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.
- Pending U.S. Legislation on Arbitration and Mediation: Update (Oct. 14)
- Class Action Suit Filed Against the National Arbitration Forum (Sept. 17)
- U.S. Congressional Hearing | “Mandatory Binding Arbitration – Is it Fair and Voluntary?” (Sept. 16)
- Videos of Congressional Hearing | Arbitration or Arbitrability?: the Misuse of Arbitration to Collect Consumer Debts (Sept. 7)
- American Bar Association’s Resolutions on the Arbitration Fairness Act of 2009 (Aug. 26)
- Recent Developments in Arbitration of Consumer Disputes (Aug. 14)
- Testimony from the U.S. Congress Hearing on the Misuse of Arbitration to Collect Consumer Debts (July 24)
- The American Arbitration Association Confirms Today That It Supends Arbitration of Consumer Debt Collection (July 23)
- National Arbitration Forum Settles with Minnesota’s Attorney General (July 20)
- U.S. Congress Hearing on the Misuse of Arbitration to Collect Consumer Debts (July 20)
- National Arbitration Forum Sued by the Minnesota Attorney General (July 16)
- National Arbitration Forum’s Response to NPR Arbitration Story (June 17)
- Employment and Consumer Arbitration: NPR Article (June 10)