Credit Slips

In Favor of the Consumer Financial Protection Agency (CFPA)

Adam's earlier post started the ball rolling on the CFPA discussion, and I wanted to weigh in (favorably) having now waded through the 153 pages of proposed legislation.  I take the case to be made for sheer regulatory consolidation as surely correct: the crazy quilt of overlapping agencies would make even Sir Humphrey cringe.  But the case in favor rests on much more than that, and of shrewd appeal to both typical bailywicks of the left and right.

Alternatives to Arbitration: Government ADR

The serious problems with binding mandatory arbitration (BMA) as a consumer dispute mechanism for financial services raises the question of "how can we do this better?" Any solution to financial services consumer dispute resolution must take into account four salient factors--(1) the disparity of sophistication between parties, (2) the disparity of resources between parties, (3) the repeat player interest of financial institutions, and (4) the frequently small amounts in controversy. Thus, litigation in court might do better at accounting for factor (3) than BMA, it does not deal will with factors (1), (2), and (4)--it is simply not practical for many consumers to litigate--court procedures make effective pro se representation difficult, time-consuming, and expensive, and the amounts in controversy are too small. Class actions can overcome these problems, but many disputes are not class action issues, and class actions have their own problematic dynamics. The fairness vs. practical trade-off between court and BMA isn't very satisfactory. Fortunately, we do not live in a binary world of public litigation vs. private ADR.

A very interesting new paper by Professor Daniel Schwarcz at the University of Minnesota School of Law raises another possibility: a public ADR system. Schwarcz's suggestion comes from his study of the United Kingdom's consumer dispute resolution system for insurance. In the UK the Financial Ombudsman Service (FOS) provides a dispute resolution mechanism for the entire insurance industry--it combines mediation, arbitration, and negotiation in a single scheme. The FOS (originally created by industry), is staffed primarily by non-attorneys and is separate from the insurance safety & soundness regulator, which helps guarantee its independence. And by being a public, rather than a private system, there are political checks and balances on its operations. Most important to note about the FOS, though, is that both consumers and industry are very happy with its operation.

Public Citizen Responds to Their Critics on Arbitration

In September 2007, Public Citizen released a report entitled The Arbitration Trap: How Credit Card Companies Ensnare Consumers. Using data from California arbitrations, the Public Citizen report shows how consumers are forced into a mandatory arbitration where they will be systematically disadvantage. Credit Slips blogger Elizabeth Warren wrote a post about the report, including this:

Public Citizen has picked a good target, and they have written a superb report.  There is solid research to back up the claim that arbitration is systematically biased. Senator Russ Feingold has introduced legislation to ban mandatory arbitration clauses imposed on consumers. Will this be the first serious consumer reform initiative in more than two decades?

That's exactly right, but the U.S. Chamber of Commerce did not like it. Through its Institute for Legal Reform, the Chamber had Navigant Consulting write a response to the Public Citizen report. Public Citizen has now released their own response to the Chamber of Commerce/Navigant report. The Public Citizen response, The Arbitration Debate Trap: How Opponents of Corporate Accountability Distort the Debate on Arbitration, which also takes on a law review article and a different Chamber of Commerce report by law professor Peter Rutledge.

Senate Hearings: Bartholet on NAF

Today, the Senate Judiciary Committee again held hearings on how recent Supreme Court decisions affect the everyday lives of Americans. Professor Elizabeth Bartholet of Harvard Law School testified about mandatory binding arbitration in both the employment and consumer context. As part of her testimony, she recites her own experience as an arbitrator for the National Arbitration Forum or "NAF" (for information on NAF, see previous Credit Slips posts here, here, here, here and here). Professor Bartholet summarizes this portion of her testimony thusly:

All this, together with my other experience as an arbitrator, and my reading of the literature, is what has led me to conclude that the Supreme Court's approval of pre-dispute arbitration has led to a private justice system in which banks and credit card companies are able to purchase the results they want, at the expense of the debtors forced into the system.

Professor Bartholet's full statement is available here so that you can read for yourself what caused her to come to this conclusion.

NAF, Just NAF

"NAF" sounds like maybe something you should say when you're frustrated. "NAF!, I stubbed my toe." In some circles, NAF may already be turning into an expletive. NAF stands for the National Arbitration Forum, a for-profit business that has twisted the tools of arbitration into a debt collection tool. The discussion about NAF should not be confused with the larger discussion about consumer arbitration generally. NAF is a problem unto itself. This organization's aggressive tactics have been featured several times by different bloggers here at Credit Slips (here, here, here, here) and are the subject of a lawsuit by the San Francisco city attorney.

Paul Bland, over at the Consumer Law & Policy blog, has a must-read post up about NAF's newest tactic: a push in the law reviews and bar journals to argue that courts should not look behind the debt collector's arbitration award to see if it is supported by any evidence. Paul explains why NAF would especially agitate for acceptance of this rule.

San Francisco City Attorney Sues NAF

My semi-favorite debt collector, er, I mean arbitration service, the National Arbitration Forum (NAF), has been sued by the San Francisco city attorney. The San Francisco Chronicle reports the story here. Different contributors have discussed the NAF here on Credit Slips (see here, here, here, and here), noting the high win rate for creditors and describing how the NAF acts almost as if they are a disguised debt collection agency. According to the article, the lawsuit makes very similar allegations against the NAF.

The lawsuit also names Bank of America as a defendant, which makes me wonder if that part of the lawsuit (not the part against the NAF) will be preempted under the Supreme Court's Watters decision from last spring (see here).

What a Law Professor Does on a Saturday Afternoon

It's Saturday afternoon, and as a law professor I'm spending it in my usual way--reading and rereading the various form contracts to which our household is subject. I was all involved with an engrossing new form describing my rights under section 631 of the Cable Communications Policy Act of 1984, when this caught my attention. The contract directed me to a web page that allows you to opt out of arbitration with Comcast. The hitch is that you have to opt out within 30 days of receiving your contract. You also have to know your Comcast account number.

Bankrupt Consumer Arbitration

A couple of years ago, I got all exorcised about MBNA v. Hill, 436 F.3d 104 (2d Cir. 2006). The case involved a consumer bankruptcy where MBNA had offset $159 from the consumer's account despite MBNA's admission that it had notice of the bankruptcy case. The consumer brought an action for damages because of MBNA's violation of bankruptcy's automatic stay and styled it as a class action. MBNA invoked the arbitration clause in its account agreement, and the Second Circuit agreed the case had to go to an arbitrator. Because the automatic stay is central to the U.S. bankruptcy court's power to protect the bankruptcy estate and because Hill had the potential to be an important precedent that undermined the bankruptcy court's authority, a few of us signed an amicus brief urging the court to reconsider its decision. The Second Circuit disagreed, and the case still stands.

I have been wondering where things stand with consumer arbitration in U.S. bankruptcy courts. I did a little poking around this morning and found a few reported cases where MBNA had been cited. Most of these are cases where a bankrupt consumer has asserted rights under a consumer protection statute as a counterclaim to the creditor's claim in the bankruptcy case. These are just the reported cases, and my curiosity is not about the law in the books but the the law on the ground. Are institutional creditors aggressively asserting arbitration clauses to avoid the jurisdiction of the U.S. bankruptcy courts? It's not really the assertion of arbitration against consumer protection claims in which I am interested. Rather, I am really curious to know whether institutional creditors are using arbitration in an attempt to avoid core bankruptcy procedures like the automatic stay or the claims resolution process. Comments are open.

Deathstar Arbitration

Arbitration may seem like the Andy of Mayberry form of dispute resolution--folksy, cheap and fair.  The data suggest, however, that it is Darth Vader's Death Star--the Empire always wins.  A new report from Public Citizen shows that the consumer loses in 95% of arbitration cases--dominance that would have made the Emperor proud.

The Public Citizen report follows an earlier jaw-dropping report this summer from the Christian Science Monitor showing that the most frequently chosen arbitrators ruled against consumers and for the companies 98.4% of the time.  After serving as an arbitrator, former judge Richard Neely described arbitration as full of "Godless bloodsuckers."  (Gee, Judge Neely, tell us what you really think.)  Several academic pieces of condemned the current use of arbitration clauses as well. 

Arbitration First-Hand

In our running discussion of arbitration, the data are useful, but sometimes it helps to get the flavor of how an arbitrator makes a decision. An attorney forwarded this email to me, which I post with permission of the author:

Had a very interesting experience today. Responded to an arbitration claim by FIA Card Services f/k/a MBNA denying client agreed to arbitration and disputing amount owing.  Requested an in-person hearing and client paid $250 fee for the hearing. Originally the hearing was scheduled at a location more than 3 hours away from my office. I objected and it was rescheduled about an hour away. The arbitration was Harold Curry. I showed up at 12 noon. At 12:45 no one from FIA appeared or called. The arbitrator called NAF to find out what he should do and left a message that was not answered. Mr. Curry and I went into an office and talked a while. I pointed out to him that the claim was based on breach of contract, but no contract was ever produced, so he could not possibly determine the parties' obligations or damages. He asked me what my client owed MBNA. I told him I did not know and that it was not my job to help MBNA establish damages. If they were so concerned, they could have shown up for the arbitration hearing. He admitted that they never show up and he has never had an attorney show up before. Just before I left, he suggested that we might reschedule. I told him I would not agree to rescheduling and that I believed he had no choice but to find an award in favor of my client. This made him extremely uncomfortable and he indicated he would need to talk to someone at NAF first. I reminded him that he was supposed to be impartial and he told me he would give me his decision in a few days.

Disinfecting Consumer Arbitration

Elizabeth Warren already posted on the Consumer Arbitration Fairness Act (H.R. 3010 in the U.S. House and S. 1782 in the U.S. Senate). In addition to the Christian Science Monitor story about the abuses that helped to motivate this bill, see here for a Credit Slips story from one former arbitrator about his experiences. This new bill would do nothing less than end mandatory arbitration in consumer transactions. Warren's post explains why consumers should care about this legislation, and I won't add to that. Rather, I wanted to add some different thoughts.

Stacking the Deck

Senator Russ Feingold and Representative Hank Johnson have introduced legislation to stop the fine-print, mandatory arbitration clauses that show up in millions of credit card agreements.  Once a dispute arises, if both parties want to go to arbitration, that's fine. But the company cannot hide an arbitration clause deep in the fine print of the credit card agreement, then require arbitration when they want to squeeze a customer for money the customer says she doesn't owe.

Why is this such a big deal? Arbitration sounds like a cheap, fair way to settle disputes. But a study from the Christian Science Monitor shows another reason: the arbitrators are beholden to the repeat players (credit card companies) that pay their fees. The top ten arbitrators ruled for the customers just 1.6% of the time, while arbitrators who weren't depending on arbitration fees (those who decided 3 or fewer cases a year) ruled for the customers 38% of the time.

A “Small” Exception in Credit Card Arbitration Clauses

The other day I took out a store credit card at a department store.  I wasn’t happy about it, but it was one of those stores that does not take Visa or MasterCard, and I had planned on paying for my purchase with a debit card.  I read the contract, even though the sales person rang up my purchase before handing it to me.  (I admit that I take an academic interest in even my own credit transactions.)  I was not surprised to find that the contract featured a binding arbitration clause, but I was impressed to see that this clause included an exception for consumer actions in small claims court.  Specifically, the issuer agreed not to invoke its right to arbitration if the customer sued it in small claims court. 

Bloodsuckers, Godless, or Both?

In "Arbitration and the Godless Bloodsuckers," Richard Neely relates his experience as an arbitrator for the National Arbitration Forum:

[T]he bank asks for substantial costs related to the arbitration itself, and those costs are significantly higher than court filing fees. . . . In one case that I handled, the fees alone amounted to $450. Furthermore, the arbitration company sends the arbitrator a judgment form already filled out so that all the arbitrator need do is check the appropriate box. . . .
   In my case I did not award the bank the litigation-related fees. . . . I never got another case!

In addition to writing this article, Richard Neely also happens to be a retired chief justice of the West Virginia Supreme Court. Katie Porter had previously posted about arbitration actions in credit card collection. The National Arbitration Forum seems a particular concern and appears to be nothing but a huge debt collection operation. Mr. Neely's comments are illuminating about the NAF's business practices. The article is a quick read (only two pages long) and appears in the September/October issue of the West Virginia Lawyer, which is available online here. (Note to readers: it is a huge file (9 Mb). Note to West Virginia Bar Association: thanks for making this content available online, but there are ways to do it without making a huge file.)