[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
   ARBITRATION OR ARBITRARY: THE MISUSE OF MANDATORY ARBITRATION TO 
                         COLLECT CONSUMER DEBTS

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



                                HEARING

                               before the

                    SUBCOMMITTEE ON DOMESTIC POLICY

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 22, 2009

                               __________

                           Serial No. 111-125

                               __________

Printed for the use of the Committee on Oversight and Government Reform


         Available via the World Wide Web: http://www.fdsys.gov
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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts       MARK E. SOUDER, Indiana
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      LYNN A. WESTMORELAND, Georgia
JIM COOPER, Tennessee                PATRICK T. McHENRY, North Carolina
GERALD E. CONNOLLY, Virginia         BRIAN P. BILBRAY, California
MIKE QUIGLEY, Illinois               JIM JORDAN, Ohio
MARCY KAPTUR, Ohio                   JEFF FLAKE, Arizona
ELEANOR HOLMES NORTON, District of   JEFF FORTENBERRY, Nebraska
    Columbia                         JASON CHAFFETZ, Utah
PATRICK J. KENNEDY, Rhode Island     AARON SCHOCK, Illinois
DANNY K. DAVIS, Illinois             ------ ------
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
------ ------

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director

                    Subcommittee on Domestic Policy

                   DENNIS J. KUCINICH, Ohio, Chairman
ELIJAH E. CUMMINGS, Maryland         JIM JORDAN, Ohio
JOHN F. TIERNEY, Massachusetts       MARK E. SOUDER, Indiana
DIANE E. WATSON, California          DAN BURTON, Indiana
JIM COOPER, Tennessee                MICHAEL R. TURNER, Ohio
PATRICK J. KENNEDY, Rhode Island     JEFF FORTENBERRY, Nebraska
PETER WELCH, Vermont                 AARON SCHOCK, Illinois
BILL FOSTER, Illinois
MARCY KAPTUR, Ohio
                    Jaron R. Bourke, Staff Director



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 22, 2009....................................     1
Statement of:
    Swanson, Lori, attorney general, State of Minnesota; Michael 
      Kelly, chief operating officer, National Arbitration Forum; 
      Richard Naimark, senior vice president, International 
      Centre for Dispute Resolution, American Arbitration 
      Association; F. Paul Bland, staff attorney, Public Justice; 
      and Christopher R. Drahozal, John M. Rounds professor of 
      law, University of Kansas School of Law....................    33
        Bland, F. Paul...........................................   133
        Drahozal, Christopher R..................................   161
        Kelly, Michael...........................................   116
        Naimark, Richard.........................................   123
        Swanson, Lori............................................    33
Letters, statements, etc., submitted for the record by:
    Bland, F. Paul, staff attorney, Public Justice, prepared 
      statement of...............................................   136
    Drahozal, Christopher R., John M. Rounds professor of law, 
      University of Kansas School of Law, prepared statement of..   163
    Kelly, Michael, chief operating officer, National Arbitration 
      Forum, prepared statement of...............................   118
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio:
        California Code of Civil Procedure.......................   189
        Prepared statement of....................................     4
        Staff report.............................................     9
    Naimark, Richard, senior vice president, International Centre 
      for Dispute Resolution, American Arbitration Association, 
      prepared statement of......................................   125
    Swanson, Lori, attorney general, State of Minnesota, prepared 
      statement of...............................................    36
    Watson, Hon. Diane E., a Representative in Congress from the 
      State of California, article dated June 5, 2008............    23


   ARBITRATION OR ARBITRARY: THE MISUSE OF MANDATORY ARBITRATION TO 
                         COLLECT CONSUMER DEBTS

                              ----------                              


                        WEDNESDAY, JULY 22, 2009

                  House of Representatives,
                   Subcommittee on Domestic Policy,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m. in room 
2154, Rayburn House Office Building, Hon. Dennis J. Kucinich 
(chairman of the subcommittee) presiding.
    Present: Representatives Kucinich, Cummings, Foster, 
Jordan, Mica, Schock, and Watson.
    Also present: Representative Johnson.
    Staff present: Jaron R. Bourke, staff director; Claire 
Coleman, counsel; Howard Schulman, Office of Representative 
Kucinich; Jean Gosa, clerk; Charisma Williams, staff assistant; 
Leneal Scott, information systems manager; Adam Hodge, deputy 
press secretary; Dan Blankenburg, minority director of outreach 
and senior advisor; Adam Fromm, minority chief clerk and Member 
liaison; Daniel Epstein and Mitchell Kominsky, minority 
counsels; and Katy Rother, minority staff assistant.
    Mr. Kucinich. The meeting will come to order.
    Good afternoon and welcome. I am Congressman Dennis 
Kucinich, chairman of the Domestic Policy Subcommittee of the 
Oversight and Government Reform Committee.
    I am joined today by the ranking member of the committee, 
Mr. Jordan of Ohio.
    Our hearing today is, ``Arbitration or Arbitrary: The 
Misuse of Mandatory Arbitration to Collect Consumer Debts.'' 
The subject of this hearing, the use of mandatory pre-dispute 
arbitrations as a method of obtaining judgments for consumer 
debts is not what we normally think of when we hear the terms 
arbitration or consumer arbitrations.
    We are not talking about arbitrations brought by consumers 
against businesses, and we are not talking about individual 
arbitrations brought by businesses against consumers. We are 
talking about mass production arbitrations where businesses 
file thousands of claims against consumers to obtain judgments 
on credit card debt where the claims are assigned to 
arbitrators in batches of dozens, where the consumer almost 
never appears or even responds, and where the so-called hearing 
consists of nothing more than the arbitrator looking at a 
statement written by the creditor and awarding the amount that 
the creditor requests.
    Over the past few months, the Domestic Policy Subcommittee 
has conducted an investigation into the actual practices of the 
two largest providers of consumer arbitration services, the 
National Arbitration Forum [NAF], and the American Arbitration 
Association, the AAA. NAF is by far the No. 1 generator of 
arbitration awards against credit card customers. The AAA also 
administered consumer debt collection arbitrations and states 
that they have stopped doing this as of June 2009.
    Subcommittee staff reviewed over 50,000 pages of documents, 
including hundreds of actual case files to determine how the 
claims were decided by the arbitrators. Our investigators have 
come to several deeply disturbing conclusions about the 
National Arbitration Forum's arbitration system.
    Who wins or loses an NAF arbitration seems to depend solely 
on which arbitrator reviews the claim. As part of our review, 
subcommittee staff compared 228 nearly identical NAF consumer 
debt collections claims and we found that three arbitrators 
granted awards in favor of the debt collection firm nearly 100 
percent of the time, while two arbitrators reviewing otherwise 
identical claims dismissed those claims nearly 100 percent of 
the time. Our review of these files found absolutely no reason 
in the case files to explain such inconsistent results.
    We also found that some of NAF's arbitrators either don't 
know the rules they are supposed to follow or they don't follow 
them and nobody at NAF seems to care. One NAF rule establishes 
a limit to the amount of time between filing of the claim and 
service of notice on the consumer debtor. Our investigation 
found that NAF does not require its arbitrators to adhere to 
this rule. Out of a total of 172 consumer debt collection 
claims that could have been dismissed under those rules, none 
were. What is more, NAF is also violating a California law by 
refusing to publish the results of many of its arbitrations 
with residents of that State.
    Our investigation further revealed that this violation is 
allowing at least one debt collection company to obtain awards 
of attorneys' fees that exceed legal limits.
    The subcommittee staff's findings support a considerable 
body of evidence showing NAF's misuse of mandatory arbitration 
in debt collection cases. Last week, the attorney general of 
the State of Minnesota filed a lawsuit against the NAF alleging 
violations of Minnesota's consumer fraud statute and other 
claims based on NAF's concealment of its ties to creditors; its 
active solicitation of creditors based on promises of providing 
leverage over consumers; its direct financial affiliation with 
one of the country's largest debt collectors.
    Remarkably, just this past Saturday the NAF agreed to a 
settlement with the Minnesota attorney general in which it 
would immediately stop all arbitration proceedings that are the 
subject of this hearing. The settlement does not admit 
wrongdoing, however. NAF still maintains that its arbitrations 
and arbitrators are fair and independent. Our investigation 
strongly suggests otherwise, and we will hear from the NAF, 
Public Justice, and from the attorney general of Minnesota 
herself, the Honorable Ms. Lori Swanson, on the supposed 
neutrality of NAF arbitrations.
    The hearing today will also address other systemic problems 
the subcommittee investigation found with this arbitration 
system, such as why the right to appeal a decision in consumer 
arbitration claims is limited to a finding of fraud or 
corruption; the lack of oversight of the claims process itself; 
and the bias built into arbitrations favoring the debt 
collection industry.
    Now, defenders of this mass production arbitration system 
argue that abolishing it will only raise the cost of litigating 
debt collection cases. But consumers have rights and 
protections under the law that are not honored in the 
arbitration setting. Furthermore, the number of Americans who 
have experienced the suspension of their rights due to consumer 
arbitration has grown as the number of consumers with debt has 
exploded.
    Today, the average adult carries over $4,000 of debt. To 
the debt collection industry and the alternative legal system 
that has been created around it can no longer be ignored by the 
Federal Government. Others seem to agree with us. There are a 
number of bills in Congress that would impose limits on the 
applicability of mandatory pre-dispute arbitration agreements, 
including one introduced by our colleague, Representative Hank 
Johnson.
    Very significantly, Congressman Barney Frank, Chairman of 
the Financial Services Committee, has introduced a bill to 
establish a new consumer protection agency which would have the 
power to limit or ban mandatory pre-dispute consumer 
arbitration agreements, and the Federal Trade Commission is 
currently evaluating the entire system of debt collection, 
including arbitration practices with an eye toward the much-
needed modernization of debt collection laws.
    I hope this hearing will bring increased awareness to the 
problems of the mandatory consumer debt arbitration system; 
holds those accountable that have abused consumers' rights in 
the past; and explore solutions to improve the system so it is 
no longer a one-stop shop for debt collection agencies to 
obtain a binding legal judgment against the consumer. Our 
citizens deserve nothing less.
    At this time, prior to recognizing Mr. Jordan, I just want 
to observe the presence of our colleague from Maryland, Mr. 
Cummings. Thank you for being here. And our colleague from 
California, Ms. Watson, thank you for being here.
    And the Chair recognizes Mr. Jordan for his opening 
statement. You may proceed.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]
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    Mr. Jordan. Thank you, Mr. Chairman.
    The challenges consumers face in troubled economic times 
only underscore the importance of this hearing. This particular 
hearing provides an excellent opportunity to discuss and debate 
mandatory arbitration clauses. This is an important matter and 
I look forward to having a productive discussion on the many 
issues surrounding consumer arbitration.
    As we debate President Obama's proposed consumer financial 
protection agency, we must think hard about the way this new 
agency would operate. Mr. Obama's existing proposal is the 
latest of the administration's expanding its reach into the 
private sector. I am particularly concerned that under the new 
agency, the administration would have the authority to 
eliminate mandatory arbitration clauses. This is simply bad 
policy.
    Well-respected academics and experts agree arbitration is 
fair, equitable and necessary. In 2007, Professor Peter 
Rutledge told the Senate Judiciary Committee that in a world 
without pre-dispute arbitration, consumers would face higher 
costs. Professor Rutledge explained the only people who with 
certainty benefit from the Arbitration Fairness Act are the 
lawyers. Frankly, it is the undisputed fact that this is 
primarily the trial lawyers that stand to benefit from the 
elimination of arbitration clauses.
    During a House Judiciary markup, Representative Hank 
Johnson claimed mandatory pre-dispute binding arbitration 
clauses leave consumers without choices, but these choices have 
nothing to do with consumer rights as much as tactics for 
lawyers to make money. Representative Johnson stated, ``You 
can't influence large corporations by being nice. You need a 
jury to get into their pocket.''
    Unfortunately, justice is sometimes the price you pay. In 
2008, Mississippi lawyer Dickie Scruggs pleaded guilty to 
conspiring to bribe a judge and is currently serving a 7-year 
sentence in Federal prison. Bill Lerach and Mel Weiss are each 
serving time in jail for a criminal conspiracy of paying 
millions of dollars in illegal kickbacks to lead plaintiffs in 
class action lawsuits in order to help the lawyers win the race 
to the courtroom. Kentucky plaintiffs lawyers William Gallion 
and Shirley Cunningham, Jr., were jailed and ordered to pay 
disgorgement of the $30 million they scammed from their clients 
in the settlement over the diet drug fen-phen.
    The point I am making is just because you have a few bad 
apples, you don't throw out the whole barrel. If it is true for 
lawyers, it is also true for arbitration. Today's oversight 
hearing is set to focus on consumer arbitration, not the evils 
of business. If, for example, credit card companies are harming 
consumers, then a separate hearing is needed. Statistics citing 
that consumers overwhelming lose in debt collection cases do 
not support the notion that arbitration is the enemy.
    By way of example, the Federal Government wins nearly all 
of its cases to recover unpaid student loan debt. Is the 
Federal Government to blame when debtors lose? Is arbitration? 
Today's hearing should foster debate on policy directly related 
to mandatory arbitration. Whether or not arbitration was 
provided dispute resolution service is good or bad for 
consumers is an inquiry independent from whether debt 
collection as a business is bad for consumers.
    Consumers have successfully used arbitration to resolve 
disputes with businesses. Debt collection may present serious 
problems to consumers, but the best evidence available would 
indicate that those problems are worse in litigation than in 
arbitration.
    It is my hope that the Members here today can help our 
witnesses tailor this hearing to the empirical data available 
concerning debt collection in consumer cases. Only then can we 
make progress in providing remedies to consumers. A flat-out 
elimination of mandatory arbitration is not the answer. To that 
end, I hope today's discussions also examine feasible 
alternatives to remedy the issues at hand.
    I am also concerned, Mr. Chairman, that three of the four 
witnesses called today by the majority have benefited from a 
lawsuit and successful settlement with the majority's fourth 
witness, the National Arbitration Forum. This may not prohibit 
us from having a productive hearing, but it is certainly a fact 
worth noting.
    Thank you, Mr. Chairman, for holding this important hearing 
today. The issues not only affect our home State of Ohio, but 
also the entire United States. I look forward to hearing from 
our witnesses.
    Mr. Chairman, I would also ask unanimous consent for the 
minority staff report be included in the record.
    Mr. Kucinich. Without objection.
    Mr. Jordan. Mr. Chairman, I would also ask for unanimous 
consent that a statement received from ACA International and an 
email be included in the hearing record as well.
    Mr. Kucinich. I would ask the gentleman, do we have the 
email?
    Mr. Jordan. Yes, we do right here.
    Mr. Kucinich. OK. Without objection.
    Mr. Jordan. Thank you, Mr. Chairman.
    Mr. Kucinich. And without objection, Members and witnesses 
may have 5 legislative days to submit a written statement or 
extraneous materials for the record.
    Without objection, at some point we will welcome 
Representative Hank Johnson to the dais to make a statement if 
he comes in time, or receive testimony and participate in the 
questions.
    And without objection, all Members will have 3 minutes 
opening statements, not to exceed 3 minutes.
    And also without objection, Mr. Jordan, without objection 
we are also going to put the staff report of the Domestic 
Policy Subcommittee majority staff on arbitration abuse in the 
record.
    [The information referred to follows:]
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    Mr. Kucinich. The Chair recognizes the gentleman from 
Maryland, Mr. Cummings, for a 3-minute statement.
    Mr. Cummings. Mr. Chairman, thank you for calling this 
hearing, and I will just submit a written statement. Thank you 
very much.
    Mr. Kucinich. I thank the gentleman.
    The Chair recognizes Ms. Watson of California for an 
opening statement.
    Ms. Watson. Thank you, Mr. Chairman, for holding today's 
important hearing to evaluate whether consumer debt collection 
arbitration as currently administered produces results that are 
fair to both businesses and consumers.
    Today, virtually all consumers often unknowingly enter into 
mandatory arbitration agreements forfeiting their right to 
regular court proceedings as part of the fine print of 
consumer, employment and franchise agreements. While some 
contend arbitration offers consumers a more cost-effective 
procedure with all the protections of a traditional litigation 
procedure, the investigation of this committee and the case 
brought by the attorney general of the State of Minnesota 
against the National Arbitration Forum, have revealed 
significant concerns about the neutrality of the arbitration 
process for consumer debt collection.
    A June 5th cover story in Business Week magazine entitled, 
``Banks versus Consumers: Guess Who Wins,'' describes the 
business practice of the National Arbitration Forum, which 
dominates credit card arbitration and operates in a system in 
which it is exceedingly difficult for individuals to prevail.
    I would like to enter this particular report to the record.
    Mr. Kucinich. Without objection.
    [The information referred to follows:]
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    Ms. Watson. Internal documents discussed in the article 
describe NAF's marketing pitches to credit card companies where 
they depict their arbitration services as favorable to 
businesses with a promised marked increase in recovery rates 
over existing collection methods.
    Rather than providing the neutral resolution service they 
portray to the public, in these confidential documents, the NAF 
describes the benefits of pro-business hasty arbitration, with 
little to no mention of the rights or concerns of the consumer.
    Elizabeth Bartholet, a Harvard Law School professor and 
former arbitrator for NAF, describes their practices as, ``a 
process that systematically serves the interest of credit card 
companies.''
    So today's hearing comes at a very critical point. With 
unemployment at 9\1/2\ percent nationally and 11.4 percent in 
my district in Los Angeles, California, and $928 billion worth 
of outstanding credit card debt in the United States as of May 
2009, it is imperative we gain meaningful insight into how we 
can improve this process and empower American consumers with 
the ability to fairly manage their consumer obligations.
    So Mr. Chairman, I look forward to today's testimony, and I 
yield back.
    Mr. Kucinich. I thank the gentlelady.
    The Chair recognizes Mr. Foster. You may proceed for 3 
minutes.
    Mr. Foster. Thank you, Mr. Chairman.
    Today's hearing follows months of extensive investigation 
by this subcommittee into hundreds of cases of consumer debt 
collection arbitration, but it is timely coming less than 1 
week after the National Arbitration Forum agreed to stop 
accepting all future consumer arbitrations.
    The settlement in Minnesota is instructive, but it is not 
the end of the story. The authority for commercial arbitration 
originated in the Federal Arbitration Act, a 1925 law that may 
well be out of date and in need of significant improvement. It 
is this panel's duty to uncover and correct flaws in 
arbitration proceedings.
    I look forward to hearing from all our witnesses on 
pragmatic solutions that will ensure consumers, as well as 
businesses, are dealt with fairly. And it is my hope that this 
committee will work swiftly to implement them.
    It may also be useful to view today's hearing in the 
context of wider financial reform. The patters of collusion 
that we will hear about today seem not unlike the conflicts of 
interest that have emerged, for example, between credit rating 
agencies and the issuers of instruments that they rate. The 
challenge of this Congress will be devise fair and workable 
reforms to our financial system that ensure that neutral 
parties are in fact neutral, and to ensure that consumers, as 
well as businesses, are protected.
    Thank you, Mr. Chairman, and I yield back.
    Mr. Kucinich. I thank the gentleman.
    If there are no additional opening statements, the 
subcommittee will receive testimony from the witnesses before 
us today.
    I want to start by introducing our panel. Ms. Lori Swanson, 
welcome, is the attorney general of the State of Minnesota. Ms. 
Swanson was elected attorney general of the State of Minnesota 
in 2006 and previously served as solicitor general and deputy 
attorney general from 1999 to 2006.
    Attorney General Swanson's legal actions, legislative 
efforts and consumer advocacy have helped to level the playing 
field on behalf of ordinary citizens. She drafted and helped 
secure the enactment of a predatory mortgage lending law in 
2007 that has been nationally heralded as a model for other 
States. She has sued cell phone companies, many of which use 
mandatory arbitration clauses for extending people's contracts 
without their permission, then charging hefty early 
cancellation penalties when they tried to cancel. She has also 
sued collection agencies for trying to trick citizens into 
paying debts they do not owe.
    On July 14, 2009, Attorney General Swanson filed a lawsuit 
against the National Arbitration Forum, alleging that it 
misrepresented its independence and hid from consumers and the 
public its extensive ties to the collection industry. On July 
17th, she entered into a landmark settlement with the National 
Arbitration Forum. She has publicly expressed concern about the 
growing use of mandatory arbitration clauses in credit card, 
cell phone and mortgage contracts.
    Mr. Michael Kelly, welcome. Mr. Kelly was until recently 
the chief operating officer of the National Arbitration Forum, 
where he oversaw all operational and legal matters. He is now 
chief executive officer of Forthright, an entity spun off from 
the NAF in late 2007 which handles all administrative matters 
for the National Arbitration Forum.
    Previously, he held executive positions with the Minnesota 
Vikings and Gander Mountain, and was a partner at the 
Minneapolis law firm Faegre and Benson. Mr. Kelly served for 8 
years on the Edina, Minnesota City Council and was the Mayor 
Pro Tem and Vice Chair of the Housing and Redevelopment 
Authority. He has served on the board of the Minneapolis 
Downtown Council and the board of the Minnesota Opera.
    Mr. Richard W. Naimark, welcome, Mr. Naimark. He is the 
senior vice president for the International Centre for Dispute 
Resolution, a division of the American Arbitration Association, 
where he has overall responsibility for international issues 
and government relations. He is the founder and former 
executive director of the Global Center for Dispute Resolution 
Research. Mr. Naimark is an experienced mediator and 
facilitator, having served as a neutral in a wide variety of 
business and organizational settings. His experience includes 
work with the United Nations, government, universities, 
corporate, construction, insurance and nonprofit areas.
    Mr. F. Paul Bland, Mr. Bland, welcome. Mr. Bland has been a 
staff attorney at Public Justice since 1997 and is responsible 
for developing, handling and helping Public Justice's 
cooperating attorneys litigate a diverse docket of public 
interest cases. He has argued and won more than 20 cases that 
have led to reported decisions for consumers, employees or 
whistleblowers in four of the U.S. Courts of Appeals and the 
high courts of six different States. He is currently handling 
or assisting with appeals before the U.S. Court of Appeals for 
the 11th Circuit; the California, Florida, Kentucky and Nevada 
Supreme Courts; and the Maryland Court of Appeals.
    Finally, Professor Christopher R. Drahozal. Welcome, 
Professor. Professor Drahozal is the John M. Rounds professor 
of law, University of Kansas School of Law. He is Chair of the 
Arbitration Task Force at the Searle Civil Justice Institute at 
Northwestern University School of Law. The professor has 
written extensively on the law and economics of arbitration. He 
has authored a casebook on commercial arbitration and co-edited 
a book on empirical research on international commercial 
arbitration. Prior to teaching, Professor Drahozal was in 
private law practice in Washington, DC, and served as a law 
clerk for the Iran-U.S. Claims Tribunal and the U.S. Supreme 
Court and the U.S. Court of Appeals for the Fifth Circuit.
    I want to thank each and every one of our witnesses for 
appearing before our subcommittee today.
    It is the policy of the Committee on Oversight and 
Government Reform to swear in all witnesses before they 
testify. I would ask at this time if you would rise and raise 
your right hands.
    [Witnesses sworn.]
    Mr. Kucinich. Thank you very much. Let the record reflect 
that each of the witnesses answered in the affirmative.
    I ask that each of the witnesses now give a brief summary 
of their testimony and to keep this summary under 5 minutes in 
duration. Bear in mind that your complete written statement 
will be included in the hearing record, so don't feel that you 
have to do a 10-minute speech in 5 minutes. I tried that once 
as a witness many years ago. It was not fun, but we will get 
all of your statement in the record.
    Let's start the discussion right now. Attorney General 
Swanson, you are recognized for 5 minutes. Thank you.

    STATEMENTS OF LORI SWANSON, ATTORNEY GENERAL, STATE OF 
  MINNESOTA; MICHAEL KELLY, CHIEF OPERATING OFFICER, NATIONAL 
  ARBITRATION FORUM; RICHARD NAIMARK, SENIOR VICE PRESIDENT, 
     INTERNATIONAL CENTRE FOR DISPUTE RESOLUTION, AMERICAN 
ARBITRATION ASSOCIATION; F. PAUL BLAND, STAFF ATTORNEY, PUBLIC 
JUSTICE; AND CHRISTOPHER R. DRAHOZAL, JOHN M. ROUNDS PROFESSOR 
           OF LAW, UNIVERSITY OF KANSAS SCHOOL OF LAW

                   STATEMENT OF LORI SWANSON

    Ms. Swanson. Chairman Kucinich, Ranking Member Jordan, 
members of the committee, thank you for the opportunity to 
appear here before you on this very important topic of 
mandatory arbitrations.
    You know, the right to have disputes resolved impartially 
is something that we as Americans value very much. Yet, 
millions of Americans are giving away that right without even 
knowing it. Credit card companies, cell phone companies, 
lenders routinely bury in the fine print of contracts that may 
run upwards of 25 or 30 pages long these mandatory pre-dispute 
arbitration clauses, and consumers don't know it. And 
oftentimes, the clauses come to the consumer not even in the 
initial agreement, but after the fact, maybe in an envelope 
stuffer. And even if the consumer doesn't see it, largely they 
are deemed to be bound to it.
    We filed a lawsuit against the National Arbitration Forum 
in Minnesota. We attached a copy of the complaint to the 
testimony submitted, so I won't go through all of it. But the 
bottom line is that the National Arbitration Forum represented 
to the public, to consumers, to the courts, to the Government 
that it was independent and neutral and operated impartially 
and like a court system, when in fact it had ties to the very 
industry that brought claims before it.
    And those ties really came two ways. The first way the ties 
came was what I would call backroom hustling, going to the 
credit card companies and the banks and so on and so forth, and 
asking the lenders to put into the fine print of these 
contracts mandatory arbitration clauses and paying executives 
commissions when they put clauses into those contracts, and 
then having other executives who were paid commissions to 
convince those very corporations to file claims against the 
consumer in the interest of the creditors against the interest 
of the consumer.
    In addition, far from the impartiality represented to the 
consumers, marketing materials given to the credit card 
companies said things like, the customer doesn't know what to 
expect from arbitration and they are more willing to pay. Or in 
arbitration, they basically ask you what it is and then hand 
you the money.
    In addition to that, we found evidence that the company in 
some cases drafted claims, the equivalent of a summons and 
complaint in a court of law, on behalf of the creditor to be 
filed against the consumer; that in some cases creditors were 
advised what their legal rights were when consumers weren't. In 
fact, we heard from employees who said that when consumers did 
call, people were instructed to really try to get them off the 
phone as quickly as possible, and even in some cases not to 
pass on a consumer's answer or information to the arbitrator.
    We also heard from arbitrators who felt that they were de-
selected, so that they had been appointed by the company to 
handle claims, but when they didn't rule for the creditor or 
give the creditor everything it wanted, or if they terminated, 
or in some cases ruled for the consumer, that they were de-
selected or taken off the panel.
    And then in addition to that, we found that the National 
Arbitration Forum is really part of one big debt collection 
conglomerate, that you have a New York hedge fund called 
Accretive that essentially owned a $42 million stake in the 
National Arbitration Forum outfit, and at the same time that it 
owned a debt collection law firm called Axiant which, in turn, 
owned and acquired the debt collection operations of a law firm 
called Mann Bracken, which is just about the biggest debt 
collection law firm in the country, so basically having this 
hedge fund controlling the two sides of the equation, or 
involved in the two sides of the equation, the debt collection 
side and then as well the arbitration side.
    Something that we did learn in connection with the 
investigation that I find troubling and gets a bit far afield 
is that the Small Business Administration in 2004 gave 
Accretive $100 million, and in 2008, the Accretive Small 
Business Investment Corp. ended up purchasing about 7\1/2\ 
percent of Axiant. And then in 2009, it asked the Small 
Business Administration for permission to purchase even more of 
Axiant, so essentially it appears, using Small Business 
Administration money to fund a debt collection enterprise that 
then treats consumers in an unfair fashion.
    It is troubling to me if the Small Business Administration 
believes that its mission is to finance the acquisition of debt 
collectors who acquire bank debt from bailed-out national 
banks, and then use the fund to go after citizens through the 
types of questionable debt collection techniques we outlined in 
the complaint. We asked the Small Business Administration for 
records. They produced, after consulting with the hedge fund, 
18 pages, largely blacked out. I couldn't get to the bottom of 
it. Maybe this Committee on Oversight can, and I would 
encourage you to followup on: Is SBA money going into this type 
of enterprise? They basically blacked out almost every 
meaningful word.
    Mr. Kucinich. Duly noted.
    The gentlelady's time is expired.
    Ms. Swanson. OK. Thank you.
    Mr. Kucinich. Would you like to just wrap it up?
    Ms. Swanson. Just to wrap up, we interviewed over 100 
consumers. The case and our concerns go beyond the National 
Arbitration Forum. There are real concerns with mandatory pre-
dispute arbitration clauses and consumers forfeiting their 
rights without knowing it, and the repeat bias that comes in 
when corporations essentially select their judge.
    Thank you.
    [The prepared statement of Ms. Swanson follows:]
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    Mr. Kucinich. Thank you very much.
    The Chair recognizes Mr. Kelly. You may proceed for 5 
minutes. Thank you for being here.

                   STATEMENT OF MICHAEL KELLY

    Mr. Kelly. Thank you, Chairman Kucinich, Ranking Member 
Jordan, members of the committee. I appreciate the opportunity 
to be here today.
    I want to reiterate we have withdrawn the National 
Arbitration Forum from handling consumer arbitrations pursuant 
to an agreement with the attorney general. That being said, it 
is our continued belief that the Forum's exit from this 
business and the loss of consumer arbitration broadly would 
represent a significant loss to the consumers that you are 
seeking to protect.
    The logical conclusion of this decision is that the 
consumer cases will all now be brought in court. Initially, I 
would like to explore the consequences of that prospect. For 
those who haven't been to Small Claims and Conciliation Court, 
which I have, it is not often a pleasant experience. In that 
case, the notice, the response, procedures can be very 
complicated. There is often no representation. Days off of work 
are required. You sit in a cattle call with hundreds of other 
people waiting for your opportunity to be heard. And your 
public finances and issues are revealed for all to see who are 
there in court.
    It is not particularly a pleasant experience. It is one 
that was outlined and discussed significantly in a Boston Globe 
article in 2006, which I think is pertinent here. In that 
article, the Boston Globe found in Massachusetts that the 
courts were stacked against the average consumer.
    If I can read from the article, it says that ``Many small 
claims courts have effectively become accomplices of collection 
firms, routinely giving them the upper hand in court cases, 
while casually disregarding the rights and dignity of ordinary 
citizens. Collectors almost always win the lawsuits they file, 
without being asked for evidence that the debts they are 
chasing are actually owed. Debtors frequently receive no notice 
of the lawsuits against them. The disabled, elderly and working 
poor are often talked into repaying debts from government 
checks, which are by law protected from judgment.''
    ``The creditors are all repeat players. They know exactly 
how the game works, said Elizabeth Warren, a Harvard Law School 
professor who studies consumer debt. We are watching a fight 
between two players, one a skilled repeat gladiator and one 
who's thrown into the ring for the first time and gets clubbed 
over the head before they even get a sense of what the rules 
are.''
    That is the court we are talking about. These cases don't 
go in front of juries. They go in front of small claim and 
conciliation courts.
    Now, what is the difference with arbitration? I can only 
speak to the difference of arbitration before the Forum, as it 
was conducted. And these are some of the fundamental 
differences. Under the Forum rules, responses can be in simple, 
plain English in whatever form the consumer chooses. Hearings 
are flexible, on their own time of the consumers. They can be 
handled on paper, by telephone, or by participatory hearing in 
the Federal jurisdiction in which they live. They are 
affordable. There is no cost to respond, and to file, the cost 
if only $19 to $40 on average.
    They are fair. The cases are decided on the merits by 
retired judges and lawyers with approximately 15 years of 
experience. And on the merits, there is a critical distinction 
between the courts that we need to make. Cases in front of the 
Forum as they were conducted required the judge, regardless of 
whether the consumer is present, to look at the merits and 
decide the case on a matter of law. That is not the same as a 
default judgment in court. Decisions in arbitration are also 
confirmed by the court before they are binding, which again is 
a court of last instance.
    The purpose of the comparison is to point out that there 
are very real and meaningful consequences to the elimination of 
consumer arbitration. We are no longer part of that fight. But 
I think it is important to note these consequences and the 
impact of reversing or changing over 80 years of law under the 
Federal Arbitration Act would have.
    I would urge that the discussion should center around two 
very basic questions: First, why? And second, what are the true 
due process issues?
    I say why, because from the results we have seen, from the 
studies we have seen, if the same subject matter is shown, and 
there are obviously people who can speak to this better than I, 
the results in court are the same as the results in 
arbitration. Due process is truly the heart of the matter. It 
needs to be studied. Due process protections should be made. 
The ground needs to be leveled for everyone who will practice 
in this field, but if that is evaluated by this committee and 
this Congress, we are confident that consumer arbitration will 
not be eliminated and should not be eliminated.
    Choice should be provided to select arbitration or court, 
and due process measures should be allowed and made uniform so 
that everyone has equal access to affordable justice.
    Thank you, Mr. Chair.
    [The prepared statement of Mr. Kelly follows:]
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    Mr. Kucinich. I thank the gentleman for his testimony.
    The Chair recognizes Mr. Naimark. You may proceed.

                  STATEMENT OF RICHARD NAIMARK

    Mr. Naimark. Thank you, Chairman Kucinich, Ranking Member 
Jordan, other Members of Congress and the committee.
    First, I must stress, and I am sure you will understand, 
the American Arbitration Association is a not-for-profit 
service organization founded in 1926. We have been around for 
over 83 years. The AAA does not represent or speak for any 
other organization, but rather we speak only from our own 
experience over these 83 years.
    From the beginning, the AAA has drafted rules and 
procedures for fair and balanced dispute resolution. Our many 
sets of rules and procedures have been scrutinized by the 
courts at all levels. As early as 1951, we established with the 
American Bar Association a series of codes of ethics for 
arbitrators which are still the standard in use today. We have 
pioneered many and perhaps most of the ethical and fair play 
standards recognized in the field today.
    What we are talking about today is a very specific and 
difficult kind of case: consumer debt collection cases where 
creditors are attempting to extract small dollar debt from 
frequently unrepresented consumers who are often in desperate 
financial straits. In our discussions with the subcommittee, 
and most recently publicly, we indicated that we do not 
currently handle nor would we receive these cases at least 
until some standards are established that are satisfactory.
    But I would like to suggest a way forward. About 10 years 
ago, we established consumer due process protocols to ensure 
balance in what was then a very young, growing field of 
arbitration, consumer arbitrations in particular. These 
protocols, these rules of fair play, were established, as with 
the earlier code of ethics for arbitrators, with individuals 
from a broad cross-section of society. We had consumer 
advocates. We had business advocates. We had regulators. We had 
academics, a wide variety of people giving in put to what was 
essentially consensus for some standards for fair play.
    The consumer due process protocols are today the standard 
of fair play in the consumer dispute arena, as evidenced by our 
small consumer caseload outside this debt collection area. We 
do about 1,100 of those a year. Almost three-quarters of those 
cases are filed by consumers who are looking for redress, and 
they win about half of those and they settle many more of them 
ahead of time before any decision.
    The due process protocols do common sense things. They do 
things like make sure the fees to the consumer are reasonable 
and that the process is accessible. They declare a right to 
both parties to have an impartial arbitrator. Very 
significantly, they provide that all remedies that would be 
available in court must be available in the arbitration 
process. And interestingly, there is a feature of the due 
process protocols where the parties may elect to opt out of the 
arbitration process and go into small claims court. Strikingly, 
almost no one elects to do so.
    Why not? I think the reason is that consumers in these debt 
collection cases and the overwhelming majority of them don't 
participate in the process. They are no-shows. It is inevitable 
that if you don't participate in your legal proceeding, there 
is a high likelihood you will lose. So this presents an 
interesting and very important challenge that has not yet been 
resolved by the courts or in arbitration.
    How do you construct a special set of due process protocols 
for these cases so that the rights of the consumer are 
protected even if they fail to participate? And I think that is 
the challenge before us.
    We make some very specific recommendations in our written 
testimony, specific to these kinds of cases about notice 
issues, about arbitrator neutrality, about standards of proof 
for these cases, whether the parties attend or not. We proposed 
to convene a broad-based diverse working group to work toward 
balancing the process in this very specialized area, and 
building protection for the legal rights of parties.
    This kind of broad community inputting process works, as 
evidenced by the existing due process protocols, and we would 
respectfully suggest that Congress should consider making such 
safeguards universal and mandatory by legislation so that all 
consumer debt collection arbitrations are properly conducted.
    Arbitration is a tool. It is simply a tool. It can be 
adapted to special circumstances to provide for access to 
fairness and justice for all parties in a dispute. We need to 
work toward that end. And I have to say, it is very doable. We 
have conducted, for instance, no-fault insurance arbitrations 
for the Supreme Court and the people of Minnesota for three 
decades now. It is essentially a consumer arbitration process 
and it works very well. And I think they present a model for 
properly conducted consumer arbitrations here.
    Thank you.
    [The prepared statement of Mr. Naimark follows:]
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    Mr. Kucinich. I thank the gentleman.
    The Chair recognizes Mr. Bland for 5 minutes. You may 
proceed.

                   STATEMENT OF F. PAUL BLAND

    Mr. Bland. Mr. Chairman, thank you so much for the 
leadership you have shown in this area, both in this hearing 
and for several years.
    Going into last week, I think that the entire consumer and 
civil rights bar of America was just absolutely shocked. Our 
eyebrows were singed by the unbelievable revelations that came 
out of General Swanson's case. That filing was amazing to us, 
that it turned out that this National Arbitration Forum, which 
had been holding itself out as a neutral and deciding tens of 
thousands of cases in favor of debt collectors again and again, 
one after another, was actually largely owned or owned by 40 
percent by the debt collectors themselves.
    But as Michael Kinsley, the pundit, always says, the real 
scandal is what is already legal. And the scandal here is that 
for 10 years before General Swanson released these facts, you 
have had this company operating essentially a rogue system that 
has been completely tilted in favor of the creditor.
    First of all, they have this incredible false humility 
whenever someone challenges them in court, in which they say, 
well, we are just the court clerks. We don't really make any 
decisions.
    That is not true. They picked who the arbitrators are. Who 
the decisionmaker is means everything. If I could pick who the 
judges were in my cases, I would be the legal Michael Jordan 
sitting here. I would never lose a case. Who the judges are 
makes a huge difference.
    So who do they pick? They do, they say, well we have 1,500 
judges. Now, one of the things they got caught lying in a 
Federal court in West Virginia where they named a bunch of 
people who were supposedly NAF arbitrators, who were very 
prominent West Virginia lawyers who weren't, but they do have 
actually a big roster of a lot of important names. What they 
do, though, is that they sent cases out to the arbitrators; 
they figured out who was going to be ruling for the creditor 
nearly all the time; and they funnel more and more of the case 
to this small number of people.
    So out of the 1,500 arbitrators, who decided the 34,000 
cases that they publicly reported on in California? Over 90 
percent of those cases were handled by two dozen arbitrators. 
You had one guy who was deciding something like 1,300 cases. 
You had people who were deciding 68 cases in a day, 40 cases in 
days again and again. I mean, that is not judging. That is 
rubber-stamping.
    They were essentially blackballing anybody who ruled for 
the consumers, and they were funneling all the cases to people 
who they knew how they were going to rule. OK? That is not the 
same as small claims court, the unbelievable insults in all the 
small claims court judges of America. You go in and you get who 
you get by a random selection. Nobody at the corporation sat 
down and picked which small claims court you got. That is a big 
difference.
    A second big difference is that there is no verification or 
substantiation or evidence required in the National Arbitration 
Forum before they give the creditor everything that they want. 
That is an invitation to abuse and the invitation to abuse has 
been accepted, particularly by debt buyers. A lot of credit 
card companies sell the debts, frequently for only a few cents 
on the dollar, sometimes as little as 0.01 cent on the dollar, 
to debt buyers. And these debt buyers keep getting further and 
further away. They usually have no evidence by then. They don't 
have a copy of a contract. They don't have statements. They 
don't have anything that actually links. They have a name and 
they have an account number and the dollar figure at the end, 
and that is it, no verification.
    And what they do is that they frequently then add all kinds 
of things on. Now, there is the idea here that, well, these 
people actually owe the debt, right? So since they owe the 
debt, they deserve to lose. Well, what we have seen again and 
again, literally in hundreds, if not thousands of cases that we 
have been able to document, again and again somebody will owe 
$1,500 or $1,000 or $2,000, and then a bunch of junk fees are 
added, interest on interest, which is illegal; attorneys fees 
which are not verified. Basically, the attorneys for the debt 
collector who are rubber-stamping something, and then they are 
getting $2,000 in attorney's fees, $1,000 in fees to the 
National Arbitration Forum. And what becomes a $1,500 debt 
suddenly becomes a $10,000, even a $15,000 or $20,000 debt.
    And what happens is that they are rubberstamp arbitrators 
take those and again and again and again, they just give them 
100 cents on what they want.
    Now, with small claims court, that is in America, by and 
large, it is not. In most courts in America, and there are 
problems in small claims courts in some places. The Boston 
Globe story was a great story. By the way, the Boston Globe 
reporter would be taking my position if he was here, and the 
idea that Elizabeth Warren would be a fan of the National 
Arbitration Forum as opposed to small claims court is someone 
who has never met or spoken to Elizabeth Warren.
    But what they do is they basically had a deal set up where 
these debt collectors would send in an email, because they have 
this interconnection. They don't even have to actually file 
anything. There is no affidavit with it. The only statement is 
the email says that our client actually gave it to us. They 
aren't even saying that it is actually true. They are just 
saying this is truly what our client gave us. And they send in 
an email with numbers in it. Then the NAF would take the email 
and they would turn it into the complaint.
    So the consumer, the thing the consumer gets isn't even 
what there was actually filed. All that was filed were some 
numbers that were taken from a printout, and then the complaint 
is sent with an order for 100 cents on the dollar, and that 
order is signed off again and again by the arbitrator.
    It is a joke. It is not the way small claims court goes. In 
small claims court, you get a default. That means you win. As 
you say, you win, but you don't get 100 cents on what you want. 
So you can't add on all these junk fees. You can't multiply 
debts in a crazy way.
    What is going to happen to all these phony awards? So they 
have stopped operating as of Friday, but meanwhile there are 
hundreds of thousands of people out there, hundreds of 
thousands of people with phony awards that have been entered in 
against them. Are those all just going to stand? Is that OK?
    And then in the race to the bottom, who is going to replace 
them? Is the Chamber going to be OK with just sitting around 
and actually having, you know, more neutral arbitrators? Or is 
the son of NAF going to appear? Is Mr. Anderson going to run 
out and open up America's happiest consumer-friendly 
arbitration company in a week, and that will replace them? 
There is no reason why the banks can't do that.
    [The prepared statement of Mr. Bland follows:]
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    Mr. Kucinich. I thank the gentleman for his testimony. Your 
time has expired.
    The Chair recognizes Professor Drahozal. You may proceed, 
sir, for 5 minutes.

              STATEMENT OF CHRISTOPHER R. DRAHOZAL

    Mr. Drahozal. Thank you, Mr. Chairman and Ranking Member 
Jordan, members of the subcommittee.
    I am very pleased to have the opportunity here to talk to 
you today about at least what colloquially is known as debt 
collection arbitration. This world has changed dramatically in 
the last week, as we are all familiar with. It has been sort of 
fascinating to be an observer of it.
    My experience in this area is as a scholar. It is not as a 
participant. And what we have been doing as part of the Searle 
Civil Justice Institute is looking at consumer arbitrations. 
The first phase of our study has been to look at AAA consumer 
arbitrations, not mass claims being filed by creditors, but 
individuals claims, most of which, as Mr. Naimark said, were 
filed by the consumers, but a number of which were also filed 
by the creditors.
    The followup phase of that study I think is where I can be 
at least somewhat helpful here to the committee, because it 
seems to me the one question that we need to think about at 
this point in the process, given what has happened with 
consumer arbitration, is where do those claims go now? Or what 
happens in court if those claims end up being decided there 
instead?
    And so what we have been doing in the next phase of our 
study is looking at consumer or business or creditors bringing 
debt collection cases in courts. We looked at several samples 
of courts and have some preliminary findings to share with the 
committee. What that means is it's an ongoing process. We have 
more courts we want to look at and more cases we want to look 
at, but we at least do have some preliminary results. And sort 
of broadly speaking, those results are as follows.
    First of all, in the sample of cases we looked at, the 
creditors win the vast majority of these cases in court. Of all 
the judgments that we have examined in the courts in our 
sample, the creditors won 99.7 percent of the cases, basically 
all but one in each of the two court samples that we had looked 
at.
    Now, compared to that to our individual American 
Arbitration Association results, where we found that the 
business claimants won more like 83 percent of the cases, some 
relief in those cases. I certainly wouldn't suggest that means 
the AAA is better for the consumers. I think a big part of the 
explanation here is different types of claims, but it is 
important to have something to compare it to. You can't just 
look at numbers in one setting and conclude that means a 
process is biased or unbiased.
    Of these judgments being entered in court, virtually all of 
them were entered by default, 96 percent to 98 percent of these 
cases in court were resolved by default judgments in favor of 
the creditor. Basically, the consumers just didn't show up.
    To the extent we have issues or questions about how you 
give notice to consumers, what that suggests to me is service 
of process by a process server is not a magic answer; that even 
in the court setting, consumers don't show up. And not 
surprisingly when they don't show up, they lose.
    Now, if you compare that to the AAA cases we looked at, 
again the individual cases brought by business claimants, 
rather than the mass arbitrations which we haven't had a chance 
to look at, under 40 percent of those cases were resolved 
without the consumer showing up. So again, this is not a matter 
of anything inherent in the arbitration process that consumers 
don't show up; that in fact, they can show up and in some 
settings do show up if it is in their interest to do so.
    The third general conclusion that we have reached is in 
these cases where the creditors are winning, with respect to 
Mr. Bland, the creditors win 100 cents on the dollar; that 
essentially they win the entire amount of principal that they 
seek and the entire amount of interest they are seeking in 97 
percent to 99 percent of the cases. All right, there is just a 
handful of cases where the creditor recovers less than the 
amount that is being sought.
    Again, if you compare that to our AAA cases, there the 
creditors won 93 percent. And again, I am not suggesting this 
is necessarily that the consumer arbitration is a superior 
system. What is going on is these are types of claims where 
consumers don't show up to dispute them and when they are 
resolved by whichever venue, they are resolved almost entirely 
in the creditor's favor.
    One final point is in consumer cases in court, there were 
no trials. I mean, the vast majority of them were default 
judgments. There were a few summary judgment motions. None of 
these things went to jury trial. None of them went to a judge 
trial. This is not a matter of these consumers otherwise would 
be having all these claims adjudicated in court because these 
cases never make it that far. And again, it is not court versus 
arbitration. It is just the nature of the claim.
    So what does that suggest to me? Well, I just have two 
general conclusions. The first is it makes me question whether 
in fact consumers are not going to be better off if they are 
going to court rather than in arbitration because the results, 
I think, at least as far as the outcomes of the cases, look to 
me pretty much the same at best.
    And then second, if you think more broadly about the 
implications for arbitration and evaluating arbitration, what 
these numbers to me suggest is you cannot find bias in a forum 
simply because it tends to rule one way. You have to compare it 
to something, and you have to compare arbitration not to 
consumer claimants, but you have to compare business claimants 
in arbitration to business claimants in court. And the claims 
and results look an awful lot the same to me, suggesting to me 
that it is not the venue that matters. It is the type of claim 
that matters.
    Thank you.
    [The prepared statement of Mr. Drahozal follows:]
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    Mr. Kucinich. Thank you, Professor.
    We are now going to proceed with questioning from members 
of our subcommittee. And I will start with my 5 minutes, and 
then continue alternating between Democratic Members of the 
panel and Republican Members of the panel.
    I want to start with Mr. Kelly. I appreciate your being 
here. Now, in your testimony you claim that arbitration is fair 
to consumers. But when you are marketing your services to 
banks, you tell your service people, and I just want to put up 
a slide here, a slide of page 2 from a Forthright-created paper 
entitled, ``Non-Mandatory Paper Education.''
    You tell your sales people to tell the banks that one of 
the benefits of arbitration is that it gives him control of the 
process. And in your marketing presentation to collection 
companies--I would like the next slide please--this is the way 
you describe the effect of arbitration on the consumer: ``The 
consumer does not know what to expect from arbitration and is 
more willing to pay;'' ``They ask you to explain what 
arbitration is, and basically hand you the money;'' ``You have 
all the leverage and the customer really has little choice but 
to take care of his accounts.''
    Mr. Kelly, given the arbitrary and unfair results that our 
staff uncovered in its review of NAF claim files, and given the 
revelations by Attorney General Swanson in the complaint she 
filed against the NAF last week of the close financial 
relationship between the NAF and the debt collection industry, 
isn't it obvious that consumers have not been getting fair 
hearings in the NAF arbitrations?
    Mr. Kelly. Chairman Kucinich, there were several questions 
in there. I will try to break them down. If I miss one, 
please----
    Mr. Kucinich. Start with fair hearings. Are consumers 
getting fair hearings when the marketing is slanted in that 
way?
    Mr. Kelly. I will say that, I will note that the rest of 
that presentation does talk about due process protections and 
also discusses the fact that no outcomes are guaranteed and 
that the process is neutral and it does depend on the 
independence of the specific neutrals.
    With respect to marketing, we don't shy away from 
explaining that we do market our services, and we market our 
services where the largest number of cases are. Frankly, in our 
civil justice system today, the majority of the cases are debt 
collection cases, and we market those services. We did, excuse 
me. I need to keep making that clear. We obviously don't any 
longer and won't.
    But I will say that, you know, at the National Arbitration 
Forum, they were unabashed believers that arbitration was a 
superior alternative to court. It is cheaper. It is efficient. 
It is faster.
    Now, in the case of collection of debt, it works the same. 
It would be cheaper. It would be effective and it would be 
faster.
    Mr. Kucinich. Well, you know, but I had some specific 
questions here. Now, isn't it true that your marketing 
statements describe the real character of consumer debt 
collection arbitration? It is intimidating to a consumer. It 
gives much more control and leverage to the creditor and it 
leaves the consumer with little choice but to pay. I mean, that 
is what you have said. Isn't that the true character of 
consumer debt collection arbitration?
    Mr. Kelly. Well, obviously I can't deny the presence of 
this document. I believe it was back in 2003. I joined in 2006. 
I don't believe it is the most artfully drafted presentation by 
any means. But I will say it is the same. I mean, the process 
is difficult to work through, whether it is court or whether it 
is arbitration. We go back to the point that is it any 
different between court or arbitration? Is there any 
fundamental difference?
    I believe that if there fundamental differences, they are 
in favor of arbitration.
    Mr. Kucinich. Well, you claim that the NAF has rules to 
protect the consumer, but our investigation finds that NAF 
doesn't follow those rules. The NAF has a Rule Six that says 
that the notice of arbitration must be served promptly. The 
word promptly is not defined in your code of procedure. But 
until August 1, 2008, NAF Rule 41(b)(3) said that any claim 
could be dismissed if more than 90 days passed between the 
filing of the claim and the proof of service of the notice of 
arbitration.
    Now, the subcommittee staff looked at the forms that the 
NAF sends to the arbitrator with each batch of claims. They are 
called desk hearing lists. And each one contains a list of 
claims that the NAF was assigning in that batch, and it recites 
for each claim the date on which the claim was filed and the 
date on which the notice of arbitration was served. These desk 
hearing lists that we reviewed showed that 160 of 230, 
approximately 70 percent of the total, should have been 
dismissed by the NAF before they were even sent to the 
arbitrators because the notice was served more than 90 days, in 
some cases a lot more than 90 days after filing, but not one of 
those cases was dismissed.
    You know, here is part of the desk hearing list sent to the 
Arbitrator Snyder. Let me put up this exhibit and then I will 
move on to the next questioner. It shows that NAF sent 
Arbitrator Snyder claims that were served more than a year 
after they were filed, clear violations of Rule Six. I mean, 
this, you know, doesn't it show that you don't really follow 
your own rules when those rules favor the consumer?
    Mr. Kelly. I believe the discussion centers around Rule 
41(b). What Rule 41(b) states is a claim or response may be 
dismissed by an arbitrator or the Forum at the request of a 
party, in accord with Rule 18 or on the initiative of the 
arbitrator, may--may is the key word in this case--the 
arbitrator has the discretion to make that determination if it 
is in the interest of justice. That is not for the Forum to 
make. It is for the arbitrator to make and it is made as purely 
discretionary.
    Now, I will have to check this, but my recollection is that 
this is a fairly new rule as well. So I would have to look at 
whether this rule was in place.
    Mr. Kucinich. We are going to move on to Mr. Jordan, and 
you know, you can have 6\1/2\ minutes to match my time. I just 
want to say it may be 90 days. It may be a year. It may.
    Mr. Jordan. Mr. Kelly, what percentage of your business was 
debt collection arbitration? Was it a majority?
    Mr. Kelly. I don't have a specific number, but yes, clearly 
the majority.
    Mr. Jordan. And what percentage of overall debt collection 
arbitration cases around the country did your company handle? 
The majority?
    Mr. Kelly. I couldn't answer that question because I just 
don't know. Those statistics aren't publicly available, so I 
don't know what the universe is out there of arbitration. We 
are a major player, if that is your point; were.
    Mr. Jordan. Were you the largest player? Were you the 
largest player in this?
    Mr. Kelly. I believe, I would believe we would be.
    Mr. Jordan. And as of last week, you are no longer in the 
business?
    Mr. Kelly. That is correct.
    Mr. Jordan. We have heard testimony here about the court 
system, the difficulties there. I mean, maybe this should go to 
Mr. Naimark, or maybe to our attorney general on this, but now 
that you are out of the business, and you were the biggest 
player, are we going to be OK? I mean, Mr. Naimark, do you want 
to comment? Can we handle what is going to happen now?
    Mr. Naimark. Well, we have announced that we will not 
receive these cases, at least at the present time, until there 
is some establishment of some establishment of additional 
standards of fair play like the due process protocols that we 
described.
    Mr. Jordan. So the whole motivation of this hearing is look 
out for consumers out there. So what is going to happen in this 
flux we are in or this interim period? Would the attorney 
general like to comment?
    Ms. Swanson. Sure, Mr. Chairman, Ranking Member Jordan. I 
think that is why it is important for Congress to act. You 
know, the National Arbitration Forum was, as I understand it, 
the dominant player in the consumer collection industry. There 
could be other companies, other arbitration companies right now 
that would take over these claims and could arbitrate them, or 
a whole new company could pop up tomorrow. And that is why I 
think this hearing is so important, and commend all of you for 
your leadership in holding it, and why I think it is important 
that Congress act to rein in these practices.
    National Arbitration Forum was one company, but the 
underlying problems with mandatory pre-dispute arbitrations run 
across the industry and are systemic.
    Mr. Jordan. Attorney General, would you agree with what the 
professor had to say? I believe his comment was it is not the 
venue, it is the type of claim that is the determining factor 
here. Do you think that is an accurate statement?
    Ms. Swanson. Ranking Member Jordan, no, I don't. I think 
the venue is problematic with arbitration because you are 
essentially allowing the corporations who are litigants to hand 
pick the judge. You are letting the corporations select which 
arbitration company you want to adjudicate the claim.
    And based on the interviews we have conducted of consumers, 
of arbitrators, of employees, there is tremendous pressure on 
the arbitration companies. It is a very, very lucrative and 
profitable business, and the corporations know that if the 
arbitration company isn't perceived to be friendly enough to 
corporate litigants, they can simply move their business to a 
new company for all the reasons I described. So I think the 
venue is problematic.
    Mr. Jordan. Thank you.
    Mr. Naimark, what is your response to what the professor 
said? I thought he laid out some good numbers in his statement 
about the venue versus the type of claim.
    Mr. Naimark. Well, I think we see from the research and 
people's experience that there are similar problems in both 
court and arbitration. The real issue is nonparticipation by 
the individual debtor. It think it is a real problem. I think 
some how or other we need to build in some safeguards. We need 
to try to get their attention. We need to do better at 
communicating with them. And I think our civil justice system 
at large could stand some improvements in terms of due process 
protections. We could all use it.
    Mr. Jordan. Professor, I have been quoting you and haven't 
given you a chance to talk, so maybe you can elaborate on some 
of the numbers. I think you talked about the percentages found 
in favor of the consumer were actually roughly the same, if I 
remember your numbers--I didn't look at them very closely--in 
small claims court versus in arbitration. So if you could maybe 
elaborate on that. I have about a minute left.
    Mr. Drahozal. Yes, the courts we looked at were two. 
Actually, neither of them was a small claims court. One was 
claims that the Federal Government brings in Federal court 
against people alleged to still owe amounts on their student 
loans. And in those cases, the ones that make it to judgment, 
the Government wins 99.7 percent of the time.
    We also looked at a sample of cases from Oklahoma, which 
has a fabulous online access to their court files for at least 
a number of the counties that we can actually use for research. 
I mean, our choice of what we studied, frankly, was totally due 
to access to the data. No other factors went into it, other 
than trying to find similar cases. And the courts that we 
looked at in Oklahoma were actually not the small claims court, 
but the sort of next up court which adjudicates claims of under 
$10,000.
    And one difference in Oklahoma is those claims actually, 
the majority of those claims were brought by debt buyers. So it 
allows us to look at the results in those cases. And again, of 
the cases that made it to judgment, 99.7 percent were resolved 
in favor of the business, the creditor in that case.
    Again, I can't sort of say arbitration is better or worse. 
I mean, the arbitration cases we looked at were AAA cases, not 
mass arbitrations, but ones adjudicated in the typical 
individual manner. And in those cases, the business won 
something in about 83 percent of the cases. And again, I don't 
tout that to say arbitration is better because consumers win 
more. What I would say is it seems to me that the reason for 
those differences is likely differences in the types of claims 
that are being brought.
    And I guess one followup point is, in going through the AAA 
files and doing this research, we would see correspondence with 
both sides, businesses and with consumers who are unhappy. Not 
surprisingly, when people lose, they are unhappy with the 
party. And we saw no suggestion whatsoever of kowtowing to 
business interests or to consumer interests. I mean, the 
response was the same. We administer these cases. The 
arbitrators make the decisions. And if you don't like it, you 
can go somewhere else if you want. But we are not going to skew 
the process in one party's favor or the other.
    Mr. Jordan. Thank you, Mr. Chairman.
    Mr. Kucinich. I thank the gentleman.
    Mr. Cummings is recognized.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    I want to thank all of you for being here. I just listened 
here and I have to tell you, this is a mess. And a lot of the 
people who are getting ripped off are my constituents. I live 
in the inner, inner, inner city of Baltimore, and I have 
listened to this testimony, and I want to thank you, Ms. 
Swanson, for what you are doing and others of you who are 
trying to get to the bottom of this.
    You know, as I was listening, I have been in those courts. 
I practiced law. I am a trial lawyer. And you know, it is one 
thing for somebody not to show up, and we can do some things 
probably in our district court systems, our lower court systems 
to let people know about the significance of getting certified 
mail and what it means, and they need to show up. It is another 
thing to go into a forum thinking that you are going to treated 
fair, and you are getting screwed. That is a whole other kind 
of situation and I think we need to think about that.
    You know, Mr. Kelly, I just want to ask you, you know, the 
subcommittee staff looked at 230 claims filed by NAF, would be 
NAF by Worldwide Asset Purchasing. And in 40 cases, the NAF 
arbitrator Jennings dismissed the claims because Worldwide did 
not provide the dates of the last payment or any other 
information on which Jennings could determine whether the 
claims were filed within the California statute of limitations. 
In 18 claims, the NAF arbitrator Krotinger dismissed the claims 
because Worldwide did not provide him with any specific 
information about how the notice of arbitration was served.
    However, in 172 identical claims, claims that didn't have 
any more statute of limitations evidence or any more evidence 
of service in the Jennings and Krotinger claims had, three 
other arbitrators apparently ignored those deficiencies and 
issued awards to Worldwide in exactly the amounts requested by 
Worldwide.
    Doesn't it show that the results in your debt collection 
arbitrations depend more on who the arbitrator is than what the 
facts or the law are? I want to direct that to Mr. Bland.
    Mr. Bland. I think that is exactly right. I think that who 
the arbitrator is is incredibly decisive, and that is why 
focusing all of the cases on a handful of cases matter.
    The idea that the data is the same between court and 
arbitration in front of the NAF is simply not true in several 
ways. First of all, Congresswoman Watson when she was here put 
the Business Week article in the record. Business Week 
discovered that debt buyers are willing to pay like twice as 
much money for old debts, particularly debts that are outside 
of the statute of limitations, if there was a National 
Arbitration Forum clause on it. The debt-buyer industry, they 
think it is worth a lot more money to have an old debt, a debt 
that is not good, in front of the NAF than they did in small 
claims court.
    The idea that they could compare these types of really old 
debts in a credit card context with student loans is totally 
off the wall, to be honest, because student loans have no 
statute of limitations. You can be pursued on the student loan 
that you took out 70 years ago. The Supreme Court and Congress, 
because Congress wants student loans to be collected, that is a 
totally different set of rules than debt collections.
    Also, I mean, the advertisements of the organization, they 
particularly wrote advertisements aimed at debt collectors that 
would say we will improve your bottom line, was one 
advertisement, or 66 percent better results was another 
advertisement we have seen.
    Mr. Cummings. Mr. Bland, thank you.
    Now, I want to hear from Mr. Kelly, if you don't mind.
    Mr. Kelly. And what was the specific question, Mr. 
Cummings?
    Mr. Cummings. You don't want me to repeat that long 
question.
    Mr. Kelly. Well, do you want me to talk about this? Or do 
you want me to address Mr. Bland's comments?
    Mr. Cummings. Yes, you can go ahead and address his 
statement, and the question.
    Mr. Kelly. First of all, once the cases are given to the 
arbitrators, the arbitrators are the finders of fact. Now, I am 
not a trial lawyer, but I was a corporate finance lawyer. I can 
tell you, I have gone with clients to court in certain venues 
in certain jurisdictions, and been crushed by judges on the 
same point of law that in other jurisdictions in front of other 
justices, we have prevailed on.
    Mr. Cummings. Can you arbitrate or shop? Can you arbitrate 
or shop?
    Mr. Kucinich. Will the gentleman yield?
    Mr. Cummings. Yes, of course.
    Mr. Kucinich. Is that why you go ahead and try to get the 
arbitrators who are going to give you a better decision?
    Mr. Cummings. Which is where I was going, Mr. Chairman.
    Mr. Kelly. Would you like me to talk about how the 
arbitrators are actually assigned?
    Mr. Cummings. Yes. And I asked you, is it possible to 
arbitrate or shop? In other words, it is like you shop for a 
judge?
    Mr. Kelly. There is a strike rule in the National 
Arbitration Forum rules similar to the strike rule in many 
courts. The State of Minnesota which is where the Forum was 
founded has a strike rule where each party, for any reason, can 
strike the arbitrator once. Now, the rules also provide that 
the parties can agree on an arbitrator as well. So that is the 
process that is employed.
    Mr. Kucinich. The gentleman's time has expired.
    Mr. Cummings. Thank you.
    Mr. Kucinich. The Chair recognizes Mr. Schock. You may 
proceed.
    Mr. Schock. Thank you, Mr. Chairman.
    Thank you all for your testimony here today.
    I guess I am interested specifically in where we go from 
here. Obviously, there seems to be some issues that were 
brought forward by Attorney General Swanson. I am sure some of 
these problems were not just specific to Minnesota. I live in 
Illinois. I am sure the other 48 States have similar problems.
    That being said, I am not sure that I am ready to throw 
away the arbitration process. I am not convinced that all 
consumers would be better off going to the court of law, having 
to hire an attorney, having to incur those costs for what would 
otherwise be a small claims court item.
    So I guess, if you could enlighten us through your work, 
Attorney General Swanson, on where you think the Congress ought 
to be looking to improve the arbitration process, unless in 
fact you believe we should do away with the process altogether.
    Ms. Swanson. Sure. Thank you, Congressman.
    You know, the biggest problem I see from all of the 
interviews and discussions we have had is, again, this ability 
of the corporation who writes the clause into the contract to 
hand pick the arbitration company who is going to adjudicate 
the claims. That is not how it works in court. In court, you 
know, you file a lawsuit and you get the judge, and that is the 
judge of the case, and that judge is not dependent upon that 
corporation for the salary. The salary comes from the 
taxpayers.
    I can speak to Minnesota. In Minnesota, we have a good 
small claims court. If you go into small claims court in 
Minnesota, the judges, even if the consumer doesn't show up in 
a default hearing they tend to scrutinize those cases. You 
know, does the consumer appear to owe them money? Did they 
actually incur the debt? Are the T's crossed and the I's 
dotted, such that before that judge issues a default judgment, 
that it looks like there is sufficient evidence to enter that 
judgment.
    I think the problem is that, for example, when you look at 
these consumer due process protocols that have been discussed, 
NAF largely followed them, too, or had them supposedly, but yet 
it didn't stop a whole lot of consumers in Illinois--we have 
talked to Illinois people--and Ohio and around the whole 
country from getting hurt.
    And so I think what Congress ought to do is say that in 
these kinds of situations where the consumer has no leverage; 
where the company is giving them contracts on a take it or 
leave it basis, the consumer has not seen the clause, that they 
ought not to be allowed in various credit card disputes, 
consumer disputes, cell phone contracts; that mandatory pre-
dispute arbitration clauses shouldn't be allowed.
    Mr. Schock. So what should happen if I am a consumer and I 
refuse to pay my $100 bill, which now becomes $150 or what have 
you. You can fast forward down the line. What should happen?
    Ms. Swanson. Well, a couple things could happen. One could 
be after the fact the consumer could agree to arbitration. If 
pre-dispute arbitration clauses weren't allowed and the 
collection agency is pursuing the consumer to pay that bill, 
and if they actually owe the bill, they could agree after the 
fact to arbitrate in a forum that is mutually in both party's 
best interest. The creditor could file a claim in small claims 
court, which at least in Minnesota, is straightforward, moves 
quickly. People do have a right of appeal to a district court 
there. Those are a couple of ways.
    And then certainly, the creditor has all of their other 
collection opportunities available, reporting to credit 
bureaus, etc.
    Mr. Schock. OK. Well, I find it interesting that even the 
Federal Government uses an arbitration process when we choose 
to collect our debts, specifically student loans, in which 
arbitrators rule on behalf of the Federal Government nearly 99 
percent of the time.
    So I guess, Mr. Naimark, if you could speak to the claims 
that the arbitration organizations are unduly biased toward 
business. Would you like to respond to that?
    Mr. Naimark. Sure. Let me approach it this way. I think the 
key issue here is the arbitrator who is the decisionmaker in 
the case. And you can do a number of things, which we do, to 
enhance the trust in the neutrality of the arbitrator.
    First of all, a thorough review of the people who are put 
on the panel or the list of potential arbitrators, so that you 
are sure that you have people of the right kinds of background 
and history. We follow a very strict disclosure process, where 
any contact or issue that might be disclosable has to be 
disclosed to the parties, giving them an opportunity to object. 
Thorough training for the arbitrators, and I would suggest in 
the debt collection area that training needs to be beefed up to 
deal with some of the specific issues we are talking about 
today in terms of due process protection and the kinds of 
interest decisions and others so that you are sure that the 
arbitrators are familiar with those things.
    We did one other thing for the short time we administered 
some of these cases. We had an internal operating process where 
we said if the consumer showed up and made an objection to an 
arbitrator, it was an automatic removal. And if the business 
objected, we would not remove them, and that way you don't get 
to stack the entire pool of arbitrators.
    Mr. Schock. Say that again. If the consumer objected to the 
arbitrator? In other words, the consumer----
    Mr. Kucinich. The gentleman's time has expired, but answer 
what he said.
    Mr. Naimark. Yes, if the consumer objected, we would remove 
the arbitrator. If the business objected, we would not.
    Mr. Schock. And I don't mean to extend, but how would they 
object? They would just say, I think this arbitrator is biased? 
They have to fill our a form? What is involved with that?
    Mr. Kucinich. The gentleman's time has expired. You may be 
new to this committee, but I try to allow everybody plenty of 
time here, and we are going to go to Mr. Foster. We will come 
back for another round.
    Mr. Schock. OK. Thank you.
    Mr. Kucinich. Thank you.
    Mr. Foster. I serve on the Financial Services Committee and 
we are in the process of marking up legislation on the Obama 
proposal. And I guess the relevant part for this discussion 
here is the proposal for a Consumer Financial Protection 
Agency.
    And I was wondering if any of you could comment on, first 
off, whether the proposed grant of authority under this 
proposal would be sufficient to deal with this problem, 
frankly? And second, whether the suggestion of a Federal 
preemption as opposed to a Federal floor, with the States 
allowed to raise the bar for a higher level of protection, 
would be more appropriate for this level situation? Anyone who 
wants to pick up? Yes, Attorney General?
    Ms. Swanson. Well, certainly representing the State of 
Minnesota, and I think my colleagues in other States would 
agree that we would be, certainly I would be strongly opposed 
to any type of Federal preemption of States' ability to do 
better to protect their citizens, their consumers.
    I think our country right now is facing an economic 
meltdown that had we had more cops on the beat perhaps we would 
have been better served. And so I think if the Federal 
Government can pass a floor to protect consumers, I think that 
is a good thing. I think it is healthy to have multiple 
regulators on it, because hopefully if one is not acting, the 
other will.
    But in terms of preempting States' ability to act, I think 
that would be misguided. As you know, we are seeing a trend 
away from that with a recent Supreme Court ruling of the U.S. 
Supreme Court allowing States to move more toward being able to 
enforce laws. I think that is a good thing.
    Mr. Foster. Are you familiar enough with it to see holes in 
the grant of authority? Or would that have been sufficient to 
at least have the CFPA in principle act on this thing on a 
Federal level?
    Ms. Swanson. Congressman, I am not familiar enough with the 
actual language.
    Mr. Foster. Mr. Bland.
    Mr. Bland. Congressman, I think that with respect to 
financial services, that the grant of authority that is in the 
statute, in the proposed statute, or proposed legislation would 
be enough to solve the problems of abusive mandatory 
arbitration. I think it would let the Federal Government come 
in and ban these clauses where they are being abused by payday 
lenders and sub-prime lenders and a variety of other ways. I 
think the language is broad enough.
    Where it doesn't address is issues such as civil rights. I 
mean, there are a lot of employment cases that are being sent 
to arbitration where you end up with an arbitrator who defends 
companies against civil rights claims being the judge, and 
there are a lot of other areas like that it doesn't address. 
But for financial services, the language I think is very broad 
and would deal with the problem very well.
    And with respect to the preemption issue, I think one of 
the things you would see if you read through some of the 
briefings in the most recent Cuomo v. Clearing House case, was 
that State regulators bring tons of cases against banks for 
deceptive practices, for racial discrimination in lending and 
so forth. And the Federal agencies, the OCC, the Office of 
Comptroller of Currency and the OTS, have done almost nothing.
    And what happened in the last 8 years is you had the last 
administration dramatically change and rewrite the regulations 
so as to basically give banks a sort of get out of jail free 
card and wipe away State laws that State regulators used to 
enforce really vigorously.
    So having the States have it be a floor rather than a 
ceiling would be a dramatic and really valuable change.
    Mr. Foster. Do any of the other of you have comments about 
what is good, bad and ugly about these proposals?
    OK. I yield back in that case.
    Mr. Kucinich. I thank the gentleman.
    The Chair recognizes the gentleman from Georgia, Mr. 
Johnson.
    Mr. Johnson. Thank you, Mr. Chairman, for holding this very 
timely hearing and allowing me to be a part of it. I do 
appreciate it and I will say that H.R. 1020, which is a bill to 
ban pre-dispute mandatory arbitration clauses in consumer 
agreements, in employment agreements, and in franchise or 
franchisee agreements would be the ultimate fix of this 
problem. And the problem is that we are trying to outsource or 
privatize these kinds of resolutions, if you will, by 
sidestepping the civil process, you know, the courthouse, in 
other words.
    And when you, you know, I have this vision in my mind of 
the courthouse on the square and there is like you can go 
around the courthouse in a circle, and then there are all these 
restaurants with great breakfasts and great lunches. And you 
can be there all day. I am thinking about a hot summer day with 
the fans just kind of twirling around lazily. It is a lazy 
afternoon and nothing else to do. I hung out on the porch since 
early morning, did a little fishing after that. Played some 
checkers thereafter. Got something to eat at lunch time.
    And now I heard about this great lawyer that is trying this 
case over here in the courthouse. I will go over there. And you 
would spend your afternoons watching the lawyers. And at that 
same courthouse, if you want to know whether or not your 
neighbor is beating his wife, how many times that has beat his 
wife, you can go to the courthouse and find that. If you need 
to look at the adoption papers, you just adopted a child, you 
could find that at the courthouse. Your real estate deeds, your 
liens, how many people have sued you, how many convictions do 
you have, all of that information is at the courthouse.
    And at the courthouse, you can't lie. You cannot lie 
because you will get charged with perjury or obstruction. And 
it is OK to lie to your neighbor across the fence telling them 
about that big fish that you caught or that hole in one that 
you hit. You know, you can lie about things like that, but you 
can't lie in the courthouse.
    Now, arbitration is different. There is no place for a 
trial, a public trial where people can come and enjoy the 
proceedings. There are no public records to be viewed. In fact, 
most folks don't even, the public doesn't even know when there 
is an arbitration proceeding taking place. And then when the 
arbitrator rules and he or she even goes against the National 
Arbitration Forum rules, which are advisory, in my opinion, 
only, not binding in any way, then you have no meaningful right 
to appeal the decision.
    And so the only thing that I can see that we need to do is 
what I have done with my Arbitration Fairness Act of 2008, and 
again in the 111th Congress, the H.R. 1020. And I am proud to 
announce that there are a number of members of this committee, 
including the chairman, who have signed on as cosponsors. I 
know Mr. Cummings is on that bill also. And that is the best 
way to solve this problem, is that the Sixth Amendment right to 
a civil trial in any endeavor or any dispute in excess of $20 
needs to be adhered to.
    Mr. Kucinich. The gentleman's time has expired.
    Mr. Johnson. I yield the balance of my time.
    Mr. Kucinich. Although I will say to the gentleman, and all 
the other Members are welcome to return in 1 hour. We are going 
to recess for 1 hour for six votes on the floor of the House. 
After that 1 hour, I would ask that all Members of the panel 
return, assuming that you are able to do that.
    And we will then go to one more round of questioning, and 
it will be brisk, and then we will conclude the business of 
this committee.
    I want to thank you for your presence here, and this 
committee stands in recess for 1 hours.
    [Recess.]
    Mr. Kucinich. The committee will come to order.
    Thank you for waiting. The vagaries of business on Capitol 
Hill is that we are always subject to the activities on the 
floor of the House. And so we just completed business for the 
day.
    I note that Attorney General Swanson is going to have to 
leave at 5 o'clock, so you will be permitted to leave at 5 p.m. 
in order to accommodate your flight back to Minnesota. And at 5 
o'clock, you may leave. You know, we are grateful for your 
presence here, and the committee will be in touch with you 
regarding this matter. We appreciate that you are here. Thank 
you, Madam Attorney General. Thank you.
    Mr. Kelly, you are required by California statute, 
California Code of Civil Procedure, section 1281.96 to publish 
the results of all your California consumer arbitrations. But 
the subcommittee's investigation reveals that you don't publish 
the results of all of your California arbitrations involving 
consumers. You only publish the results of some of them.
    For example, you administered 2,331 California arbitrations 
filed against consumers by Columbia Credit Services. But you 
haven't published the results of any of those arbitrations. The 
explanation your representative gave our staff is that while 
California requires reporting of consumer arbitrations, it does 
not define the term consumer arbitrations.
    Mr. Kelly, tell me, is there any way at all in which an 
arbitration filed by Columbia to collect on a consumer debt 
assigned by MBNA Bank is any less a consumer arbitration than 
an arbitration filed by Worldwide Asset Purchasing to collect 
on a consumer debt assigned by MBNA Bank?
    Mr. Kelly. Chairman Kucinich, the circumstance you are 
describing is accurate. There is no definition in the statute. 
So you take a very hazardous course if you make a determination 
one way or another.
    What we did in that circumstance is we relied on the filers 
to indicate what is a consumer case and what is not a consumer 
case. We didn't make an independent judgment, review the facts 
of the case, and frankly that, in and of itself, could argue 
against the neutrality of the process. So we left it alone. If 
the filer is designated as consumer, it was designated as a 
consumer.
    I will point out that even some of our most vocal opponents 
have indicated on the record that our filing in California is 
far superior and far more complete to many of the other 
providers of neutral services, and we can provide that specific 
reference if you so choose.
    Mr. Kucinich. Well, I have to say respectfully that what 
you are saying defies credibility because contrary to your 
representative's explanations to us, in fact, Mr. Kelly, 
California does define the term consumer arbitrations. This is 
a quote from section two, the definitions section of the 
California ethics standards for neutral arbitrators in 
contractual arbitration. I am going to put up the document. It 
is a pretty quick read, but what they do is they basically 
define consumer arbitration, and it is a pretty succinct 
definition.
    Now, isn't it really true that all of the Columbia claims 
are consumer arbitrations? That is under the California act.
    Mr. Kelly. Mr. Chairman, I have to admit I am not 
intimately familiar with the California law and the statutes 
there. Thankfully, the representative who you are referring to 
is here today, if you might give a moment.
    Mr. Kucinich. I am sorry. That what?
    Mr. Kelly. The representative of our organization that you 
are referring to is here today.
    Mr. Kucinich. Do you want to confer with somebody?
    Mr. Kelly. Yes, if I may.
    Mr. Kucinich. What we are going to do, I am going to ask 
staff to provide you with a definition of consumer arbitration. 
I would like you to look at it a moment. We will wait.
    Mr. Kelly. Yes, sir. Thank you.
    Mr. Kucinich. Just take your time.
    Mr. Kelly. Mr. Chairman, if I may.
    Mr. Kucinich. Yes, the gentleman may proceed. I started off 
by asking you a question, so we can frame this properly. What I 
said is that contrary to your representative's explanation to 
us, California does define the term consumer arbitration. We 
have just given you a copy of the definition. And I began to 
quote from section two, but since you have read it, I don't 
need to do that, and without objection, section two is going to 
be included in the record of this hearing.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] 64915.157
    
    Mr. Kucinich. Now, again, Mr. Kelly, isn't it true that all 
of the Columbia claims are consumer arbitrations under this 
California definition?
    Mr. Kelly. Under this definition, I couldn't tell you. This 
is the first time I have seen this definition. The definition, 
Mr. Chairman, is not the definition at issue.
    Mr. Kucinich. Bear with me on this. The contract is with a 
consumer party as defined in the standard. Isn't that right? 
Isn't it right?
    Mr. Kelly. I am not following you, Mr. Chairman. I am 
sorry.
    Mr. Kucinich. The contract that we are talking about here 
is with a consumer party. Right?
    Mr. Kelly. Which contract are you referring to?
    Mr. Kucinich. These are consumer arbitrations. The contract 
is with a consumer party. Right?
    Mr. Kelly. I haven't looked at these specific cases.
    Mr. Kucinich. Are you familiar with the Columbia case, the 
Columbia cases? You are familiar with the Columbia cases?
    Mr. Kelly. I am aware that Columbia cases are at issue in 
the San Francisco lawsuit.
    Mr. Kucinich. So we are going back to the definition of 
consumer arbitration in California, which is where we are 
focused here. The contract is with a consumer party in this, in 
the Columbia cases. The contract in which the debt is incurred 
is with a consumer party. Correct?
    Mr. Kelly. I would disagree if what you are talking about 
is the reporting statute. The definition that you have 
presented here is not a definition in the statute. I mean, it 
is inappropriate to take a random definition of consumer in 
some unrelated statute.
    Mr. Kucinich. This is right from the California ethics 
standards for neutral arbitrators in contractual arbitration.
    Mr. Kelly. But it is not----
    Mr. Kucinich. You know, you can argue with me. You can't 
argue with those words. This is right from that. We didn't make 
that up.
    Mr. Kelly. I am not saying that, and I completely agree 
with you on that.
    Mr. Kucinich. Are you currently being prosecuted for 
violations of this statute?
    Mr. Kelly. We are in suit in San Francisco. Yes.
    Mr. Kucinich. So I think it is clear that NAF is violating 
California law. But why?
    Mr. Kelly. Well, that is an issue in the lawsuit and we 
would strongly disagree with it. And I am not sure I am making 
my point clear, but this is not the reporting statute at issue 
in the San Francisco case.
    Mr. Kucinich. The subcommittee staff obtained the case 
files of 48 NAF arbitrations filed by Columbia. And those files 
show that Columbia routinely asked arbitrators to add attorneys 
fees of 33 percent, despite the fact that the controlling 
Delaware statute places an upper limit of 20 percent on 
attorneys fees. In most of these cases, Columbia received 
attorneys fees that violated Delaware law. Now, isn't it true 
that your failure to publish the results of your Columbia 
arbitrations in California assists Columbia in concealing its 
violations of Delaware law?
    Mr. Kelly. Chairman Kucinich, we can certainly provide you 
the information necessary to respond to that. I can't tell you 
here today what the facts are or what the arbitrators decided 
in those cases. Frankly, that is a matter of law and not an 
issue that I am prepared to qualify here one way or another.
    Mr. Kucinich. Well, we are going to take your explanation. 
We are going to move on. Columbia is not--but I think that 
since we have other members of the committee who have not been 
able to come back for this second round, the committee is going 
to submit this question in writing and give you the opportunity 
to answer succinctly and with some detail in writing. So I want 
to move to that and make sure we send a letter to Mr. Kelly.
    Mr. Kelly. We would appreciate that, Mr. Chairman. I 
apologize for the confusion.
    Mr. Kucinich. Well, we are not confused about this. You 
know, Columbia is not the only collection company whose 
California arbitration results you do not publish, in violation 
of California law. Your representative informed our staff that 
there are others. Do you know whether or not those other 
collection companies are also asking for and obtaining awards 
of attorney fees that violate Delaware laws?
    Mr. Kelly. As we sit here, Mr. Chairman, I don't have 
personal knowledge of that.
    Mr. Kucinich. We are going to send you a written request 
and we are going to ask you to provide the committee with a 
list of companies whose California cases you have not 
published. And we appreciate your cooperation with this 
subcommittee.
    Mr. Kelly. You will have the cooperation.
    Mr. Kucinich. Because I just, you know, we just had that 
discussion.
    Now, Mr. Kelly, let's look at, for a minute I want to look 
at one reason why consumers--I am waiting for anybody from your 
side who wants to come. I will be glad to yield to them. I am 
going to go to a third round now.
    Mr. Kelly, let's look for a minute at one reason why 
consumers may not have appeared at one of your consumer 
arbitrations. In all of the claim files that the NAF produced 
to our subcommittee staff, the only evidence that the consumer 
knew about the arbitration was a form statement by the 
creditor's attorney that the respondent was, ``served with the 
initial documents required by Rule Six,'' and that ``conforms 
to the requirements of Rule Six and applicable law.'' There is 
no evidence of who actually performed the service, who was 
served, or the documents were served.
    Now, in each and every one of these cases, the NAF has 
absolutely no idea who actually received the service. Isn't 
that right?
    Mr. Kelly. In response to that, I will say that our rules 
provide for service in a number of manners, and the rule is 
pretty clear on this. Certified mail can be delivered 
personally. Proof of that service must be provided in order for 
the case to proceed. The rules are consistent with those, as I 
understand it, in the Federal Rules of Civil Procedure.
    I will note that in most small claims courts, all that 
needs to be done is regular mail. Our procedures are far more 
involved than that.
    Mr. Kucinich. You need an affidavit, but isn't it true that 
there is no return receipt showing the signature of who 
actually received the documents. Isn't that right?
    Mr. Kelly. I would disagree with that.
    Mr. Kucinich. There is a return receipt?
    Mr. Kelly. In the cases, I certainly can't speak for every 
case in the system, but by and large, we get, if there is 
certified mail, we by and large do get a return receipt, as far 
as I know. Now, obviously, we would need to go back and we need 
to look at the specific cases you are referring to, because I 
am not familiar with those specific cases.
    Mr. Kucinich. Am I correct that it is NAF's position that 
the adequacy of service is an issue for the arbitrator, and the 
arbitrator alone to decide?
    Mr. Kelly. That is correct.
    Mr. Kucinich. Well, I want to see how this works in 
context. I am going to ask staff to hand to Mr. Kelly a 
complaint by a Mr. Benjamin Guzman who is a respondent in an 
arbitration handled by the NAF. He states that he never 
received any notice of arbitration and that the person alleged 
to have received the notice was his landlord, for whom Mr. 
Guzman was not on speaking terms at the time.
    The NAF's official response written by your staff counsel, 
Mr. Ryan Chandley, was that the creditor filing the claim 
required a proof of service and that ``the decision about the 
adequacy of service in this case would be decided by the 
arbitrator hearing the case.''
    I just want you to walk through this with me. You have the 
creditor filing the claim, serves Mr. Guzman's landlord, files 
a proof of service saying that the creditor served Mr. Guzman. 
Mr. Guzman, no notice of the claim because his landlord didn't 
tell him about it. Mr. Guzman does not appear at the hearing 
because he doesn't know about it. The arbitrator didn't know 
that Mr. Guzman was not served because the proof of service 
says Mr. Guzman was served.
    So Mr. Kelly, how can the arbitrator make a decision about 
adequacy of service? He or she can't, can they? They don't have 
any time, they don't have any true information. The only 
information an arbitrator has is that Mr. Guzman actually was 
served.
    So when the NAF response that ``the decision about the 
adequacy of service would be decided by the arbitrator hearing 
the case,'' can you see how that would seem disingenuous?
    Mr. Kelly. Mr. Chairman, if Mr. Guzman was not properly 
served, that is a defense that he can raise in the arbitration 
and a defense that he should raise with the arbitrator. That is 
a matter of law.
    Mr. Kucinich. OK. OK, let's stop right there. You know, 
these hearings don't have to be that formal. He doesn't know, 
get it? He doesn't even know about it. It went to his landlord 
who isn't talking to him.
    Mr. Kelly. So run the string out.
    Mr. Kucinich. So how do you assert your rights if you don't 
even know that you were cast into some proceeding?
    Mr. Kelly. So let's run the string out, then.
    Mr. Kucinich. Help me with this. I am interested.
    Mr. Kelly. Eventually, presumably, Mr. Chandley is here and 
I can ask him about the specific case. But let's just run the 
logical string out on that. So Mr. Guzman doesn't know that he 
has been sued, right?
    Mr. Kucinich. OK.
    Mr. Kelly. Which, by the way, the Boston Globe talks about 
routinely in small claims and conciliation court, because there 
only mail is required, not certified mail.
    Mr. Kucinich. We are talking arbitration, NAF arbitration.
    Mr. Kelly. So let me get back. So then Mr. Guzman at some 
point presumably learns that judgment has been entered against 
him. Correct?
    Mr. Kucinich. How did that happen?
    Mr. Kelly. I assume that some--I don't know, but I am just, 
I am speaking of a hypothetical now because this specific 
case----
    Mr. Kucinich. So you are saying at some point he is going 
to find out a judgment was entered against him, but the 
judgment occurs, one would assume, principally because he 
wasn't even in court, in this arbitration setting to defend 
himself.
    Mr. Kelly. His opportunities are to reopen the case, to 
move to vacate the award, to move to amend. He also has an 
opportunity----
    Mr. Kucinich. How often does that happen?
    Mr. Kelly. He also has an opportunity at the court hearing 
in district court when that arbitration award is going to be 
enforced to at that point move to set aside the arbitration 
award.
    Mr. Kucinich. Does that happen very often? And if people 
don't know enough to negotiate an arbitration, how are they 
going to know or have the resources to negotiate a court 
appeal?
    Mr. Kelly. Well, it isn't a court appeal. All it is is a 
hearing to confirm the arbitration award. But I mean, then you 
get into your fundamental policy issue, Mr. Chairman.
    Mr. Kucinich. Well, let me ask you. You were talking about, 
you know, what he can do. How much time does Mr. Guzman have to 
set this decision aside?
    Mr. Kelly. I would need to consult on that, if I may.
    Mr. Kucinich. How much? Yes, go ahead. Sure.
    I yield myself such time as I may consume here.
    Mr. Kelly. I am sorry. What was that?
    Mr. Kucinich. I was just, a committee formality saying we 
are going to continue.
    Mr. Kelly. Mr. Chairman, I reiterate that I don't claim to 
be an expert in this area of the law. I am advised by the staff 
counsel that you spoke with that the time is generally 90 days, 
but there are exceptional circumstances which can be considered 
under the rules.
    Mr. Kucinich. And if the creditor doesn't file within 90 
days and waits, what happens then to Mr. Guzman?
    Mr. Kelly. Then it would fall under those exceptional 
circumstances I previously mentioned.
    Mr. Kucinich. Mr. Bland, would you like to comment on this?
    Mr. Bland. There is actually, it is a distressing thing 
about our court system right now, but there is actually a 
circuit split, as I understand it, among the different Federal 
circuits and also among the State courts about what happens if 
the arbitration award is entered, and the consumer has 90 days 
under the Federal Arbitration Act and under the vast majority 
of the State Arbitration Acts. If they don't move to vacate the 
judgment within the 90 days, for example, because they don't 
know about it, there are a number of courts which have actually 
said that they can't then come in and challenge any aspect of 
the award, even service. I mean, there are some courts that 
have this terrible catch 22.
    Now, there are more courts sort of on the consumer side of 
this, but that actually has happened a number of times in 
courts in America where even identity theft victims who can 
prove that it was never their credit card or whatever have an 
arbitration award entered against them, don't find out about it 
until after the 90 days, and then when there's a confirmation 
proceeding, they can't defend.
    Mr. Kucinich. What happens then?
    Mr. Bland. I mean, it differs from court to court, but 
there are a lot of courts----
    Mr. Kucinich. OK, let's try to help answer the question 
that I asked Mr. Kelly. What happens after 90 days?
    Mr. Bland. It depends on what part of the country you are 
in, but in a lot of parts of the country, you are nailed down 
and stuck with it even if you never got notice. I mean, it 
depends. There are parts of the country where you can defend 
against the confirmation in court if you have a lawyer, but 
there are actually a lot of parts of the country where that 
sticks. It is incredibly unfair.
    Mr. Kucinich. You heard me lay out the case of Mr. Benjamin 
Guzman.
    Mr. Bland. Yes, sir.
    Mr. Kucinich. How many Benjamin Guzmans are out there, do 
you think?
    Mr. Bland. Well, there are tons. In my testimony at pages 
18 to 20, we set out a whole bunch of examples of instances 
where there were terrible service of process, and we gave you a 
list of 9 or 10 consumer lawyers, not just us. I am not the 
only person in the world who says that there are a whole bunch 
of people who have come into my office and said, I never got 
service.
    I did a case in the NAF that was a nursing home collections 
case where our client was in her 90's and she had Alzheimer's, 
and they served the house of one of her daughters where she had 
lived like four addresses before. I mean, it was incredibly 
ridiculous service and then they enter an award of $20,000.
    Mr. Kucinich. Mr. Bland, do you have any idea of how many 
people----
    Mr. Bland. Thousands.
    Mr. Kucinich [continuing]. Have had arbitration awards 
issued against them without ever receiving notice the 
arbitration was going to occur?
    Mr. Bland. It is going to be in the thousands. I mean, it 
would be impossible to give you an exact number, but it is 
going to be----
    Mr. Kucinich. Mr. Kelly, do you have a response to that? Is 
that possible that there could be thousands of people out there 
who have arbitration awards issued against them without ever 
receiving notice that an arbitration was going to occur?
    Mr. Kelly. I couldn't begin to answer that.
    Mr. Kucinich. OK. I want to ask you, Mr. Kelly, about the 
relationship with the Accretive alleged in Minnesota's attorney 
general's suit. I know you have settled this case, but if I am 
asking any questions that may bring some new things and you are 
not sure, you do have a right not to testify. You would have to 
assert it.
    You knew at or about the time of the reorganization of the 
NAF in which the Agora funds set up by Accretive acquired a 40 
percent ownership interest in your company, that Accretive was 
acquiring or had acquired the three largest U.S. debt 
collection firms, speaking of Mann Bracken, Wolpoff and 
Abramson, and Eskanos and Adler.
    And you knew that relationship had to be concealed in order 
to maintain the appearance that the NAF was an impartial body 
with no ties to the debt collection industry.
    I want to show you a slide in which you clearly state your 
intent to conceal the true nature of your financial 
relationships. Put that slide up, OK? And we are going to give 
you a copy so you know exactly what we are talking.
    Now, this is a memo from you to Madhu Tadikonda, dated 
Monday, November 20, 2006. And the relevant part of this memo, 
``Madhu, I look forward to working with you, too,'' and then 
you go on to say, ``We remain deeply concerned about walling 
any deal off, any deal from Mann Bracken. The shared ownership 
issue concerns us on many levels.''
    And you go on to say in enumerated paragraph No. 3, that in 
parentheses, ``No public information concerning Accretive with 
the fund that ultimately acquires and holds a minority interest 
in the Forum.'' And then in a later paragraph, you state, ``I 
cannot overstate our concern over the Mann Bracken 
relationship, although I do not have any solutions off the top 
of my head,'' and this is highlighted, ``We should certainly 
plan for unwinding any deal in the event shared ownership 
becomes an acute issue.''
    Now, if the public knew about the true nature of NAF's 
financial relationships to the largest debt collection 
companies in the country, do you think anyone would believe 
that the NAF was fair or independent or uncompromised?
    Mr. Kelly. Well, let's be very clear about the structure 
here because I think there are some things in there that can be 
grossly misleading. Let me just say this.
    Mr. Kucinich. Well, clarify it for us.
    Mr. Kelly. This is accurate. I will clarify. This is 
obviously accurate and I did have these concerns. Then I say in 
there, I want to put some additional thinking around the 
structural issues. So we did. I want to point out that there is 
no ownership----
    Mr. Kucinich. But you are saying you did, but that is not 
really reflected in this memo, is it?
    Mr. Kelly. No, because there are subsequent--obviously, 
this was one of the very first memos in our transactional 
discussions.
    Mr. Kucinich. So as we go through this, you are saying that 
you have other documentation you could provide to this 
committee that you were trying to get to what point?
    Mr. Kelly. We can certainly provide more information, but I 
can walk you through what was done. Actually, there is nothing 
particularly unusual or sinister about it. The first point is 
that the ownership of the National Arbitration Forum never 
changed. There is no corporate ownership of the National 
Arbitration Forum. The same individuals own that entity that 
always owned that entity.
    Some of the assets of the National Arbitration Forum were 
conveyed to an entity Forthright, which I am not the CEO of. 
Forthright, not the National Arbitration Forum, did accept 
outside investors, a minority. So the first point that is 
important to note is this is a minority.
    Mr. Kucinich. Were they involved in debt collection?
    Mr. Kelly. Well, let's qualify that. So that 40 percent was 
then sold to approximately 17, there are approximately 17 
funds, not 1, 17, that were part of Agora, roughly 17. We can 
find you the specific number and provide that.
    Mr. Kucinich. Were you involved in helping to put this deal 
together?
    Mr. Kelly. Of those 17, 1 fund was Accretive. All right? So 
one-seventeenth of those funds was Accretive that held a 
minority interest of 40 percent in an entity that was not the 
National Arbitration Forum, but that serviced the National 
Arbitration Forum.
    Mr. Kucinich. How did you end up with Accretive, then? If 
16 out of 17 was not involved, then how did Accretive come in 
and how did they just so happen to be a debt collection 
company?
    Mr. Kelly. Well, no. All those funds participated. Agora 
includes roughly 17 diverse funds, which include the endowment 
funds of four major universities, for example. We can provide 
you with that information. But Accretive is just one of those 
17 funds in the 40 percent.
    Mr. Kucinich. Are you saying it is just coincidence that 
you had a partnership here with a debt collection company?
    Mr. Kelly. No. There was no partnership with a debt 
collector. Accretive, which is 1 of the 17 funds that bought 40 
percent of the servicing company also has an investment in a 
company that services----
    Mr. Kucinich. Did you know that? Was that a surprise to you 
that they were involved in debt collection?
    Mr. Kelly. I am not sure we were aware at the time. I 
believe we were aware at the time that they had an investment, 
but keep in mind in private equity, it is not uncommon for 
private equity funds to have hundreds, in fact thousands of 
portfolio companies.
    Mr. Kucinich. I understand that. But you know what is 
interesting about this memo is that, well, you could have 
mentioned hundreds of different entities. You mention Mann 
Bracken.
    Mr. Kelly. Well, this is the one--the other ones didn't 
cause any concern. This was the one that caused concern, and we 
went to great lengths to protect and build in structural 
systems.
    Mr. Kucinich. So you are saying you made every effort not 
to have any relationship with debt collection companies. Is 
that your testimony?
    Mr. Kelly. I would say that is right. I would say that we 
did a lot of structural things in order to create Chinese walls 
and wall off that small fund from the entity, including after 
we did the split, we had a whole segregation team together 
which weighed all the practices, separated everything from data 
bases and phone lines, went through it. I did not sit on that 
segregation team.
    Mr. Kucinich. How do you explain this memo, though? Help 
me. What was going on?
    Mr. Kelly. We had the largest law firm in Minneapolis 
review and do a full legal audit on the process.
    Mr. Kucinich. But you are here right now and I have your 
memo and I have your words.
    Mr. Kelly. Correct.
    Mr. Kucinich. And I see you mention Mann Bracken, which was 
about to be acquired by Accretive, a big debt collection firm. 
You mention in your memo that you were concerned about walling 
any deal off, any deal from Mann Bracken. OK, we know what that 
means.
    Then you mention you cannot overstate your concern about 
the Mann Bracken relationship, and you say that in the 
parentheses, ``No public information connecting Accretive with 
the fund that ultimately acquires and holds a minority interest 
in the Forum.''
    Now, you know, anybody who reads that, it is a fair reading 
that you were just trying to keep this is a secret. I mean, 
what was going on in your mind? Why were you afraid of that?
    Mr. Kelly. Actually, for competitive reasons, frankly. My 
concern was that we would have a difficult time marketing to 
other businesses and other entities. That was my concern.
    Mr. Kucinich. Because, play this out, why?
    Mr. Kelly. Because there was this particular investment, 
which is why we protected against it fully to ensure that when 
we do make it public, we are able to say we have these 
protections in place and this is why it is fair, which is in 
fact what we did.
    Mr. Kucinich. What happens to the $42 million----
    Mr. Kelly. In fact, it is--and it was public before this. I 
mean, we were required to make these disclosures in a number of 
States. This is not something that is, frankly, we didn't think 
that there was an issue with it, to be honest, and we still 
don't.
    Mr. Kucinich. Well, then what happens to the $42 million 
that the Agora fund has invested in Forthright and the NAF? 
What happens to that money?
    Mr. Kelly. The money that is invested in Agora? The money 
Agora invested into Forthright?
    Mr. Kucinich. That the Agora funds invested in Forthright. 
What happens to that, well, the investment in Forthright and 
the NAF. What happens to the $42 million?
    Mr. Kelly. Are you asking where that $42 million is?
    Mr. Kucinich. What happens to it?
    Mr. Kelly. The $42 million by and large was distributed to 
the shareholders.
    Mr. Kucinich. $42 million distributed to the shareholders. 
Who are the shareholders?
    Mr. Kelly. The shareholders of Forthright include NAF, 
Inc., the Agora Funds, and there is a management pool in there 
as well.
    Mr. Kucinich. And are there any other shareholder interests 
there that we are talking about that you are aware of?
    Mr. Kelly. Not that I am aware, but we can provide that 
information to you.
    Mr. Kucinich. I would like you to provide to the committee 
all the shareholders receiving any of the distribution.
    Mr. Kelly. We would be happy to do that. The information 
was freely provided to the attorney general as well. Be happy 
to provide that.
    Mr. Kucinich. OK.
    Now, in Ms. Swanson's testimony, it was stated that the 
Small Business Administration was instrumental in the creation 
of the arbitration debt collection conglomerate that she 
brought charges against and stymied her investigation into the 
NAF. Just if you could help me here, Mr. Kelly. Can you think 
of any legitimate justification for using money from the Small 
Business Administration to finance the creation of Axiant, 
which joined together the three largest debt collection 
companies in the United States?
    Mr. Kelly. Mr. Chairman, I can't answer that question 
because I have no--that question would have to be answered by 
Axiant or someone else. I can tell you that the SBA is not a 
participant in the Agora Fund. There is no SBA money. There is 
no SBA money in the Agora Fund.
    Mr. Kucinich. Did you have any communications with any 
representatives of the SBA in connection with their response to 
the investigation of the Minnesota attorney general?
    Mr. Kelly. I in fact have never had any interaction that I 
am aware of with the SBA, and neither has anyone from 
Forthright.
    Mr. Kucinich. Anybody in your company that was directed to 
have contact with the SBA, if you didn't? Do you know anybody 
in your company who has?
    Mr. Kelly. No, and again, as I said, I wouldn't imagine 
there ever would be because the SBA is not invested in Agora.
    Mr. Kucinich. Has anyone in NAF, Inc. had any contact with 
the SBA in connection with the----
    Mr. Kelly. There is no investment by the SBA there. I think 
I can just clarify this. I mean, I don't mean to be 
confrontational. I don't intend to be. We are out of the 
business.
    Mr. Kucinich. Can I tell you, you know, I am not a 
confrontational person.
    Mr. Kelly. But I will say I think you may misunderstand the 
SBA investment. Trust me, I hesitate to speak for the attorney 
general, but as I understand it the SBA investment is in a fund 
other than Agora. It is in another investment. That investment 
is, as far as I know, unrelated to----
    Mr. Kucinich. Unconnected to Axiant in any way?
    Mr. Kelly. It may be, but that is the question I can't 
answer.
    Mr. Kucinich. So you are saying as far as the structure of 
it, you are not familiar.
    Mr. Kelly. Yes, it is not in our structure.
    Mr. Kucinich. But that you never had any connection with, 
or meetings with any representatives of the SBA and no one 
connected with you in any of your capacities had any 
communication with the SBA about the investigative matter at 
the Minnesota Attorney General's Office.
    Mr. Kelly. That is correct, sir.
    Mr. Kucinich. I think that we have covered most of the 
territory that we can cover today. We have had a number of 
witnesses sit here while Mr. Kelly has had to do most of the 
work.
    Is there anything you would like to say in conclusion? Do 
you want to make any final statements before we wrap this up?
    Professor, do you want to say anything?
    Mr. Drahozal. I don't think I have anything to add from my 
opening statement, which is that the most important thing to 
me, it seems to me, is we are evaluating arbitration as a 
process, we can't do it in isolation, that we need to compare 
it to the alternatives. And I would sort of urge the committee 
to sort of take that into account.
    Mr. Kucinich. Thank you.
    Mr. Bland.
    Mr. Bland. Congressman, I think you have the big picture 
here totally. If I could make one suggestion with respect to 
the California disclosures issues, I think that from the cases 
that have come into us and complaints we have gotten from 
California consumers and from contacts we have gotten from a 
bunch of California lawyers, that the disclosures that have 
been made leave out, apparently on purpose, two really 
important things. California was trying to figure out not just 
who won the case and how many cases were brought by certain 
companies, but they were trying to figure out if the 
arbitration fees were big in particular cases. And they were 
trying to figure out second whether there was a lot of 
attorneys fees being added in, because there are limits under 
the debt collection laws about the amount of attorneys fees 
that are going to be added in.
    And what has happened in a bunch of cases that we have seen 
from consumers and other California consumer lawyers have seen 
is that a company, a debt collector will bring a claim, say, 
for $5,000. Then they have a $1,000 claim for attorneys fees 
and a $1,000 claim for arbitration fees. And then they get it 
all from the arbitrator. And what shows up on the internet in 
their disclosures is claim of $7,000, award $7,000, attorneys 
fees zero, arbitration fees zero.
    And so it gets bundled in so that the answer a consumer 
gets, they get the impression that there is no arbitration 
fees. They get the impression that there is no attorneys fees. 
And the whole point of the statute asking the question is to 
get an honest answer to that.
    And I think that if the committee is going to ask some 
written questions, I urge you to probe that, because we have 
gotten a lot of consumers complaining to us that they feel like 
the information that they have seen up there is not accurate.
    Mr. Kucinich. Your point is well taken. And there needs to 
be a sorting out of the various fees so we clearly understand 
which ones are being bundled in and described as being one 
thing when in fact they are the other. It is a point well 
taken, and in our followup questioning, we will do that.
    Mr. Naimark.
    Mr. Naimark. Only thank you for the opportunity to 
participate. We have no further comment.
    Mr. Kucinich. Thank you.
    Mr. Kelly, you have been here a long time. You have been a 
very busy witness. Is there anything that you would like to say 
before we wrap this hearing up?
    Mr. Kelly. No, Chairman Kucinich. Thank you for your time. 
And obviously, if there is any additional documents, we would 
be happy to provide it, as we have in the past.
    Mr. Kucinich. Well, I know that this has certainly been a 
difficult time for NAF. Occasionally, institutions in our 
society proceed in a way that sometimes they get the legal 
system at another point takes a different view of it, and then 
everything changes. And obviously, things are happening like 
that for NAF.
    What we are trying to do with this committee is to look at 
how these practices in arbitration affect consumers with these 
mass debt collections. And if you put yourself in a position of 
a consumer who may not be getting proper information and may 
not really know what is going on, it is going to be a very 
tough time for a lot of people.
    And then you get the issue of financial literacy, which is 
altogether a different issue which another committee takes up.
    So this subcommittee is going to continue to be involved in 
this. We will continue to send you some inquiries that we would 
appreciate your cooperation in helping us find out what we can 
do to try to make this system work better for consumers. 
Certainly, with your experience, you are probably going to be 
someone who is in a position to tell us what can be done to 
make the system better.
    And so we appreciate you taking this time. I want to thank 
each and every one of the witnesses here for their 
participation.
    I am Dennis Kucinich, Chairman of the Domestic Policy 
Subcommittee. Today's hearing has dealt with the issue of 
arbitrations and the misuse of mandatory arbitration to collect 
consumer debts.
    This committee stands adjourned.
    [Whereupon, at 5:35 p.m. the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]
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