[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
http://www.oversight.house.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.
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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.]
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