WSJ: “Turmoil in Arbitration Empire Upends Credit-Card Disputes”

Last week’s Wall Street Journal had an interesting and well-written article about arbitration of credit card disputes, centered around the National Arbitration Forum (NAF). Hat tip to Don Philbin. Here is an excerpt:

Arbitration and mediation have existed as ways to resolve disputes in the U.S. for more than 200 years. They became the standard practice in the financial world after 1987, when a Supreme Court decision gave securities firms the go-ahead to require arbitration to resolve brokerage-account disputes.

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.

Former arbitrators, a congressional subcommittee, consumers and government suits are now alleging that NAF has been systematically ruling against consumers for years. Banks prevail over consumers in 94% of debt-collection arbitrations, an NAF official said in recent testimony to a congressional subcommittee. Arbitration advocates defend those results, citing studies that show debtors lose at a similar rate in court. They say that there is typically a long paper trail proving that customers owe the amounts in dispute.

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

A sweeping overhaul won’t occur unless Congress decides whether to pass laws limiting how arbitration can be used. But arbitration experts now expect that more collection claims will be funneled into the courts.

Read the full article here.

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