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Consumer advocates slam credit-card arbitration

They charge the deck is tilted in favor of banks in disputes with credit-card holders.

By Simone BaribeauContributor to The Christian Science Monitor / July 16, 2007



New York

Javier Beltran was shocked when an arbitrator ruled that he owed $10,000 on a $2,500 loan. The money had helped him finance his brother's funeral expenses. But after failing to repay the debt promptly, Mr. Beltran had high interest charges, late fees, and attorneys' fees tacked onto the bill.

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When he signed the contract in 2000, Beltran was unaware that he'd agreed to have a private third party settle any disputes. In fact, when his case was heard, and the arbitrator ruled against him, Mr. Beltran wasn't even there, nor did he have anyone representing him.

"I still do not know what arbitration is," said Beltran in a sworn affidavit.

Beltran's case is far from unique. In fact, if you own a credit card, chances are you have a mandatory arbitration clause. What that essentially means is that if you think the credit-card company has charged you wrongly, you might not be fighting in court. Instead, you may find your case brought before an arbitrator who works for a private arbitration group, in many cases, it's a group chosen by the banks.

The practice has become common over the past decade. A 2004 survey published by Law & Contemporary Problems found that mandatory arbitration clauses covered more than two-thirds of finance-related consumer contracts. And now, as more credit-card users end up in arbitration, consumer advocates say that the arbitration process makes it more difficult for consumers to dispute debts.

Complaints have recently caught the attention of Congress. On Thursday, Sen. Russ Feingold (D) of Wisconsin and Rep. Hank Johnson (D) of Georgia unveiled legislation that would prohibit predispute mandatory arbitration clauses in consumer agreements, letting consumers choose whether to go to arbitration or court if a dispute arose.

"Arbitration can be a fair and efficient way to handle disputes, but only when it is entered into knowingly and voluntarily by both parties," Senator Feingold said in a release. "People from all walks of life ... often find themselves strong-armed into mandatory arbitration agreements. We need to make sure that all Americans can still have their day in court."

In June, an oversight committee held

hearings on mandatory arbitration's fairness. "[W]hat was once a choice has become a mandatory part of consumer contracts," said Rep. Linda Sánchez (D) of California, chair of the House subcommittee that held the hearing. "And despite all of the benefits of arbitration, mandatory arbitration agreements may not always be in the best interest of consumers."

Arbitration critics' concerns are myriad: Consumers may not realize they've agreed to arbitration and aren't in a position to negotiate contracts; unlike court hearings, arbitration hearings aren't generally open to the public, and consumers may be less likely to respond to a hearing notice from an arbitration group they haven't heard of than to a court summons.

But at the heart of the controversy is the idea that arbitration groups are dependent on the goodwill of repeat litigants – in this case creditors – for business. The result, consumer advocates claim, are incentives for arbitration groups to create rules that, though neutral when taken at face value, may favor creditors.

Arbitration proponents say that hearings are fair and help relieve caseloads of overburdened courts. They say the private system is cheaper, faster, and more efficient than litigation for consumers as well as business. Consumers, they say, have many opportunities to dispute a creditor's claim – debtors are sent notices via certified mail and can request a hearing in person or a document hearing. Before a creditor can act to collect an award, a court must confirm it.

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