New Twist on Arbitrating Credit Card Debts

Arbitration clauses are now standard in credit card agreements. The credit card companies sometimes use arbitration to collect debts, turning these awards into default judgments that allow them to levy on a debtor's assets or garnish her wages. I'm working on a study to examine this trend, and the National Consumer Law Center has flagged potential problems with the practice.

Apparently, banks are finding it much less fun when consumers use arbitration against them. Although the practices are not analogous, the banks' complaints ring true to the problems that plague consumers when banks use arbitration to collect debt.

An entity called the "National Arbitration Council" (NAC) apparently gets the names of consumers from debt management plans and then suggests to consumers that they allow NAC to arbitrate their credit card debt to reduce or eliminate the amount owed. NAC then has the consumers send a letter to the credit card company claiming to amend the card agreement to include NAC as an arbitrator. Apparently, the NAC then always rules in favor of the consumer and issues "awards." The key here is that the banks are not bound by law to arbitrate with NAC. The cardholder agreements typically specify the arbitration providers. In a recent case, a federal court in Florida held that NAC had no authority to arbitrate because it was not listed in the contract and did not get the consent of both parties. The court vacated the NAC awards and enjoined the NAC from arbitrating futher disputes between the credit card comanies and their cardholders. See Citbank (South Dakota) N.A. v. National Arbitration Council, Inc., WL 2691528 (M.D.Fla., Sept. 19, 2006).

I make two observations for Credit Slips readers. First, the NAC seems to be ripping off consumers by telling them that these arbitration awards will have legal force and collecting an arbitration fee. If this is correct, where exactly is the FTC? Consumer lawyers whose clients used NAC should sue under their state's mini-UDP statutes. Second, the reasons that the banks are finding these arbitration actions frustrating track almost exactly the complaints that consumers make about the arbitration process. a) When one party basically picks the dispute provider, the results seem to stilt. The bank's leading debt dispute ADR provider, the National Arbitration Forum, for example, seems to virtually always rule in favor of the bank. b) It's confusing to get paperwork from an arbitration company and have to deal with them and their deadlines rather than dealing with the counterparty to the contract. c) Because the bank doesn't think it has to arbitrate and therefore doesn't respond, default judgment issue and it's really difficult to vacate these. 4) These NAC "arbitrations" don't actually involve proceedings or witnesses and proceed solely on the basis of paper. I'm guessing my study reveals similar lack of evidentiary processes are used by the credit card company's arbitrators But that, of course, is okay. While I think NAC is ultimately harming consumers, the credit card companies' complaints about the arbitration process would seem to just support arguments against arbitration in this context, a risky proposition given the number of arbitrations that the credit card companies institute AGAINST consumers each year.

Thanks to Jean Sternlight for bringing the Citibank v. NAC case to my attention.

Comments

[Nathan Hines]

Regarding the advice for consumer lawyers ("sue under their state's mini-UDP statutes"), might the Credit Repair Organizations Act also provide an avenue of attack? It seems like the NAC is offering to do something ("settle for less") that is typical of so-called credit repair organizations. To the extent they represent to the consumer that NAC's "rulings" have the force of law, they would be making "untrue or misleading representation of the services" they offer.

Just a thought.

[Regina Mullen]

I feel it is very important to note that arbitration is an important tool that can work to a consumer's benefit. While NAC and others apparently try to sell consumers on the idea of a magic solution to their credit problems, the fact remains that consumers often CAN have input into the arbitration process down to the choice of arbitrator. There are often provisions in arbitration agreements that provide that the court appoints an arbitrator when parties fail to agree on the neutral party to hear the dispute. The weak link, and what makes the NAC process faulty from the court cases I have read, is that they purport to issue an award without agreement, jurisdiction and any semblance of due process. Consumers should never make unilateral payments to s so-called neutral and any "arbitrator" who asks for money without the agreement of both parties in writing, a thorough conflicts check with disclaimers and other safeguards to ensure that no bias or other improper conduct occurs, is no true arbitrator. I serve both as a mediator and an arbitrator and am adamant that the process cannot favor either side. Awards must be based on the facts, the rules under which the arbitration takes place and fundamental fairness. Consumers need not fear debt arbitration, but should embrace it as a positive step towards managing their finances.