Consumer advocates slam credit-card arbitration
They charge the deck is tilted in favor of banks in disputes with credit-card holders.
from the July 16, 2007 edition
Page 2 of 4
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.
Despite advocates' concerns, it's unclear whether consumers who go through arbitration are any more likely to get a judgment against them than those who go to court. The National Arbitration Forum (NAF), one of the nation's largest private arbitration firms, is commonly used by creditors and secondary debt buyers. A Monitor analysis of the last year of available data from NAF found that arbitrators awarded in favor of creditors and debt buyers in more than 96 percent of the cases. () Such results may be similar to outcomes in court. It also found that the 10 most frequently used arbitrators – who decided almost 60 percent of the cases heard – decided in favor of the consumer only 1.6 percent of the time, while arbitrators who decided three or fewer cases decided for the consumer 38 percent of the time.
NAF would not comment on the findings because it had not participated in the analysis, but maintains that its arbitrators are neutral. Edward Anderson, managing director of NAF, says that caseloads of arbitrators probably reflect types of cases. "Undoubtedly, the more complex the disputes, the more arbitrator time would be involved and the fewer cases an arbitrator would be able to handle," he writes in an e-mail, noting that cases where one party does not respond are less complex than those where there is a controversy. Indeed, arbitrators who heard few cases were far more likely to hear contested cases than other arbitrators.
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