More credit card issuers ditch mandatory binding arbitration

Even more customers can expectrelief soon from a once nearly universal provisionof credit card agreements that many debtors and their advocates considerprofoundly unfair.

The provision in question is the compulsory arbitration of disputes, a procedure that critics say worksagainst the best interests of consumers, partly because it prevents them fromtaking their complaints to court.

Several of the nation's largestcredit card companies -- including Chase and, just in recent weeks, Bank of America and Capital One -- have announced that they aredropping the arbitration requirement from their consumer agreements or will notenforce it.

Credit card issuers say customer service representatives will redoubletheir efforts to resolve disputes at that level. If that doesn't work, thecourts will again be the answer.

The case for andagainst arbitrationBut, for now, tens of millions of credit card and other consumercontracts still contain provisions requiring the arbitration of disputesbetween the customer and the lender.

Defenders of the procedure saydecisions by private arbitrators are fair and relatively swift, and the programkeeps the court system from becoming even more bogged down than it already is.

But consumer advocates say arbitrationoften is stacked against the consumer. That's because arbitrators almost alwaysare hired by the lenders and, thus, are to some extent beholden to them.

"Legally, we call these 'adhesionclauses,' meaning you get it and you have to agree to it," said Merrill Davidoff, aPhiladelphia-based attorney. "Weconsider them very overbearing, one-sided clauses that required consumers tobring disputes to arbitration and denied consumers the right to participate orinstitute class actions."

The tipping pointsAnd, so, the action acceleratedduring the summer. Issuers arebelieved to be in negotiations with lawyers representing consumers in aclass-action lawsuit. At the same time, the Obama administration and powerful membersof Congress are calling for federal action to restrict or eliminate mandatory arbitrationof disagreements between credit card users and lenders.

"We think this trend, in the firstfive or seven years of the decade, very much went against consumers and in thefavor of banks and insurance companies," said Davidoff. His firm, Berger & Montague, four years agofiled suit accusing a number of credit card issuers of unlawfully colludingagainst consumers by requiring them to arbitrate disputes.

"But we've won some victoriesturning back the tide of arbitration," Davidoff said. "One way or the other,these arbitration clauses will become less prevalent."

So, where will this leave consumers?

Exhibit A: On July 14, Minnesota Attorney GeneralLori Swanson filed a lawsuit that accused the National Arbitration Forum (NAF) -- oneof the largest of such firms, handling more than 200,000 disputes a year -- ofdeceiving consumers.

She said the company portrayed itself as a neutralarbiter, even though it was affiliated with one of the nation's largestdebt collection agencies. In addition, the suit alleged, NAF maintained closeties to credit card issuers.

A 2007 arbitration study by Public Citizen, aconsumer rights organization, found that consumers lost 94 percent of the casesfiled by MBNA (now owned by Bank of America) and arbitrated by NAF.

Just four days after the Minnesota suit wasfiled, NAF agreed not to accept new cases from credit card companies, banks,utilities, health care operations, cell phone companies and many other firms.

Exhibit B: Even a leading group of arbitrators called for reform.

A few days after NAF capitulated, a representative ofthe American Arbitration Association (AAA) told a U.S. House subcommittee that action wasrequired.

"A national policy committee dedicated to meaningfulreform can enhance an array of due-process elements so that there is deeperfairness and transparency," Richard Naimark, the AAA's senior vice president,testified to Congress.

"Consumers deserve an alternative to litigation," hesaid, "but they also need to be able to trust that option."

At the same time, the AAA said it was suspending itsconsumer debt collection programs.

The dam was broken.

Issuers take actionChase soon announced that it would stopfiling arbitration claims against consumers, and Bank of America said it wouldstop enforcing the provision in its consumer credit card agreements.

In December 2009, Capital One joined in the retreat and Bankof America took its action a step further, saying it would eliminate theprovision from its consumer and small business credit card contracts.

All three also tentatively settled their portions ofthe class action lawsuit filed by Davidoff and his firm, though Capital One andBank of America say their decisions to terminate their arbitration program werenot directly related to that legal settlement.

"Theimplication that the litigation drove our decision to drop arbitration from ouragreements is incorrect," said Pam Girardo, a spokeswoman for Capital One.

Shesaid the "vast majority" of customer disputes already were being handled inother ways, primarily through discussions with customer servicerepresentatives, and the bank's policy for some time has been not to usemandatory arbitration for collection purposes.

"Infact, we're scheduled to send new cardholder agreements to all customers inJanuary 2010, and we decided to drop the mandatory arbitration provision becauseit has not been utilized often enough by either our cardholders or Capital Oneto warrant having it remain in the agreement," she said.

SaidShirley Norton, a spokeswoman for Bank of America:

"Both sides agreed to the settlement toavoid the costs and uncertainty of further legal action. Bank of America deniesany liability or wrongdoing in the matter and believes that it fully compliedwith all laws."

When the settlement is approved by the court,she said, all current consumer and small business credit cardholders will benotified that the mandatory arbitration provision has been eliminated.

"Next year, we will incorporate the newpolicy into all new consumer and small business cardholder agreements," Nortonsaid.

Severalother credit card issuers, including Citi and Discover, are still named in thesuit and have not made recent announcements, but the trend away from forcedarbitration is clear.

"We afford all card members the choice toaccept or opt out of arbitration," said Matthew Towson, Discover's seniormanager of community affair and media relations.

"If the card member chooses to opt out, wedo not close their account, and they still would retain all card member privileges,"he said. "Discover also does not initiate arbitration as a means of enforcingcustomer collections."

What's next?Though the much discussed Credit CARD Act of 2009,which delivers various reforms (many of which take effect in February), doesn'tdeal with arbitration, a House-passed law to create a Consumer Financial Protection Agency would give that office the authority to eliminate, or at least curb, consumer arbitration.

Two other bills restricting consumer arbitration alsowere being passed around Congress this year.

Taken as a whole, the future of consumer arbitrationseems clear -- and not very promising. And consumer advocates are pressing theiradvantage.

"These reforms are occurring because the Minnesotaattorney general's lawsuit exposed that credit card companies and supposedlyneutral arbitration companies were colluding," said Ed Mierzwinski, consumer program director of theU.S. Public Interest Research Group (PIRG), a federation of consumer interestorganizations around the nation.

"The modest actions by some, but not all, [creditcard] firms do not eliminate the need for full-fledged congressional banson forced arbitration," he said.

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