Credit Card Companies Dealt A Major Blow

credit card mail

That was fast! 

Last week the Minnesota attorney general sued the National Arbitration Forum alleging credit card companies were too closely tied to the creditors in the arbitrations the NAF conducted between consumers and credit card companies. 

This weekend, a settlement was reached and the NAF – one of the biggest players in the credit card arbitration game, according the WSJ Law Blog – will no longer be a forum for consumer-related arbitrations.

This suit is going to get a lot of attention when Obama’s proposed Consumer Protection Agency gets rolling.

From Business Week:

The settlement with the National Arbitration Forum comes after the Minnesota AG sued the firm on July 14 for consumer fraud, deceptive trade practices, and false advertising. The civil suit, filed in state district court in Minneapolis, alleged conflicting ties between the NAF and debt-collection law firms that represented major credit-card companies. The suit also alleged that New York hedge fund Accretive LLC owned stakes in such collection law firms and the NAF, sending arbitration business between the two.

Under the terms of the consent decree, dated July 17 and signed by the AG and NAF officials, the arbitration firm by the end of this week will stop accepting new consumer arbitrations of any sort. These include arbitrations over disputed credit-card debt as well as new lines of business the NAF has moved into, such as arbitrating consumer debts in healthcare, telecommunications, utilities, mortgages, and consumer leases. The only business NAF can now be involved with is in arbitrating Internet domain disputes, a business it has long been in.

The settlement throws in turmoil an increasingly favoured venue for credit-card companies to collect disputed debts from card holders. Since the beginning of the decade, most card companies have included mandatory arbitration clauses in credit-card contracts, forcing consumers to arbitrate rather than use the courts.

The Minnesota suit said that Bank of America, JP Morgan Chase, Citigroup, Discover Card, and American Express use NAF, which is based in St. Louis Park, Minn.

Attorney General Swanson will testify this week before Congress and will ask that mandatory arbitration clauses in consumer contracts be prohibited, according to the Minnesota Star-Tribune.  

As we mentioned earlier, one of the powers of the proposed Consumer Protection Agency is to review and potentially ban mandatory arbitration clauses in certain contracts, although no one really knows which ones yet. With AG Swanson already asking industry heavyweight the American Arbitration Association to voluntarily end its own credit card-related arbitrations, a major shake-up in the industry could be on its way. 

If mandatory arbitration clauses are prohibited, when a customer dispute arises or the card company needs to enforce a debt and more informal collections fail, the company will have to either bring the case in court or request the cardholder submit to mediation or arbitration.

It is important to point out that nothing has been said about ending voluntary arbitrations.  The parties can still agree to arbitrate either once a dispute arises or when they enter into a mutually negotiated contract.  But if credit card and other consumer companies can no longer insist disputes be kept out of court, the flood of lawsuits tort reformers always threaten – according to the suit, the NAF handled more than 200,000 collection claims in 2006 – could actually occur. 

Complete destruction of mandatory arbitration clauses is unlikely – the lobbyists for the related industries are sure to see to that.  But the back-and-forth could result in a few compromises that give consumers more power in choosing the location and forum for the arbitration, as well as increased abilities to appeal the arbitration decision.

Some argue there could be a flip side to that increase in consumer power. Credit card companies clearly believe arbitration is the cheaper option, and any increase they see in costs to fight court battles will likely be passed on to consumers through higher fees, higher rates and less credit availability. There’s no such thing as a free lunch, even if you put it on your credit card.

The intricacies of arbitration clauses are no doubt tiresome (which is why none of us ever read them!), but the fight over them could be huge.


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