Credit card companies, like brokerage firms, have typically required customers to agree to binding arbitration to settle any disputes that may arise between them, and waive their right to tale the company to court. The practice of inserting mandatory arbitration clauses in consumer contracts has been targeted for reform by the Obama administration.
Proponents of mandatory arbitration argue that it is quicker and cheaper than court, and just as fair. But mandatory securities arbitration has been criticized as inherently biased because, for one thing, securities arbitrations are administered by the securities industry’s “self-regulatory” organization. Critics argue that it is really little more than a trade organization.
Similarly, an organization that administers many if not most of the arbitrations between credit card companies and consumers, the National Arbitration Forum (NAF), is a closely-held, for-profit company that has financial ties to the debt-collection industry, according to the Minnesota Attorney General. (See the July 21, 2009 Wall Street Journal article entitled “Credit-Card Companies Tossed Into Disarray,” by Robin Sidel and Amol Sharma.) In 2006, the NAF administered 214,000 such arbitrations. The NAF says that companies win 94% of the consumer arbitrations it administers.
Last month, the Minnesota Attorney General sued the NAF alleging that it violated Minnesota laws against consumer fraud, deceptive trade practices and false advertising by failing to disclose those financial ties. The NAF has been hit with a wave of lawsuits, according to its spokesperson. The NAF agreed to stop administering consumer debt arbitrations. The American Arbitration Association followed suit. “This is an issue beyond any one problem company,” said Minnesota Attorney General Lori Swanson. “It is a systemic industry-wide problem. Consumers are giving away rights without even knowing it.”
A dispute resolution process, like the financial markets, cannot work if there is a widespread perception that it is basically crooked and unfair. Proponents can say what they want about the benefits of mandatory arbitration, but the existence of financial ties between the arbitration forum and the industry looks crooked. Combine that with a 94% loss rate for consumers, and the fact that individual consumers have no power to bargain-away mandatory arbitration clauses even if they know about them, and you have the proverbial poisoned chalice.