Debt Arbitration -- The
Pendulum is Swinging Back


Our article on Binding Mandatory Arbitration pointed out how this conflict resolution option badly hurts the consumer. From credit cards to nursing homes to employment, companies employed BMA through the offices of the National Arbitration Forum (NAF) and, to a lesser extent, American Arbitration Association, to provide "rubber stamp" justice to financially vulnerable consumers.

In a typical case, a bank refers an unpaid credit-card bill to a debt collector. If the collector is unsuccessful at recovering it, it refers the case to an arbitration body. Arbitration bodies, such as NAF and AAA, which generated revenue by charging fees to the parties involved, use retired judges and attorneys as arbitrators who decide the cases. If the arbitrator rules for the creditor, the collector can ask a court for a judgment to collect. Because a debt collector can earn up to a third of the debt outstanding when the ruling is in the bank's favor, it can be in a collector's interest for an arbitrator to rule against the card holder.



In a July complaint, the Minnesota attorney general's office alleged NAF deceived consumers and engaged in false advertising. Consumers didn't realize NAF was financially affiliated with "one of the country's major debt collection enterprises," the complaint alleged. While telling consumers that it was an impartial arbitrator, NAF worked closely with creditors, the regulator claimed, including drafting claims against consumers.

Also in July, a congressional subcommittee, which began an investigation last year to study the fairness of mandatory arbitration, concluded that the current arbitration system is "ripe for abuse." Arbitration, as "operated by NAF, does not provide protection for those consumers," the committee said.

NAF says its arbitration system is fair. It provides "the most inexpensive option for consumers to resolve a dispute," rather than going to court, according to an NAF statement. NAF settled the case with Minnesota Attorney General Lori Swanson in July without admitting the charges. As part of the settlement, it agreed to stop arbitrating credit-card cases nationwide.

Since its settlement with the Minnesota attorney general, NAF has focused on other forms of arbitration such as domain-name disputes. It has been hit by numerous complaints alleging it favored its corporate clients in credit-card disputes.

The case has had a nationwide effect. The AAA, which handled far fewer of the cases than NAF, has also stopped hearing such cases. The AAA said its decision wasn't related to NAF's case, but it decided to stop those arbitrations after an evaluation revealed "weaknesses in the consumer debt collection arbitration process," according to its Web site.

The exit of the nation's two main debt arbitrators is part of a larger shift by banks away from requiring unhappy customers to arbitrate disputes, rather than go to court. In August, Bank of America Corp., which had used NAF to handle disputes, said credit-card holders now are free to go to court rather than being forced into arbitration. J.P. Morgan Chase & Co., citing recent events, ceased filing new arbitration credit-card claims in July and is evaluating whether to continue to include an arbitration clause in consumer contracts.

In fact, the incestuous relationship between NAF's major stockholder, Accretive LLC and Accretive's debt collection business venture which was created to collect consumer debt in NAF cases was far more byzantine. For the full story go to Turmoil in Arbitration Empire Upends Credit-Card Disputes .

Congress has responded with a spate of new legislation including:

The Arbitration Fairness Act of 2009 which would ban mandatory pre-dispute arbitration in employment, consumer, and franchise contracts. Click here to check out the Senate version: S. 931. House version: H.R. 1020.

The Employee Free Choice Act of 2009 would amend the National Labor Relations Act to require first mediation and then binding arbitration if both parties are unable to reach an agreement within a certain time frame. Senate version: S. 560. House version: H.R. 1409.

The Payday Loan Reform Act of 2009 which would prohibit a mandatory arbitration clause that is "oppressive, unfair, unconscionable, or substantially in derogation of the rights of consumers." H.R 1214.

The Fairness in Nursing Home Arbitration Act of 2009 would render pre-dispute arbitration clauses in nursing home contracts unenforceable. Senate version: S. 512. House version: H.R. 1237.

The Consumer Fairness Act of 2009 would treat arbitration clauses which are unilaterally imposed on consumers as an unfair and deceptive trade practice and prohibit their use in consumer transactions. H.R. 991.

For a complete listing of bills before Congress aimed at addressing this problem as well as continuing updates go to: Disputing, Conversations about Dispute Resolution.

For more information about negotiating debt, click on any of the links below.

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