Beginning in 2000-2001, several major credit card banks started using a tactic called “consumer arbitration” as part of the collection process. It was a rigged game from start to finish, and I’m pleased to report that consumers have finally won a major victory, thanks to a lawsuit filed by the Attorney General of Minnesota. Forced arbitration, used as a collection tactic, is about to go the way of the dinosaur. It’s been a long time coming, and this is a huge win for consumers.
First, a little background. The original idea behind arbitration is to provide businesses and individuals with a means of resolving disputes outside the formal legal system. Instead of lawsuits, why not sit down with a neutral arbitrator and negotiate an out-of-court compromise? Makes sense, right? This also goes by the name of “alternative dispute resolution,” but is usually simply called “arbitration.”
The banks all originally started including *mandatory arbitration* to their credit card contracts with the aim of blocking consumer class-action lawsuits. In other words, the banks were tired of being on the receiving end of class-action lawsuits, so they inserted a clause that basically says, “Use this card, and you waive your rights to sue us, and are required to use the arbitration process for dispute resolution.”
Leaving aside the questionable legality of forcing consumers to give up their day in court, the real fireworks began when the banks started using it the OTHER WAY AROUND – as part of the collection process. The banks would forward delinquent files to a collection law firm, who would then send a demand notice coupled with a threat of filing an arbitration claim. The supposedly neutral arbitrator they used was the National Arbitration Forum (NAF). If the consumer failed to comply and resume payments, the file went to the NAF for “arbitration.” The NAF would then promptly grant an “award” to the credit card bank. This award represented nothing more than a piece of paper, and did not carry the same legal weight as a formal court judgment. However, the bank (or the law firm that initiated the action) had the option of forwarding the award to a law firm in the client’s home state, where it could then be converted to a legal judgment against the debtor.
Here’s the problem: Arbitration, by definition, is supposed to be conducted by a NEUTRAL third party that has no conflict of interest – that is, no direct involvement with either party to the dispute. Yet the National Arbitration Forum was literally nothing more than a rubber stamp for the credit card industry. The creditors hardly ever lost! They got their award almost every single time, with exceptions being very rare. Statistics (assembled by consumer groups rightfully concerned about this tactic) indicated award rates in excess of 94% in favor of the creditor. Basically, it became nothing more than a paper mill – a corrupt system that in the end had nothing to do with its original intention.
Yet this sad state of affairs dragged on for nearly a decade. Flash forward to 2009, and the Attorney General of Minnesota decided that enough was enough. The MN AG sued the National Arbitration Forum. The AG’s written complaint is a thing of beauty, the product of some very expert detective work performed by the AG’s staff. The complex web of interlocking relationships between the banks and the forum has to be seen to be believed. Heck, Bernie Madoff could have learned a thing or two from these guys!
Rather than admit any wrongdoing, the NAF “voluntarily” agreed to suspend all consumer arbitration activity, citing a litany of self-serving excuses for this abrupt shift. Since virtually all of the NAF’s business came from the credit card banks, this essentially means that the NAF is no more, at least relative to consumer debt arbitration. Folks, this is a major win for consumers.
The fireworks are far from over though. Hundreds of thousands of consumers were victimized by this rigged procedure, and the class action suits against the NAF (and their cohort banks) are just kicking into gear now. The fun will likely drag on for several years, with the class-action attorneys being the only real winners. But at least it means that consumers will no longer need to dread the “kangaroo court” that was the National Arbitration Forum.
Predictably, one major creditor just announced it will forgo the mandatory arbitration clause from their card agreements. Naturally, the announcement was pitched in such a fashion as to make it seem like they were being high-minded. In reality, it was nothing more than self-interest. They can’t arbitrate anymore anyway, now that their captive arbitration forum has folded its tent, so why not get a little PR value out of a major announcement on a new consumer-friendly “no mandatory arbitration” policy? The other major credit card issuers will probably jump in soon with similar announcements. Time will tell whether or not they craft some other equally duplicitous collection scheme.