumers and further the public interest, that would be at 
least something you would consider.
    Mr. Stutzman. So maybe the process is working.
    Mr. Johnston. Yes.
    Mr. Stutzman. Is there a perfect system? No. But this is 
about--I know for us, in my personal experiences, that this is 
a good process to have available to you.
    Mr. Pincus--sorry, was somebody else going to say 
something? Okay. Mr. Pincus, some supporters of this proposed 
have argued that arbitration is just unfair, that it deprives 
consumers from their constitutional right. Has the Supreme 
Court, has any court weighed in on this issue at all?
    Mr. Pincus. The Supreme Court has made clear that 
arbitration doesn't deprive anyone of rights. It has repeatedly 
upheld and applied to Federal Arbitration Act. And so I think 
it has really addressed that issue.
    Could I just respond to the question that you were asking 
to Professor Johnston, because I think it is important to note, 
because people have referred to the small number of 
arbitrations. In a way, that number is sort of an iceberg, 
because all arbitration systems say, before you start the 
arbitration, let's try and work this out, exactly what you 
said. And so a huge number of claims are resolved at that 
process and never go to arbitration, and the CFPB didn't try to 
even get any data on what that is.
    I can give you one metric that is in the public record. I 
represented AT&T in a litigation that went to the Supreme 
Court, and one of the questions raised was: Gee, your 
arbitration system must be ineffective because people don't 
file many. And what AT&T said was, and this was a number of 
years ago: Well, we have calculated the number of credits and 
payments and other resolutions in this pre-arbitration process, 
and it came at that time to $1.3 billion a year.
    So that is, obviously, a very substantial amount of 
consumer relief that isn't captured in the number of 
arbitrations, but is a function of the availability of the 
arbitration system.
    Chairman Neugebauer. The time of the gentleman has expired.
    I now recognize the gentleman from California, Mr. Royce, 
for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    I thank our witnesses for joining us here.
    The Credit Repair Organization Act, CROA, is a strict 
liability consumer protection statute that Congress passed to 
defend consumers against false claims of fixing credit reports.
    Unfortunately, access to credit monitoring services 
provided by credit Bureaus and others has been threatened by 
the courts moving away from Congress' original intent with 
CROA.
    So my first question to Mr. Pincus, what is the impact of 
eliminating class action lawsuit waivers for those under CROA's 
jurisdiction that offer credit score monitoring?
    Mr. Pincus. Well, unfortunately, it will open the door to 
these very large, very draconian class actions that can really 
impose--threaten hundreds of millions, maybe more in liability. 
And in the real world, again, we don't know whether it is 
meritorious or not, but the company can't take the chance. So 
it is either going to have to pay a lot of money in settlement, 
which is going to change its whole business structure, or it is 
going to conclude it can't be in that business anymore because 
the risk is just too great.
    Mr. Royce. Or without a fix to the CFPB's rule or a fix to 
CROA, which I proposed with House Resolution 347, the 
Facilitating Access to Credit Act, my conclusion would be that 
credit monitoring products and services would be severely 
limited, but certainly one of those consequences.
    Community financial institutions, if we go to another 
important subject here, such as credit unions and community 
banks, have to maintain strong personal relationships with 
their customers. At a time of unprecedented regulatory burdens, 
their success depends upon this.
    So my second question, to Mr. Hong, how does the 
arbitration process benefit consumers and contribute to better 
relationships between consumers and their community financial 
institutions, and what will happen when the CFPB opens up 
credit unions and community banks to class action lawsuits?
    Mr. Hong. If I can speak on behalf of those smaller 
institutions. One of the things that you will see that, one of 
benefits that arbitration can provide them is the fact that 
they have developed these dispute resolution processes that are 
more informal and convenient for consumers in nature. And so if 
you take away their ability to offer those types of 
proceedings, you potentially open them up for dramatic 
increases in class action litigation risk.
    And so in those instances, they will probably have to have 
a conversation with at least potential regulators about how 
they should take compensatory actions on their side to reserve 
more capital to deal with that type of risk. And I am sure it 
just makes prudent business sense to hold on to more capital 
for defensive litigation purposes.
    Mr. Royce. Well, I would like to ask unanimous consent to 
submit a letter to the record from the Credit Union National 
Association that highlights the problems the CFPB's arbitration 
rule will create for community financial institutions.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Royce. And lastly, if I have the time, I would like to 
ask Mr. Bland briefly, if I could, I would like to get back to 
this cy-pres donation issue and ask--because the website lists 
you personally as the point of contact for these cy-pres 
donations--could you tell me how many cy-pres donations from 
class action lawsuit cases has Public Justice received in 2016, 
and what is the aggregate dollar value of those awards, if I 
could ask?
    Mr. Bland. I am not sure the exact number. I would have to 
look it up. Probably about half a dozen. And I think it is 
probably in the nature of $700,000.
    Mr. Royce. So I would ask for that data for 2016 and 2015, 
if you have that, and if you could provide this committee with 
a list of the source and amount of such donations Public 
Justice has received maybe in the last 5 years. That would be, 
I think, helpful to the committee. Thank you.
    Mr. Chairman, thank you again. I think my time has expired.
    Chairman Neugebauer. I thank the gentleman.
    With unanimous consent, I am going to yield to Mr. Scott 
for one additional question.
    Mr. Scott. Yes. Thank you very much.
    This question is very important to me because it reflects 
my deep concern for my constituents in Georgia. I don't know if 
this committee knows or not, but according to the FDIC, their 
latest data of 2013, 37 percent of the households in Georgia 
are either unbanked or underbanked.
    And so, you see, I have a concern that--CFPB is a wonderful 
organization, I have no qualms with that, doing a fine job. But 
the purpose of this committee is to kind of examine what could 
be unintended consequences so we can work those out. And this 
37 percent is magnified because the national average is just 10 
percent.
    So my State of Georgia is in the crosshairs here and 
depends upon nontraditional financial service products, like 
prepaid cards and general purpose reloadable prepaid cards. And 
so I got to be very concerned about that.
    So my question is, how do we know that the prepaid cards, 
things like that that our people have to use and secure access 
to financial help that many of us just take for granted, how do 
we know that the CFPB is going to be able to work to make sure 
that these instruments are still available and affordable for 
the 37 percent of Georgia households in my State? And what 
steps are they taking to make sure that this happens, given a 
situation like this?
    And granted, to your point, Mr. Bland, about the 
differentiation of the amount, suffice it to say, as professor 
Johnston pointed out, as we grapple with this, we have to find 
an answer to where this situation is and how the consumers will 
benefit the most with this outrageous gap of, say, from $55, as 
this report says, to the $5,400 that the report says is there.
    So you got to understand, we have to come to grapple with 
this. But in my last 42 seconds here, would anybody have any 
idea if the CFPB is looking at maybe some of these unintended 
consequences?
    Mr. Pincus. Well, I think the concern is, based on their 
study and based on what is accompanying the rule, they really 
haven't looked at what the consequences are of the sort of 
layering on that was being discussed before of their 
supervisory and regulatory and enforcement role, plus other 
State and local agencies, plus private class actions, and 
whether there isn't a way to ensure that nothing falls between 
the cracks that is meritorious. We don't want that.
    But to say, for example, one solution that comes to my mind 
is the CFPB gets notified of things that have a class-wide 
effect that people are worried about and it can look into them. 
You know, it doesn't just have its enforcement authority. It 
has its supervisory authority, which gives it another very 
important tool for dealing with things that are adversely 
affecting consumers without going through the whole enforcement 
process.
    So I think what is unfortunate is they have sort of, in a 
knee-jerk way, said we are just going to have the class action 
system layered on top of everything without looking at what 
that is really going to do to the cost of availability if 
things, just as you are mentioning.
    Mr. Scott. Did you want to respond, Mr. Bland?
    Mr. Bland. Please, quickly.
    Mr. Hong. Do you mind, if I can just add?
    Mr. Scott. Oh, okay. Mr. Hong.
    Mr. Hong. I was just going to add one additional comment, 
which was the fact that one of the reasons why we asked the 
CFPB to do a supplemental study to get a more comprehensive 
picture of how this rule might affect borrowers is that 
exposing financial institutions to more class action litigation 
risk exposure, that potentially locks away capital for 
productive uses. And I think that speaks directly to the issues 
that you are trying to raise.
    Mr. Bland. May I have 20 seconds on this? For 3\1/2\ years, 
4 of the largest credit card companies in America stopped using 
their arbitration clauses that ban class actions as a result of 
an antitrust suit. And during those 3\1/2\ years they did not 
increase their interest rate, they did not increase any fees, 
there was no impact at all of them going naked without the 
arbitration clause that bans class action.
    So all this stuff about how it is going to harm the economy 
and drive up prices and so forth, we had an actual experiment, 
and it is set out in the study, and we know the answer. And the 
answer was that not having the class action ban did not 
increase fees or costs.
    Mr. Johnston. Can I respond to that?
    Chairman Neugebauer. Mr. Johnston.
    Mr. Johnston. I mean, just on basic economics, there is no 
reason we would have expected to see any change in prices with 
what was at the time perceived to be a temporary change in 
cost, and, moreover, the statistical assumptions that have to 
be met for the experiment to be valid were not met.
    Chairman Neugebauer. I thank the gentleman.
    I want to thank our witnesses, and I also want to thank our 
members. I think we have had a healthy discussion today, and I 
appreciate the witnesses offering their time here. And I yield 
briefly to the gentleman from Georgia for a unanimous consent.
    Mr. Scott. Yes. I would just ask for unanimous consent to 
submit for the record this letter from the Public Citizen 
nonprofit organization.
    Chairman Neugebauer. Without objection, it is so ordered.
    And also, I ask unanimous consent that we make a part of 
the record a statement from the National Association of Federal 
Credit Unions, a research paper by Jason Scott Johnston 
entitled, ``High Cost, Little Compensation, No Harm to Deter: 
New Evidence on Class Actions Under Federal Consumer Protection 
Statutes.''
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    Chairman Neugebauer. And with that, this hearing is 
adjourned.
    [Whereupon, at 4:50 p.m., the hearing was adjourned.]






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                              May 18, 2016

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