Research and Statistics

Credit card binding arbitration system crumbling


A controversial, but common practice in the credit card industry — requiring consumers to go to arbitrators rather than the courts when disputes arise — appears on the verge of collapse.

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Two more supporting beams have crumbled and now, with astonishing speed, the entire edifice of the mandatory credit card arbitration system is collapsing.

A second major arbitration firm — the American Arbitration Association — said Tuesday that it has suspended all consumer arbitration activities. And JPMorgan Chase, one of the nation’s largest credit card issuers, announced Wednesday that it would stop filing such claims against consumers.

These moves came just days after a forced and full retreat staged by the National Arbitration Forum, the nation’s largest credit card arbitration firm. It surrendered in response to pending action in Congress and several lawsuits, including a sharply worded action filed last week by Minnesota’s attorney general.

binding arbitration That lawsuit echoed complaints long lodged by consumers and their advocates. They say that mandatory arbitration has been quietly slipped into the fine print of millions of credit card, cell phone and other consumer contracts, to the detriment of consumers.

Defenders of the system say arbitration provides quicker, cheaper resolution of billing and other disputes; critics say it stacks the deck against consumers and forces them to waive their rights, often unknowingly, to sue in court.

‘The beginning of the end’
“This is the beginning of the end for forced arbitration in all consumer contracts,” Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group, a federation of consumer interest organizations around the nation, said Thursday.

“It will lead to a fairer marketplace,” he said. “Forced arbitration has allowed firms to ignore consumer complaints and perpetuate unfair practices, knowing that the consumer had no recourse other than a stacked kangaroo court.”

Here is a review of recent events:

Minnesota Attorney General Lori Swanson ignited the swift cascade of developments by filing suit July 14 against the National Arbitration Forum, which she accused of deceiving credit card customers and other consumers as it handled more than 200,000 billing or collection disputes a year.

She said the company claimed to be a neutral arbiter but was, in fact, affiliated with one of the nation’s largest debt collection agencies. In addition, the suit alleged, NAF maintained close ties to credit card issuers.

The NAF capitulated just four days later. On Sunday, it agreed not to accept new cases filed by credit card companies, banks, utilities, health care operations, cell phone companies and other firms. A spokesman said the company maintains that its operations were fair and proper, but he said it can no longer afford to defend itself.

Consumer activists cheered.

“The issues raised by the Minnesota lawsuit against NAF demonstrate the dangers of letting major corporations force consumers into private, secretive tribunals of their own choosing,” said David Arkush, director of Private Citizen’s Congress Watch Division.

He and others urged other companies to take similar steps. They didn’t have long to wait.

On Tuesday, the American Arbitration Association, another major arbitration firm, also took action. It said it reviewed the situation and decided to suspend participation in consumer debt disputes, pending the development of new guidelines.

That group’s senior vice president, Richard Naimark, testified Wednesday before a congressional subcommittee that is examining the controversy.

“As a result of the AAA’s review and our experiences administering debt collection arbitrations,” he said, “in addition to our consideration of a number of policy concerns that have been raised, it is the AAA’s position that a series of important fairness and due process concerns must be addressed and resolved before we will proceed with the administration of any future debt collection arbitrations.

“Until such time, the AAA has placed a moratorium on the administration of any consumer debt collection arbitration programs.”

As a result of recent events, we are taking swift and appropriate action.

— Paul Hartwick
spokesman, JP Morgan Chase

JPMorgan Chase, the nation’s largest issuer of credit cards, announced Wednesday that it no longer would submit disputes to arbitration and was reevaluating the inclusion of arbitration provisions in its consumer contracts.

“Chase seeks to provide excellent service with integrity and respect for our customers,” said Paul Hartwick, a Chase spokesman. “As a result of recent events, we are taking swift and appropriate action.”

Assuming that other credit card, cell phone and consumer-oriented firms follow suit, this leaves open the question of what comes next. That is, what recourse will consumers and creditors have when billing disputes — including nonpayment of bills — arise?

One possibility: A flood of lawsuits will be filed through the court system.

Views differ on that issue.

“We’re currently evaluating all of our options,” Hartwick said. “And, yes, pursuing issues in court is one of those options.”

Mierzwinski, the consumer advocate, had a different perspective.

“It won’t lead to more lawsuits,” he said. “It will lead to a fairer marketplace. It’s a great day.”

See related: Minnesota attorney general files lawsuit over binding arbitration, Study says binding arbitration is fair, Credit card arbitration: What it is, how it works, 6 tips for dealing with binding arbitration

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