With legal pressure ramping up against the often-criticized way to resolve disputes, card issuers are abandoning compulsory arbitration and recasting their agreements with consumers.
Even more customers can expect relief soon from a once nearly universal provision of credit card agreements that many debtors and their advocates consider profoundly unfair.
|HOW BINDING ARBITRATION WORKS|
|The overwhelming majority of cases involve consumers with unpaid bills, typically between $5,000 and $20,000. A bank will refer a debt to a bill collector; if the collector is unsuccessful, an arbitration firm is called in.|
The arbitrators hire retired judges and attorneys to hear cases. If the arbitrator — who is paid by the credit card firm — rules against the consumer, the debt collector proceeds to the courts to seek a judgment to collect.
The provision in question is the compulsory arbitration of disputes, a procedure that critics say works against the best interests of consumers, partly because it prevents them from taking their complaints to court.
Several of the nation’s largest credit card companies — including Chase and, just in recent weeks, Bank of America and Capital One — have announced that they are dropping the arbitration requirement from their consumer agreements or will not enforce it.
Credit card issuers say customer service representatives will redouble their efforts to resolve disputes at that level. If that doesn’t work, the courts will again be the answer.
The case for and against arbitration
But, for now, tens of millions of credit card and other consumer contracts still contain provisions requiring the arbitration of disputes between the customer and the lender.
Defenders of the procedure say decisions by private arbitrators are fair and relatively swift, and the program keeps the court system from becoming even more bogged down than it already is.
But consumer advocates say arbitration often is stacked against the consumer. That’s because arbitrators almost always are hired by the lenders and, thus, are to some extent beholden to them.
“Legally, we call these ‘adhesion clauses,’ meaning you get it and you have to agree to it,” said Merrill Davidoff, a Philadelphia-based attorney. “We consider them very overbearing, one-sided clauses that required consumers to bring disputes to arbitration and denied consumers the right to participate or institute class actions.”
The tipping points
And, so, the action accelerated during the summer. Issuers are believed to be in negotiations with lawyers representing consumers in a class-action lawsuit. At the same time, the Obama administration and powerful members of Congress are calling for federal action to restrict or eliminate mandatory arbitration of disagreements between credit card users and lenders.
“We think this trend, in the first five or seven years of the decade, very much went against consumers and in the favor of banks and insurance companies,” said Davidoff. His firm, Berger & Montague, four years ago filed suit accusing a number of credit card issuers of unlawfully colluding against consumers by requiring them to arbitrate disputes.
“But we’ve won some victories turning back the tide of arbitration,” Davidoff said. “One way or the other, these arbitration clauses will become less prevalent.”
So, where will this leave consumers?
Exhibit A: On July 14, Minnesota Attorney General Lori Swanson filed a lawsuit that accused the National Arbitration Forum (NAF) — one of the largest of such firms, handling more than 200,000 disputes a year — of deceiving consumers.
She said the company portrayed itself as a neutral arbiter, even though it was affiliated with one of the nation’s largest debt collection agencies. In addition, the suit alleged, NAF maintained close ties to credit card issuers.
A 2007 arbitration study by Public Citizen, a consumer rights organization, found that consumers lost 94 percent of the cases filed by MBNA (now owned by Bank of America) and arbitrated by NAF.
Just four days after the Minnesota suit was filed, NAF agreed not to accept new cases from credit card companies, banks, utilities, health care operations, cell phone companies and many other firms.
Exhibit B: Even a leading group of arbitrators called for reform.
A few days after NAF capitulated, a representative of the American Arbitration Association (AAA) told a U.S. House subcommittee that action was required.
“A national policy committee dedicated to meaningful reform can enhance an array of due-process elements so that there is deeper fairness and transparency,” Richard Naimark, the AAA’s senior vice president, testified to Congress.
“Consumers deserve an alternative to litigation,” he said, “but they also need to be able to trust that option.”
At the same time, the AAA said it was suspending its consumer debt collection programs.
The dam was broken.
Issuers take action
Chase soon announced that it would stop filing arbitration claims against consumers, and Bank of America said it would stop enforcing the provision in its consumer credit card agreements.
In December 2009, Capital One joined in the retreat and Bank of America took its action a step further, saying it would eliminate the provision from its consumer and small business credit card contracts.
All three also tentatively settled their portions of the class action lawsuit filed by Davidoff and his firm, though Capital One and Bank of America say their decisions to terminate their arbitration program were not directly related to that legal settlement.
“The implication that the litigation drove our decision to drop arbitration from our agreements is incorrect,” said Pam Girardo, a spokeswoman for Capital One.
She said the “vast majority” of customer disputes already were being handled in other ways, primarily through discussions with customer service representatives, and the bank’s policy for some time has been not to use mandatory arbitration for collection purposes.
“In fact, we’re scheduled to send new cardholder agreements to all customers in January 2010, and we decided to drop the mandatory arbitration provision because it has not been utilized often enough by either our cardholders or Capital One to warrant having it remain in the agreement,” she said.
Said Shirley Norton, a spokeswoman for Bank of America:
“Both sides agreed to the settlement to avoid the costs and uncertainty of further legal action. Bank of America denies any liability or wrongdoing in the matter and believes that it fully complied with all laws.”
When the settlement is approved by the court, she said, all current consumer and small business credit cardholders will be notified that the mandatory arbitration provision has been eliminated.
“Next year, we will incorporate the new policy into all new consumer and small business cardholder agreements,” Norton said.
“We afford all card members the choice to accept or opt out of arbitration,” said Matthew Towson, Discover’s senior manager of community affair and media relations.
“If the card member chooses to opt out, we do not close their account, and they still would retain all card member privileges,” he said. “Discover also does not initiate arbitration as a means of enforcing customer collections.”
Though the much discussed Credit CARD Act of 2009, which delivers various reforms (many of which take effect in February), doesn’t deal with arbitration, a House-passed law to create a Consumer Financial Protection Agency would give that office the authority to eliminate, or at least curb, consumer arbitration.
Two other bills restricting consumer arbitration also were being passed around Congress this year.
Taken as a whole, the future of consumer arbitration seems clear — and not very promising. And consumer advocates are pressing their advantage.
“These reforms are occurring because the Minnesota attorney general’s lawsuit exposed that credit card companies and supposedly neutral arbitration companies were colluding,” said Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group (PIRG), a federation of consumer interest organizations around the nation.
“The modest actions by some, but not all, [credit card] firms do not eliminate the need for full-fledged congressional bans on forced arbitration,” he said.
See related:A comprehensive look at the Credit CARD Act of 2009, 11 things to know about debt collectors and collection agencies, Credit card binding arbitration system crumbling, Leading arbitration firm quits the business after lawsuit, Minnesota Attorney General files suit against arbitration firm