[Congressional Record Volume 146, Number 5 (Monday, January 31, 2000)]
[Senate]
[Pages S140-S144]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
AMENDMENT NO. 2747
(Purpose: To make an amendment with respect to consumer credit
transactions)
Mr. FEINGOLD. Mr. President, I send an amendment to the desk and ask
for its immediate consideration.
The PRESIDING OFFICER. The clerk will report.
The legislative clerk read as follows:
The Senator from Wisconsin [Mr. Feingold] proposes an
amendment numbered 2747.
Mr. FEINGOLD. Mr. President, I ask unanimous consent that reading of
the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:
At the appropriate place in title XI, insert the following:
SEC. 11____. CONSUMER CREDIT TRANSACTIONS.
(a) Definition.--Section 1 of title 9, United States Code,
is amended--
(1) in the section heading, by striking ``and `commerce'
defined'' and inserting ``, `commerce', `consumer credit
transaction', and `consumer credit contract' defined''; and
(2) by inserting before the period at the end the
following: ``; `consumer credit transaction', as herein
defined, means the right granted to a natural person to incur
debt and defer its payment, where the credit is intended
primarily for personal, family, or household purposes; and
`consumer credit contract', as herein defined, means any
contract between the parties to a consumer credit
transaction.''.
(b) Agreements To Arbitrate.--Section 2 of title 9, United
States Code, is amended by adding at the end the following:
``Notwithstanding the preceding sentence, a written provision
in any consumer credit contract evidencing a transaction
involving commerce to settle by arbitration a controversy
thereafter arising out of the contract, or the refusal to
perform the whole or any part thereof, shall not be valid or
enforceable. Nothing in this section shall prohibit the
enforcement of any written agreement to settle by arbitration
a controversy arising out of a consumer credit contract, if
such written agreement has been entered into by the parties
to the consumer credit contract after the controversy has
arisen.''.
Mr. FEINGOLD. Madam President, I rise today to introduce an amendment
to the bankruptcy reform bill that will protect and preserve the
American consumers' right to take their disputes with creditors to
court. There is a troubling trend among credit card companies and
consumer credit lenders of requiring customers to use binding
arbitration when a dispute arises. Under this system, the consumer is
barred from taking a dispute to court, even a small claims court.
While arbitration can certainly be an efficient tool to settle
claims, it is credible and effective only when customers and consumers
enter into it knowingly, intelligently, and voluntarily. Unfortunately,
that is not what is happening in the credit card and consumer credit
lending business. One of the most fundamental principles of our civil
justice system is each American's right to take a dispute to court. In
fact, each of us has a right in civil and criminal cases to a trial by
jury. A right to a jury trial in criminal cases is contained in the
sixth amendment to the Constitution. The right to a jury trial in a
civil case is contained in the seventh amendment, which provides, ``In
suits at common law where the value and controversy shall exceed $20,
the right of trial by jury shall be preserved.''
It has been argued that Americans are overusing the courts. Court
dockets across the country are said to be congested with civil cases.
In response to these concerns, various ways to resolve disputes, other
than taking a dispute to court, have been developed. Alternatives to
litigating in a court of law are collectively known as ``alternative
dispute resolution,'' or ADR. Alternative dispute resolution includes
mediation and arbitration. Mediation and arbitration can resolve
disputes in an efficient manner because the parties can have their
cases heard well before they would have received a trial date in a
court. Mediation is conducted by a neutral third party, the mediator,
who meets with the opposing parties to help them find a mutually
satisfactory solution. Unlike a judge in a courtroom, the mediator has
no independent power to impose a solution. No formal rules of evidence
or procedure control mediation. The mediator and the parties mutually
agree on how to proceed.
In contrast, arbitration involves one or more third parties--an
arbitrator or arbitration panel. Unlike mediation but similar to a
court proceeding, the arbitrator issues a decision after reviewing the
merits of the case as presented by all parties. Arbitration uses rules
of evidence and procedure, although it may use rules that are simpler
or more flexible than the evidentiary and procedural rules that a party
would follow or be subjected to in a court proceeding. And arbitration
can be either binding or nonbinding.
Nonbinding arbitration means the decision issued by the arbitrator or
arbitration panel takes effect only if the parties agree to it after
they know what the decision is.
In binding arbitration, parties agree in advance to accept and abide
by the decision, whatever it is. In addition, there is a practice of
inserting arbitration clauses in contracts to require arbitration as
the forum to resolve disputes before a dispute has even arisen.
Now, this is called mandatory arbitration. This means that if there
is a dispute, the complaining party cannot file suit in court, and
instead is required to pursue arbitration. It is binding, mandatory
arbitration, and it therefore means that under the contract the parties
must use arbitration
[[Page S141]]
to resolve a future disagreement, and the decision of the arbitration
panel is final. The parties have no ability to seek relief in court or
through mediation. In fact, if they are not satisfied with the
arbitration outcome, they are probably stuck with the decision. Even if
a party believes the arbitrator did not consider all the facts or
follow the law, the party cannot file a lawsuit in court. A basis to
challenge a binding arbitration decision exists only where there is
reason to believe the arbitrator committed actual fraud, which is a
pretty unlikely scenario.
In contrast, if a dispute is resolved by a court, the parties can
potentially pursue an appeal of the lower court's decision.
Madam President, because binding mandatory arbitration is so
conclusive, this form of arbitration can be a credible means of dispute
resolution only when all parties know and understand the full
ramifications of agreeing to it. I am afraid that is not what is
happening in our Nation's business climate and economy in a variety of
contexts ranging from motor vehicle franchise agreements, to employment
agreements, to credit card agreements. I am proud to have sponsored
legislation addressing employment agreements and motor vehicle
franchise agreements. In fact, I am the original cosponsor, with my
distinguished colleague from Iowa, Senator Grassley, the manager of the
bankruptcy reform bill, of S. 1020, which would prohibit the unilateral
imposition of binding, mandatory arbitration in motor vehicle
dealership agreements with manufacturers. Many of our colleagues have
joined us as cosponsors.
Similar to the problem in the motor vehicle dealership context, there
is a growing, menacing trend of credit card companies and consumer
credit lenders inserting binding, mandatory arbitration clauses in
agreements with consumers. Companies such as First USA Bank, American
Express, and Green Tree Discount Company unilaterally insert binding
mandatory arbitration clauses in their agreements with consumers, often
without the consumers' knowledge or consent.
The most common way the credit card companies have done so is often
through the use of a ``bill stuffer.'' Bill stuffers are the
advertisements and other materials that credit card companies insert in
envelopes with the customers' monthly statements. Some credit card
issuers such as American Express have placed fine-print, mandatory
arbitration clauses on bill stuffers. Let's take a look at what I am
talking about.
I have in my hand a monthly statement mailing from American Express.
Let's look inside.
First, we have the return envelope to pay your bill. And look at what
is on the envelope. They have attached an advertisement.
So before you can mail your payment, you have to tear this
advertisement off the back of the envelope. Otherwise you won't be able
to seal it shut.
Then, if you look at what else is in the envelope, here is the
monthly statement. It is a multipage printed form, front and back.
On this occasion, even though there was very little activity on this
particular account--one charge and one credit--the statement is six
pages long. The first page contains information about how much you owe
American Express, charges made, payments received, finance charges
applied, and so on. The reverse side of the first page also contains
some fine print information about the account.
Then, if you look at pages 3 and 4 they contain additional fine-print
information about the account; for example, what to do if your card is
stolen or lost, and a summary of your billing rights.
If you keep reading at this point, you look at pages 5 and 6. They
are chock full of advertising material. Target stores urge you to shop
with them. The State of North Carolina encourages you to plan your next
holiday in North Carolina.
This past spring, in addition to an American Express cardholder being
bombarded with all of this information, American Express cardholders
also received this--For Your Information, ``FYI, A Summary of Changes
to Agreements and Benefits.'' The summary is 10 pages long.
In addition to the multipage statement of charges, terms, and
advertising material, the cardholder received another multipage
document with fine-print terms and conditions.
If my colleagues are like me and most Americans, I review the
statement of charges for accuracy, look at how much I owe, rip off the
bottom portion, stick it and my check in the return envelope, and mail
it to American Express. I don't spend a lot of time reading all of the
fine-print information about the account or the ad. I certainly would
not spend time reading a 10-page summary of changes to my statement. At
most, I might scan these other pages and bill stuffers, but I would not
spend time reading them in detail.
Let's look at the summary of changes. As I said, it is called, ``FYI,
A Summary of Changes to Agreements and Benefits.'' When you look at
their summary, there are two things that hit you: The cartoon in the
middle and the big letters, ``FYI'' in the upper left side of the first
page. FYI, for your information, to me and most Americans means that it
contains some information that may be of interest to me but nothing
that requires serious thought or action from me. In reality, however,
the summary of changes is a complex, fine-print document that almost
reads like a legal document. It talks about changes to various
privileges of the American Express card membership, American Express
Purchase Protection Plan, Buyer's Assurance Plan, Car Rental Loss and
Damage Insurance Plan, and Credit Protection Plan.
In addition, the summary contains an arbitration provision on page 2.
Even though the document contains changes to the terms of the agreement
with the cardholder--it actually changes the contract between the
parties--it is simply labeled as an FYI, for your information,
document. I find that troubling.
If we take a closer look at the arbitration provision, this
arbitration provision is in condensed, fine print, to say the least. It
is not exactly easy to read, even though this is an enlarged version of
the original. The key clause in this arbitration provision is the
following:
If arbitration is chosen by any party with respect to a
claim, neither you nor we will have the right to litigate
that claim in court or have a jury trial on that claim.
I will repeat that.
If the cardholder has a dispute with American Express, the cardholder
cannot take the claim to court or have a jury trial on the claim. This
provision took effect on June 1 of last year. So if you are an American
Express cardholder and you have a dispute with American Express, as of
June 1999, you can't take your claim to court--even small claims court.
You are bound to use arbitration, and you are bound to live with the
final arbitration decision.
In this case, you are also bound to use an arbitration organization
selected by American Express, the National Arbitration Forum.
Unfortunately, American Express isn't the only credit card company
imposing mandatory arbitration on its customers. First USA Bank, the
largest issuer of Visa cards, with 58 million customers, has been doing
the same thing since 1997.
Here is the bill stuffer distributed by First USA. This is the inside
of a folded, one-page insert. As you can see, similar to the American
Express summary, this is another fine-print, condensed set of terms and
conditions. It covers a wide variety of topics, including information
on finance charges, termination and foreign currency transactions. Here
in the last column are the three paragraphs on the arbitration
provision. The language is similar to the American Express language and
states that the cardholders' dispute will be resolved by arbitration.
The cardholder will not be able to go to a court to resolve the claim.
No ``if's,'' ``and's,'' or ``but's'' about it. Just plain and simple.
The cardholder, by virtue of continuing to simply use the First USA
card, gives up the right to go to court, even small claims court, to
resolve the dispute.
Unfortunately, this problem also extends beyond credit cards. It is
also a growing practice in the consumer loan industry. Consumer credit
lenders such as Green Tree Consumer Discount
[[Page S142]]
Company are inserting mandatory arbitration clauses in their loan
agreement. The problem is these loan agreements are usually adhesion
contracts, which means that the consumer must either sign the agreement
as is or forego a loan.
In other words, the consumer lacks the bargaining power to have the
clause removed. More importantly, when signing on the dotted line of
the loan agreement, the consumer may not even understand what mandatory
arbitration means. The consumer in all likelihood does not understand
that he or she has written away his or her right to go to court to
resolve a dispute with the lender.
Arbitration in some ways, of course, is an efficient way to settle
disputes. But it has to be entered into knowingly and voluntarily. That
is not what is happening in either the consumer loan or credit card
industries.
You might say that if consumers are not pleased with being subjected
to a mandatory arbitration clause, consumers can cancel their credit
card, or not execute on their loan agreement, and they can take their
business elsewhere. Unfortunately, that is easier said than done. As I
mentioned, First USA Bank, the Nation's largest Visa card issuer, is
part of this questionable practice. In fact, the practice is becoming
so pervasive that consumers may soon no longer have an alternative
unless they forego use of a credit card or a consumer loan entirely. I
think that is kind of a hefty price to pay to retain the longstanding
right to go to court.
In my opinion, this is a decision that consumers should not be forced
to make. Companies such as First USA, American Express, and Green Tree
argue that they rely on mandatory arbitration to resolve disputes
faster and cheaper than court litigation. The claim may be resolved
faster, but is it really cheaper? Is it as fair as a court of law? I
don't think so.
Arbitration organizations can charge exorbitant fees to the consumer
who brings a dispute--often an initial filing fee plus hourly fees to
the arbitrator or arbitrators involved in the case. These costs to
consumers can be higher than bringing the matter to small claims court
and paying a court filing fee.
For example, the National Arbitration Forum, the arbitration entity
of choice for American Express and First USA, the National Arbitration
Forum charges fees that are likely greater than if the consumer brought
a dispute in small claims court. For a claim of less than $1,000, the
National Arbitration Forum charges the consumer a $49 filing fee. In
contrast, the consumer could have brought the same claim, in small
claims court here in the District of Columbia and would have paid a fee
of no more than $10. In other words, the consumer pays a fee to the
National Arbitration Forum that is nearly five times more than the fee
for filing a claim with small claims court.
That is bad enough, but the National Arbitration Forum's competitors
are even worse. The American Arbitration Association charges a $500
filing fee for claims of less than $10,000, or more if the claim
exceeds $10,000, and a minimum filing fee of $2,000 if the case
involves three or more arbitrators. In addition to the filing fee, they
also charge a hearing fee for holding hearings other than the initial
hearing--$150 to be paid by each party for each day of hearings before
a single arbitrator, for $250 if the hearing is held before an
arbitration panel. The International Chamber of Commerce requires a
$2,500 administrative fee plus an arbitrator's fee of at least $2,500,
if the claim is less than $50,000. These fees are greater if the claim
exceeds $50,000. This $5,000 or more fee could very well be greater
than the consumer's entire claim. So, as you can see, the consumer's
dispute is not resolved more efficiently with arbitration. It is
resolved either at greater cost to the consumer or not at all, if the
consumer cannot afford the costs, or the costs outweigh the amount in
dispute.
The unilateral imposition of mandatory arbitration also raises
fairness concerns. As I demonstrated earlier, typical cardholders are
not likely to ever notice the arbitration provision. But even if they
notice the provision and read the fine print, consumers nevertheless
may not understand that their right to court has just been stripped
away. So, what we have here is a small number of people who will
actually read the bill stuffer and an even smaller number who will
understand what it means.
Another problem with mandatory, binding arbitration is that the
lender gets to decide in advance who the arbitrator will be. In the
case of American Express and First USA, they have chosen the National
Arbitration Forum. All credit card disputes with consumers involving
American Express or First USA are handled by them. What does this mean?
If you think about it, the arbitrator has a financial interest in
reaching an outcome that favors the credit card company. If the
National Arbitration Forum develops a pattern of reaching decisions
that favor the cardholder, wouldn't American Express or First USA
strongly consider taking their arbitration business elsewhere? I think
there is a very good chance, I would say there is a significant chance
that would happen.
There has been one important ruling on the enforceability of
mandatory arbitration provisions in credit card agreements. That ruling
involved a mandatory arbitration provision announced in mailings to
Bank of America credit card and deposit account holders. In a 1998
decision by the California Court of Appeals, which the California
Supreme Court refused to review, the court ruled that the mandatory
arbitration clauses unilaterally imposed on the Bank's customers were
invalid and unenforceable. As a result of that decision, credit card
companies in California cannot impose mandatory arbitration in their
disputes with customers. In fact, the American Express notice
recognizes this fact and notes here at the bottom that the provision
will not apply to California residents until further notice from the
company. I think that was a wise, well-reasoned decision by the
California appellate court, but Americans have no assurance that all
courts will reach the same fair and reasonable decision.
My amendment extends the wisdom of the California appellate decision
to every credit cardholder and consumer loan borrower in the country.
It amends the Federal Arbitration Act to prohibit the unilateral
imposition of mandatory, binding arbitration in consumer credit
transactions. Let me be clear. I believe that arbitration can be an
efficient way to settle disputes. I agree we ought to encourage
alternative dispute resolution. But I also believe that arbitration is
a fair way to settle disputes only when it is entered into knowingly
and voluntarily by both parties to the dispute. My amendment does not
prohibit arbitration of consumer credit transactions when entered into
voluntarily and knowingly. It merely prohibits binding, mandatory
arbitration imposed unilaterally without the consumer's knowledgeable
and/or voluntary consent.
Credit card companies and consumer credit lenders are increasingly
slamming the courthouse doors shut on consumers, often unbeknownst to
them. This is grossly unjust. Let's restore fairness to the resolution
of consumer credit disputes.
At some point I hope that my colleagues will join me in keeping the
doors to the courthouse open to all American credit card users and
consumer credit borrowers. At this time, however, I will not push for a
vote on this issue. I have agreed to withdraw this amendment with the
understanding from my friend from Iowa, Senator Grassley, the manager
of this bill and the chair of the Judiciary Subcommittee on
Administrative Oversight and the Courts, that the issue of mandatory
arbitration in consumer credit agreements will be part of a hearing to
be held in the Courts Subcommittee on March 1. That hearing will
address the Federal Arbitration Act and the problem of mandatory
arbitration clauses inserted in contracts unilaterally. I appreciate
Senator Grassley's leadership and cooperation in reaching this
accommodation. I look forward to working with him on this issue, as
well as the broader issue of the growing, problematic trend of the
unilateral imposition of mandatory arbitration in a variety of
contracts.
I admire the leadership of the Senator on the overall issue in
addition to the fact it has come up and is a serious problem in the
consumer credit agreement area.
Mr. GRASSLEY addressed the Chair.
[[Page S143]]
Amendment No. 2747 Withdrawn
Mr. FEINGOLD. Madam President, I withdraw the amendment and yield the
floor.
The PRESIDING OFFICER. Without objection, the amendment is withdrawn.
The Senator from Iowa is recognized.
Mr. GRASSLEY. Madam President, I have had a chance to discuss this
issue with the Senator from Wisconsin over a long period of time, both
at the subcommittee level, the committee level, and during floor action
on this bill which has been going on now since last October, with a
long interim for a holiday break.
I appreciate what the Senator from Wisconsin is trying to do. We have
joined together on a bill dealing with one aspect of this problem and
that happens to be a bill which deals with arbitration in the
automobile industry. As the lead Member of the Senate on alternative
dispute resolution issues, I certainly do not want alternative dispute
resolution to be used in unfair ways. So following up on the request of
the Senator from Wisconsin that if we could make some sort of
arrangement for his not offering his amendment at this time--and he has
withdrawn it--I have scheduled a hearing in my judiciary subcommittee
on our bill. I hope to air some of these other problems the Senator has
raised.
I do have a great deal of sympathy for what the Senator from
Wisconsin is attempting, but I think more groundwork needs to be done
so we all have a better understanding of these issues before moving
ahead at this time.
The bottom line, I say to the Senator from Wisconsin--and I hope he
will answer yes or no--is that I wish to make sure he is working with
us between now and our hearing so every commitment I have made in
regard to his offering or not offering his arbitration amendment to
this bill at this time is to his satisfaction.
Mr. FEINGOLD. Madam President, it is very much to my satisfaction. I
am delighted to know we are going to look at a variety of contexts at
this hearing, including this one with the credit card companies but
also the one my colleague and I have had so much interest in regarding
motor vehicles and also the employment discrimination area. To me,
although I would be pleased to have this amendment on this bill, I
think that is a good opportunity to point out the overall problem we
have had, what my colleague described as the possibility arbitration
would be used in a way that neither of us would like, that it would
somehow become a method of unfairness instead of what we both hope,
which is a way to resolve disputes more efficiently or economically,
sometimes, than when you go to court. I think it is an excellent idea.
I look forward to working with the chairman in preparation for the
hearing. I think it is a good way to work out all these issues, and,
again, I thank the Senator from Iowa for being very easy to work with
on this and being very serious about getting something done.
Mr. SARBANES. Madam President, I express my appreciation to the
managers of the bankruptcy bill, Senators Leahy, Torricelli, Grassley,
and Hatch, for accepting and including an amendment I had planned to
offer on the floor as part of the managers' amendment to S. 625. My
amendment requires that a simple yet important disclosure be made on
credit card bills to help protect consumers.
During the bankruptcy reform debate in the last Congress, the Senate
examined whether the increased rate of consumer bankruptcies in the
Nation resulted solely from consumers' access to an excessively
permissive bankruptcy process, or whether other factors also
contributed to this increase. Ultimately we concluded that the record
increase in bankruptcy filings across the nation was due not only to
the ease with which one can enter the bankruptcy system, but also to
the unparalleled levels of consumer debt--especially credit card debt--
being run up across the country. As Senator Durbin noted, and as the
CBO, FDIC, and numerous economists have found, the rate of increase in
bankruptcy filings paralleled the rate of increase in consumer debt.
This is not a coincidence. Rather, increased bankruptcies proceed
directly from the fact that Americans are bombarded daily by credit
card solicitations that promise easy access to credit without informing
their targets of the implications of signing up for such credit.
During our debate in the last Congress, the Senate also concluded
that irresponsible borrowing could be reduced, and many bankruptcies
averted, if Americans were provided with some basic information in
their credit card materials regarding the consequences of assuming
greater debt. A consensus emerged that credit card companies have some
affirmative obligation to provide such information to consumers in
their solicitations, monthly statements, and purchasing materials, in
light of their aggressive pursuit of less and less knowledgeable
borrowers.
As a result of this consensus, the Senate's bankruptcy bill in the
last Congress--S. 1301--contained several provisions in the managers'
amendment addressing credit card debt, and requiring specific
disclosures by credit card companies in their payment and solicitation
materials. These provisions, which I sponsored along with Senators Dodd
and Durbin, were vital to the Senate's success in adopting balanced
bankruptcy reform legislation by the overwhelming margin of 97-1.
Unfortunately, the House-Senate conference committee struck these
disclosure provisions from its final conference report, leaving the
bankruptcy bill again a one-sided document that failed to account for
the role credit card companies play in the accumulation of credit card
debt and in increased consumer bankruptcy rates. As a result of the
conference committee's actions, the conference report died in the
waning days of the 105th Congress.
As we again debate bankruptcy legislation, it remains my firm belief
that Congress must address both sides of the consumer bankruptcy
equation--both the flaws in the bankruptcy system that make it easy for
people to declare bankruptcy even if they have the ability to pay their
debts, and the lending practices that encourage people with limited
financial resources to accumulate debts that are beyond their ability
to repay.
Last year, the Senate adopted an amendment to S. 625 that requires
credit card issuers to give customers on their billing statements three
disclosures: (1) warning that paying just the minimum monthly amount
will increase the interest they pay and the time it takes to repay
their balances; (2) a generic example; and (3) a toll-free number a
customer can call for an estimate of how long he or she has to pay the
minimum payment and the total payment to pay off his balance. However,
the amendment contained an exception for certain credit card issuers
that provide actual, instead of estimated, payment information. Such a
credit card issuer would not have to disclose the warning, an example,
or even the telephone number. This situation subverted the purpose of
this section and distorted the balance contained in the original
amendment.
My amendment would restore this balance by requiring some disclosures
to be given by certain credit card issuers that have a toll-free number
for informing customers of the actual number of months it takes to
repay outstanding balances using minimum monthly payments requirement.
It requires such credit card issuers to make two disclosures: (1) the
telephone number and (2) a warning. My amendment requires the credit
card bill to contain the statement, ``Minimum Payment Warning: Making
only the minimum payment will increase the interest you pay and the
time it takes to repay your balance. For more information, call this
toll-free number: __________.''
If we are going to make it harder for individuals to file for
bankruptcy, we need to make certain that they are informed about their
credit decisions. The minimal warning contained in my amendment helps
credit card customers who pay the minimum monthly amount on their
credit card bills better understand how long it will take and how much
they will pay to work off the balance. The Financial Literacy Center
has calculated that a consumer who, for example, has a $5,000 loan
balance outstanding on which 17% interest is charged and who is paying
2% of the balance each month, will take 50 years to pay off the entire
loan and end up paying $33,447. That is a very long time and a
significant burden that, with the disclosures in my amendment, debtors
will be able to better appreciate.
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My amendment helps consumers get important information that will
enable them to analyze how to manage their credit card borrowing more
effectively.
____________________