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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 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

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 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

RANDY NEUGEBAUER, Texas, Chairman 

STEVAN PEARCE, New Mexico, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

ROBERT PITTENGER, North Carolina 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

MIA LOVE, Utah 

TOM EMMER, Minnesota 

WM. LACY CLAY, Missouri, Ranking 

Member 

GREGORY W. MEEKS, New York 

RUBE ́ N HINOJOSA, Texas 

DAVID SCOTT, Georgia 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

MICHAEL E. CAPUANO, Massachusetts 

JOHN K. DELANEY, Maryland 

DENNY HECK, Washington 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

(V) 

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 

(1) 

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. 

2 

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 DoddFrank 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 BuVerDate Nov 24 2008 18:28 Mar 08, 2018 Jkt 024135 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\24135.TXT TERI
3 

reau 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 

4 

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 

5 

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 

6 

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, 

7 

‘‘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; 

8 

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 

9 

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. 

10 

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? 

11 

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. 

12 

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 

13 

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 

14 

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. 

15 

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 hashedout 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 

16 

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 

17 

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 

18 

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 inVerDate Nov 24 2008 18:28 Mar 08, 2018 Jkt 024135 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\24135.TXT TERI
19 

crease 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. 

20 

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. 

21 

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. 

22 

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? 

23 

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 

24 

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 

25 

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? 

26 

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. 

27 

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. 

28 

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,’’ 

29 

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. 

30 

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 customercentered 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. 

31 

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. 

32 

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 subVerDate Nov 24 2008 18:28 Mar 08, 2018 Jkt 024135 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\24135.TXT TERI
33 

stantial 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. 

34 

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. 

35 

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. 

36 

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 

37 

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 

38 

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 ac- tion 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 smallbusiness 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. 

39 

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. 

40 

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? 

41 

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 

42 

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 kneejerk 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 31⁄2 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 31⁄2 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.’’ 

43 

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.] 

(45) 

A P P E N D I X 

May 18, 2016 

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