|WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037-1420
ERIC J. MOGILNICKI
March 22, 2000
The Honorable Charles E. Grassley
Dear Senator Grassley:
Thank you for your follow-up questions regarding my testimony before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts on behalf of the American Bankers Association, Consumers Bankers Association, American Financial Services Association, and National Retail Federation. Each of these organizations looks forward to working with you and the Subcommittee and its Staff to improve the use of arbitration in consumer credit contracts.
Your questions asked me to respond to some very serious -- and groundless -- criticisms of arbitration made in Ms. Sturdevants testimony on behalf of the National Association of Consumer Advocates. More generally, you have asked me to focus on the important issue of how consumer rights are enforced in the absence of class actions. I believe the answers to these questions are closely related. The criticisms voiced by Ms. Sturdevant largely spring from a flawed premise: that only class action litigation can protect consumers. Adherence to this view requires demonizing financial institutions that offer arbitration, criticizing arbitration for not mimicking class action litigation, and ignoring the many flaws in the use of class actions to resolve consumer disputes. Most importantly, the attack on arbitration fails to account for the entire framework of government oversight of financial institutions -- which accomplishes the goal of preventing systemic abuses without the costs and delays of class action litigation.
Your second question mentions the criticism that arbitration alone will not provide a compelling incentive for financial institutions to stop illegal business practices. This criticism is wrong in two respects. First, arbitration awards serve precisely the same purpose as litigation awards. Second, arbitration is never alone in policing the practices of financial institutions. To the contrary, these practices are regulated extensively at both the state and federal level in order to ensure a competitive marketplace in which consumer rights are protected. There are a host of laws that protect consumers, including the following:
The Electronic Fund Transfer Act, 15 U.S.C. §§ 1693-1693r, and Regulation E, 12 C.F.R. pt. 205, establish the basic rights, liabilities, and responsibilities of consumers who use electronic fund transfer services and financial institutions that offer these services; The Equal Credit Opportunity Act, 15 U.S.C. §§ 1691-1691f, and Regulation B, 12 C.F.R. pt. 202, prohibit discrimination in any aspect of a credit transaction on the basis of race, color, religion, national origin, age, sex or marital status, or because an applicant derives income from public assistance, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act; The Fair Credit Reporting Act, 15 U.S.C. §§ 1681-1681u, regulates, among other things, the consumer reporting industry, including establishing requirements to ensure fair, timely, and accurate reporting of credit information, and places disclosure obligations on users of consumer reports; The Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-1692o, prohibits unfair and deceptive collection practices by third party debt collectors, including the collection of fees not provided for in either the loan contract or state law; The Federal Trade Commission Act, 15 U.S.C. § 45-58, prohibits, among other things, "unfair methods of competition" and "unfair or deceptive acts or practices" in the marketplace, and Regulation AA; 12 C.F.R. § 227.11, subpart issued by the Board of Governors of the Federal Reserve System under section 18(f) of the Federal Trade Commission Act, 15 U.S.C. § 57a(f), prohibits "unfair or deceptive acts or practices of banks in connection with extensions of credit to consumers." The Truth-in-Lending Act, 15 U.S.C. §§ 1601-1667j, and Regulation Z, 12 C.F.R. pt. 226, require, among other things, that accurate disclosure of the cost and terms of credit be provided to the consumer before the consummation of the credit transaction; and State banking and consumer protection laws and regulations supplement these laws and typically grant additional protections to their residents.
Each of these statutes provides for enforcement by the appropriate regulatory agency. Financial institutions are regularly examined for compliance with these laws and regulations by the appropriate federal and/or state regulators. Such regulatory examinations often involve on-site examination and supervision that test each institutions compliance with these laws. Agencies examinations are based on complex procedures that require examining staff to review the institutions disclosures, payment processing procedures, denial rates, and a host of other issues.
In addition to performing extensive supervisory compliance examinations, each of the federal agencies has established consumer complaint divisions that investigate consumer complaints. These efforts allow consumers to initiate action to stop illegal business practices, without filing a class action lawsuit, and so directly address the criticisms noted in your questions. These offices all offer phone numbers and e-mail addresses that consumers can use to report problems and obtain redress. In addition, many of the agencies provide information in the form of pamphlets or on-line complaint forms on their internet web sites.
The Board of Governors of the Federal Reserve System complaint division is accessible through the Boards internet web site at www.bog.frb.fed.us/pubs/complaints/ or by phone at (202) 452-3693. Consumer complaints filed against member banks are investigated by the 12 regional Federal Reserve Banks. If the investigation reveals that a federal law or regulation has been violated, the Board will require the bank to take appropriate corrective action, and then notify the consumer of the violation and the corrective action the bank has been directed to take.
The Office of the Comptroller of the Currency created the Customer Assistance Group ("CAG") to answer questions, offer guidance, and assist customers in resolving complaints about national banks. Information about filing a consumer complaint concerning a national bank is available at the OCCs internet web site at www.occ.treas.gov/customer.htm or by phoning the OCCs Customer Assistance Group ("CAG") at 1-800-613-6743. Complaints against a state-nonmember bank can be filed by contacting the FDIC through its internet web site at www.fdic.gov/consumers/index.html or by phoning 1-800-934-3342.
Violations uncovered during a regulatory examination or during the investigation of a consumers complaint can be the basis for initiating an enforcement action against the institution to compel compliance and to provide restitution to consumers where appropriate. The federal banking agencies plenary enforcement authority has been found to be comprehensive, including even the enforcement of state law. See National State Bank v. Long, 630 F.2d 981, 988-89 (3d Cir. 1980). In 1998, FDIC examination, supervision, and enforcement actions alone resulted in the reimbursement of over $1 million to 31,222 consumers for violations of the Truth-In-Lending Act by 161 FDIC-supervised banks.
Outside of the bank area, the Federal Trade Commission (the "Commission") also engages in enforcement activities that protect consumer rights in the area of consumer credit. For example, from January 1999 to January 2000, the Commission obtained consent judgments against seven subprime mortgage lenders and their owners for alleged violations of the Home Ownership and Equity Protection Act ("HOEPA"), the Truth in Lending Act ("TILA"), Regulation Z, and/or the Federal Trade Commission Act ("FTC Act").
Alongside federal agencies, state attorney generals also engage in enforcement activities that ensure consumer rights. For example, the Minnesota Attorney General recently filed a complaint against U.S. Bancorp, accusing the bank of violating the Fair Credit Reporting Act, consumer fraud, deceptive trade practices, and false advertising. U.S. Bancorp agreed to settle the lawsuit with payment of a $500,000 fine, restitution to consumers (potentially as much as $15 million in Minnesota alone), and charitable contributions. Similarly, the New York Attorney General last year reached a $6 million settlement agreement, which averted the filing of a major civil rights lawsuit in federal court, with Delta Funding, a Long Island mortgage company. Delta Funding is alleged to have charged excessive interest rates and excessive fees on mortgage loans.
These federal and state regulatory efforts are supplemented by the careful steps taken by financial institutions to assure that they adhere to the letter and spirit of the law. The fiercely competitive business of offering credit requires good customer relations. As Julie L. Williams, the OCC Chief Counsel, recently declared before the California Bankers Association, "[b]anks must integrate compliance into a broader strategy of customer relations and customer service if they are going to maintain the loyalty of consumers who are increasingly sensitive to how they are treated by financial institutions." As evidenced by the number of credit card offers in the mail, consumers can choose among sources of credit. Financial institutions cannot afford to fail to do right by their customers.
One way in which financial institutions assist their customers is by agreeing with them to arbitrate their disputes. As Congress has noted, "the advantages of arbitration are many: it is usually cheaper and faster than litigation; it can have simpler procedural and evidentiary rules; it normally minimizes hostility and is less disruptive of ongoing and future business dealings among the parties; [and] it is often more flexible in regard to scheduling." H.R. Rep. No. 97-542, at 13 (1982). Indeed, the informality and efficiency of arbitration provides a more level playing field than the courts.
As noted in your questions, Ms. Sturdevants testimony included several strident criticisms of arbitration. At best, those criticisms reflect an unfamiliarity with the rules governing arbitration. Ms. Sturdevant insists that "there will be no discovery" under the rules of the National Arbitration Forum ("NAF"). In fact, the NAF and other arbitration forums allow for discovery. See National Arbitration Forum Code of Procedure, Rule 29; see also American Arbitration Association Arbitration Rules for the Resolution of Consumer Disputes, Rule 8 (b); JAMS/Endispute Financial Services Arbitration Rules and Procedures, Rule 38. Ms. Sturdevant also insists that "an arbitrator does not have the power to order injunctive relief." In fact, arbitrators can order injunctive relief. See AAA Rule 13(c); JAMS/Endispute Rule 20(c); NAF Rule 20D. Ms. Sturdevant also further asserts that punitive damages are not available in arbitration. In fact, the Supreme Court has found that such damages are available. BMW of North America v. Gore, 517 U.S. 559, 577 (1996). Finally Ms. Sturdevant argues that arbitration "limits the availability of substantive rights and statutory remedies." In fact, the Supreme Court has explained that the opposite is true: [b]y agreeing to arbitrate a statutory claim, a party does not forego the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum." Mitsubishi Motors Corp. v. Solar Chrysler-Plymouth, Inc., 743 U.S. 614 (1985).
To be sure, there are differences between arbitrations and class actions. Those differences are purposeful, and are designed to serve "the twin goals of arbitration, namely, setting disputes efficiently and avoiding long and expensive litigation." Folkways Music Publishers, Inc. v. Weiss, 989 F.2d 108, 111 (2d Cir. 1993). The goals of class action litigation are too often the opposite. A recent study by the Rand Institute for Civil Justice found that the way class actions were settled "challenges the assertion that class actions are instruments for public good, rather than private gain." Arbitration works because of -- not in spite of -- its differences from class action litigation. See Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 489 (1989). Finally, unlike class actions, arbitration can resolve disputes that are individual in nature -- which constitute the vast majority of consumer credit disputes.
In sum, the public interest in consumer protection in the area of consumer credit is safeguarded by federal and state regulators. The interest of individuals in resolving their individual disputes is safeguarded by the complaint procedures of the banks themselves, the review of consumer complaint efforts of the regulators, and, when necessary, by a system of arbitration that preserves consumers rights while reducing the cost, difficulties and delays associated with resolving disputes through litigation. The American Bankers Association, Consumer Bankers Association, American Financial Services Association and National Retail Federation believe this system works, and look forward to working with you, the Subcommittee and its Staff to help to ensure that arbitration remains available to financial institutions and consumers.