Mandatory Arbitration: Why the Card Companies Always Won
Sorry to rag on credit-card companies again (actually, you know I love it), but news keeps coming out about their odious practices -- or in this case, the odious practices others perform for them.
Take mandatory -- sometimes called "forced" -- arbitration. You may not realize it, but buried deep in your cardholder agreement (and almost every other one on earth) is a clause that has you waiving the right to file a lawsuit and requiring that you submit any dispute to arbitration, conducted by one of three companies: the National Arbitration Forum (NAF), Judicial Arbitration and Mediation Services (JAMS), and the American Arbitration Association. Card companies (and cell phone carriers too) argue that arbitration saves everybody the time and money of going to court.
Public Citizen, the Center for Responsible Lending, Consumers Union, and other pro bono advocates, however, hate mandatory arbitration for about 391 reasons, give or take. For starters, it isn't cheap. If an ordinary schlemiel (or schlemozzle, for that matter) asked for arbitration of an unfair $1,000 charge, he would be out of pocket in 15 minutes because it costs $750 to initiate a case, and $200 to $300 an hour, split among the two parties, for an arbitrator. Unlike courts, arbitrators provide no record of proceedings and no rationale for their judgements. Worse, the clause prevents consumers from bringing class action suits. So, if you and 2 million other people found that you each wanted to contest a fraudulent charge of $10, there was squat you could do about it. As if all that weren't bad enough, a 2007 study by Public Citizen of cases brought over a four-year period in California before NAF found that consumers lost 94% of the time.
Thanks to a lawsuit filed last week against the National Arbitration Forum by Lori Swanson, Minnesota attorney general, we now know why consumers were such losers. Creditors, with the help of arbitration companies, turned consumer arbitration into a debt collection service. The NAF historically held itself out to be independent, neutral and just like a court, but Swanson charged that,
The NAF works behind the scenes--alongside creditors and against the interests of ordinary consumers--to convince credit card companies to insert arbitration provisions in their customer agreements and then appointing the Forum to decide the disputes. The lawsuit alleges that the Forum pays commissions to executives whose job it is to convince creditors to put mandatory arbitration clauses in their customer agreements. The Forum does this to generate arbitration filings in the Forum--and hence, revenue--for itself.
In 2006, it seems, Accretive, a private equity firm in New York -- sounds like something that builds up in my refrigerator if I'm not careful -- through an entity called "Agora," invested some $42 million in NAF. Around the same time, Accretive went out and acquired a batch of law firms that specialize in debt collection, which are together named Axiant. Ergo, the whole enterprise was smushed into one big debt collection agency owned by Accretive. Consumers only ever brought a few cases to arbitration. Instead, it was "creditors who brought the vast majority of claims," says Ben Wogsland, a spokesman for the Minnesota A.G.'s office. Creditors would hire Axiant law firms who would send the cases to the NAF where "neutral" arbitrators would find in favor of the credit card companies (or cell phone carriers). NAF "made representations that aligned itself against consumers, including, for example, that '[t]he customer does not know what to expect from arbitration and is more willing to pay. "Card companies would get their dough, portions which accreted at Accretive. This enterprise was chugging along nicely -- for Accretive, until Swanson brought her action. Now things have come to a welcome standstill. Over the weekend, the two sides reached a settlement that required NAF to stop taking consumer-debt cases as of this Friday, July 24. Soon after, the American Arbitration Association declared that it would follow suit. No word yet from JAMS.
But there's more. At Domestic Policy subcommittee hearings on mandatory arbitration only yesterday, Rep. Dennis Kucinich (D, Ohio) released a staff report itemizing NAF's abuses: arbitrators decided cases without any evidence, they ignored pro-consumer evidence, and they failed to dismiss cases that creditors filed beyond deadlines. Well, the list goes on and on. Kucinich is working on a bill to reform arbitration, and until new standards are set, both NAF and AAA say no more credit-card disputes for them.
If banks wind up returning to the courts to collect their dough, don't expect a golden age of consumer rights. Back in ancient '70s, before some biz executive thought up mandatory arbitration, credit card companies and banks had no problem taking huge batches of debtor cases to court -- usually to a venue that was not anywhere near where the consumer lived. The papers were delivered by "sewer service"; in other words, process servers dropped them in the gutter rather than delivering them to consumers. As a result, most debtors never appeared in court. Citibank, back in those days, won 96% of its default judgements.
Pray that Kucinich can make arbitration as neutral as it's supposed to be and get his bill through Congress.