[Congressional Record Volume 146, Number 20 (Tuesday, February 29, 2000)]
[Senate]
[Pages S933-S935]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. FEINGOLD (for himself and Mr. Leahy):
  S. 2117. A bill to amend title 9, United States Code, with respect to 
consumer credit transaction; to the Committee on the Judiciary.
 Mr. FEINGOLD. Mr. President, today I introduce the Consumer 
Credit Fair Dispute Resolution Act of 2000, a bill that will protect 
and preserve American consumers' right to take their disputes with 
creditors to court. This bill is identical to an amendment that I 
offered recently to the bankruptcy reform bill.
  In recent years, credit card companies and consumer credit lenders 
are increasingly requiring their customers to use binding arbitration 
when a dispute arises. Consumers are barred by contract from taking a 
dispute to court, even small claims court. While arbitration can be an 
efficient tool to settle claims, it is credible and effective only when 
consumers enter into it knowingly, intelligently and voluntarily. 
Unfortunately, that's not happening in the credit card and consumer 
credit lending arenas.
  One of the most fundamental principles of our justice system is the 
constitutional right to take a dispute to court. Indeed, all Americans 
have the right in civil and criminal cases to a trial by jury. The 
right to a jury trial in criminal cases is contained in the Sixth 
Amendment to the Constitution. The right to a jury trial in civil cases 
is contained in the Seventh Amendment, which provides ``In Suits at 
common law, where the value in controversy shall exceed twenty dollars, 
the right of trial by jury shall be preserved. . . .''
  Some argue that Americans are over-using the courts. Court dockets 
across the country are congested with civil cases. In part as a 
response to these concerns, various ways to resolve disputes have been 
developed, short of going to court. Alternatives to court litigation 
are collectively known as alternative dispute resolution, or ADR. ADR 
includes mediation and arbitration. Mediation and arbitration are often 
efficient ways to resolve disputes because the parties can have their 
case heard well before they would have received a trial date in 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 power to impose a solution. No formal rules of evidence or procedure 
control mediation; the mediator and the parties mutually agree on the 
best way to proceed.
  Arbitration also involves a third party--an arbitrator or arbitration 
panel. Unlike mediation but similar to a court proceeding, the 
arbitrator issues a decision after reviewing the arguments 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 the parties would follow in a court 
proceeding.
  Arbitration can be either binding or non-binding. Non-binding 
arbitration means that 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.
  Some contracts contain clauses that require arbitration to be used to 
resolve disputes that arise after the contract is signed. 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. ``Mandatory, binding arbitration'' 
therefore means that under the contract, the parties must use 
arbitration to resolve a future disagreement and the decision of the 
arbitrator or 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.

[[Page S934]]

  Under mandatory, binding arbitration, even if a party believes that 
the arbitrator did not consider all the facts or follow the law, the 
party cannot file a suit in court. The only basis for challenging a 
binding arbitration decision is if there is reason to believe that the 
arbitrator committed actual fraud. In contrast, if a dispute is 
resolved by a court, the parties can potentially pursue an appeal of 
the lower court's decision.
  Mr. President, because mandatory, binding arbitration is so 
conclusive, it can be a credible means of dispute resolution only when 
all parties understand the full ramifications of agreeing to it.
  But that's not what's happening in a variety of contexts--from motor 
vehicle franchise agreements, to employment agreements, to credit card 
agreements. I'm 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, of S. 1020, which would prohibit the unilateral 
imposition of mandatory, binding 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 franchise 
context, there is a growing, menacing trend of credit card companies 
and consumer credit lenders inserting mandatory, binding arbitration 
clauses in agreements with consumers. Companies like First USA Bank, 
American Express and Green Tree Discount Company unilaterally insert 
mandatory, binding arbitration clauses in their agreements with 
consumers, often without the consumer's knowledge or consent.

  The most common way credit card companies have done this is through 
the use of a ``bill stuffer.'' Bill stuffers are the advertisements and 
other materials that credit card companies insert into envelopes with 
their customers' monthly statements. Some credit card issuers like 
American Express have placed fine print mandatory arbitration clauses 
in bill stuffers. The arbitration provision is usually buried in fine 
print in a mailing that includes a bill and various advertising 
materials. It is often described in a lengthy legal document that most 
consumers probably don't even skim, much less read carefully.
  American Express issued its mandatory arbitration provision last 
year. It took effect on June 1st. So, if you're 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 the final 
arbitration decision. In this case, you are also bound to use an 
arbitration organization selected by American Express, the National 
Arbitration Forum.
  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. First USA also alerted its cardholders with a 
bill stuffer, containing a condensed set of terms and conditions in 
fine print. The cardholder, by virtue of continuing to use the First 
USA card, gave up the right to go to court, even small claims court, to 
resolve a dispute.
  Mr. President, this growing practice extends beyond credit cards into 
the consumer loan industry. Consumer credit lenders like Green Tree 
Consumer Discount Company are inserting mandatory, binding arbitration 
clauses in their loan agreements. The problem is that these loan 
agreements are usually adhesion contracts, which means that consumers 
must either sign the agreement as is, or forego a loan. In other words, 
consumers lack the bargaining power to have the clause removed. More 
importantly, when signing on the dotted line of the loan agreement, 
consumers may not even understand what mandatory arbitration means. In 
all likelihood, they do not understand that they have just signed away 
a right to go to court to resolve a dispute with the lender.
  It might be argued that if consumers are not pleased with being 
subjected to a mandatory arbitration clause, they can cancel their 
credit card, or not execute on their loan agreement, and take their 
business elsewhere. Unfortunately, that's 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. 
Consumers should not be forced to make that choice.
  Companies like 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 often 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 can be 
much 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 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, a consumer can 
bring the same claim to small claims court here in the District of 
Columbia for a filing 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 case in small claims court.
  That's bad enough, but some other arbitration firms are even more 
expensive. 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, it also charges 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, or $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. The 
fees could very well be greater than the consumer's claim. So, as you 
can see, a consumer's claim is not necessarily 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.
  Another significant 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 that entity. 
There would seem to be a significant danger that this would result in 
an advantage for the lenders who are ``repeat players.'' After all, if 
the National Arbitration Forum develops a pattern of reaching decisions 
that favor cardholders, American Express or First USA may very well 
decide to take their arbitration business elsewhere. A system where the 
arbitrator has a financial interest in reaching an outcome that favors 
the credit card company is not a fair alternative dispute resolution 
system.
  There has been one important court decision on the enforceability of 
mandatory arbitration provisions in credit card agreements. The case 
arose out of a mandatory arbitration provision announced in mailings to 
Bank of America credit card and deposit account holders. In 1998, the 
California Court of Appeals ruled that the mandatory arbitration 
clauses unilaterally imposed on the Bank's customers were invalid and 
unenforceable. The California Supreme Court refused to review the 
decision of the lower court. As a result, credit card companies in 
California cannot invoke mandatory arbitration in their disputes with 
customers. In fact, the American Express bill stuffer notes that the 
mandatory, binding arbitration provision will not apply to California 
residents until further notice from the company. The California 
appellate court decision was wise and

[[Page S935]]

well-reasoned, but consumers in other states cannot be sure that all 
courts will reach the same conclusion.
  My bill extends the wisdom of the California appellate decision to 
every credit cardholder and consumer loan borrower. It amends the 
Federal Arbitration Act to invalidate mandatory, binding arbitration 
provisions in consumer credit agreements. Now, let me be clear. I 
believe that arbitration can be a fair and 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 
between consumers and lenders only when it is entered into knowingly 
and voluntarily by both parties to the dispute after the dispute has 
arisen. Pre-dispute agreements to take disputes to arbitration cannot 
be voluntary and knowing in the consumer lending context because the 
bargaining power of the parties is so unequal. My bill does not 
prohibit arbitration of consumer credit transactions. It merely 
prohibits mandatory, binding arbitration provisions in consumer credit 
agreements.
  Credit card companies and consumer credit lenders are increasingly 
slamming the courthouse doors shut on consumers, often unbeknownst to 
them. This is grossly unjust. We need to restore fairness to the 
resolution of consumer credit disputes. I urge my colleagues to support 
the Consumer Credit Fair Dispute Resolution Act.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  The bill follows:

                                S. 2117

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Consumer Credit Fair Dispute 
     Resolution Act of 2000''.

     SEC. 2. 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.''.
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