Business Week: Consumer Credit Arbitration — you lose!
Consumer credit card agreements these days typically include clauses requiring binding arbitration and stipulating which arbitration firm is used. More often than not that firm is The National Arbitration Forum (NAF). They control the market to the tune of nearly 99% of consumer credit card contracts. “Millions of credit-card accounts mandate the use of arbitration by NAF.”So says Business Week in an investigative piece by Robert Berner and Brian Grow in this week’s issue. Berner and Grow found that NAF had achieved their market share through aggressive marketing; their business development effort promised “a marked increase in recovery rates over existing collection efforts.”
Remember, this is not a collection agency we’re talking about. This is binding arbitration for resolving disputes where consumers have given up their legal rights to go to court in an agreement that in many cases (most cases?) they have not read. (Have you read your credit card contract lately? Ever?)
From the Business Week cover story — Banks vs. Consumers (Guess Who Wins):
What if a judge solicited cases from big corporations by offering them a business-friendly venue in which to pursue consumers who are behind on their bills? What if the judge tried to make this pitch more appealing by teaming up with the corporations’ outside lawyers? And what if the same corporations helped pay the judge’s salary?
It would, of course, amount to a conflict of interest and cast doubt on the fairness of proceedings before the judge.
Yet that’s essentially how one of the country’s largest private arbitration firms operates. The National Arbitration Forum (NAF), a for-profit company based in Minneapolis, specializes in resolving claims by banks, credit-card companies, and major retailers that contend consumers owe them money. Often without knowing it, individuals agree in the fine print of their credit-card applications to arbitrate any disputes over bills rather than have the cases go to court. What consumers also don’t know is that NAF, which dominates credit-card arbitration, operates a system in which it is exceedingly difficult for individuals to prevail.
Some current and former NAF arbitrators say they make decisions in haste—sometimes in just a few minutes—based on scant information and rarely with debtor participation. Consumers who have been through the process complain that NAF spews baffling paperwork and fails to provide the hearings that it promises. Corporations seldom lose. In California, the one state where arbitration results are made public, creditors win 99.998% of the time in NAF cases that are decided by arbitrators on the merits, according to a lawsuit filed by the San Francisco city attorney against NAF.
“NAF is nothing more than an arm of the collection industry hiding behind a veneer of impartiality,” says Richard Neely, a former justice of the West Virginia supreme court who as part of his private practice arbitrated several cases for NAF in 2004 and 2005.
Other examples of egregious practices include an arbitrator who says she usually takes only “four to five minutes per arbitration” and completes “10 to 12 an hour.” The target of an arbitration can be informed by mail rather than being served papers in person, and evidence can be introduced without authentication.
Is it any wonder, then, that when the May 2008 bankruptcy filing numbers were released this week the news was bleak:
[T]here were 89,560 total bankruptcy filings (of all types) in the month of May. With 21 business days in May, that is a daily rate of 4,266. That figure represents an increase of 34% from the daily rate in May 2007. This is no one-month blip in the data. The daily bankruptcy filing rate for the first five months of 2008 (4,026 per day) is 30% higher for the first five months of 2007 (3,093 per day). So far, there have been almost 423,000 bankruptcies filed in 2008. … We are still on pace for 1,000,000 bankruptcy filings in 2008.