Minnesota Lawsuit Shines Spotlight On Big Banks' Card Arbitration
Swanson filed her lawsuit against the National Arbitration Forum, a for-profit firm widely used by large bank card issuers as an inexpensive tool to resolve disputes with cardholders. In the complaint, Swanson charged that, rather than being a neutral arbiter of disputes, the NAF had not disclosed that it had financial links to debt collection companies.
"The forum represents to the public, the courts and consumers that it is independent, operates like an impartial court system, and is not affiliated with any party," Swanson wrote in the complaint. "The consumer does not know the forum works alongside creditors behind the scenes-against the interests of consumers-to convince creditors to place mandatory predispute arbitration clauses in their customer agreements and to appoint the forum as the arbitrator of any disputes that may arise in the future. The forum does this so that creditors will file arbitration claims against consumers in the forum, thereby generating revenue for it."
One of the ways credit union and bank card programs have differed has been the way they handle disputes with cardholders. Both have used collection techniques to bring delinquent cardholders current, but in cases where accounts fall significantly behind, they have used different approaches.
Credit unions most often resort to gradual repayment plans or, when necessary, take delinquent members to court to collect the debt while, almost universally, bank issuers have fallen back on binding arbitration.
Binding arbitration is where two parties in a dispute agree to take the matter through an arbitration proceeding before a neutral arbitrator to resolve their dispute. As part of the process, both agree ahead of time to abide by the arbitrator's decision.
Bank card issuers have favored this approach because it is generally less expensive than going to court and, critics have charged, because they have hoodwinked consumers into agreeing to arbitration instead of choosing to go to court. Most bank cardholders agree to use binding arbitration when they sign their application for a card, according to consumer groups critical of the approach, and most do not realize they have signed away their right to appear in court in a disagreement with the card issuer.
The degree of consumer criticism of the practice reached such a pitch that Congress is currently considering legislation banning card issuers from using binding arbitration to resolve credit card disputes.
Enter Swanson's suit, which has both highlighted the issue and substantially changed the situation on the ground. As part of a settlement of the suit, the NAF agreed to stop taking card arbitration cases entirely.
Separately, another pillar of the arbitration industry has announced it would stop working in the field until it was substantially reformed.
The American Arbitration Association, a nonprofit organization that bills itself as the "largest arbitration services provider," announced soon after the NAF-Minnesota settlement that it too was getting out of the business until Congress passes legislation reforming the practice.
"We have been studying this issue for some time," said Richard Naimark, senior vice president for AAA. "We made our decision to impose a moratorium on administering consumer debt arbitration independently and not at the behest of any outside entity as has been claimed. We commend the Congress for its initiatives to protect consumers in debt collection cases, and we will continue to work with it willingly and enthusiastically," Naimark added.
The departure of these two large arbitration organizations from the arbitration business has thrown the credit card world into some disarray. Large card issuers have announced they have either decided not to use arbitration any longer or are "considering their options." This gives credit unions a chance to point out the consumer benefits of their cards, according to analysts.
"The topic may be too specific for credit unions to use as a standalone marketing message," said Karin Brown, vice president for collections with Lending Solutions. "But it could be part of the argument credit unions use for why their cards are better for their members. Absolutely."
Jeff Russell, CEO of TMG Financial Services, agreed, adding that credit unions considering selling their portfolios to banks need to take into account how those institutions resolve disputes.
Russell explained that firms buying a card account have to send the cardholder a set of new disclosures covering how the issuer handles disputes. But, he added, many cardholders may not realize that the next time they use their card after receiving those disclosures signifies their consent to them.
"It is definitely possible for a credit union cardholder to go from a situation where they didn't face arbitration when the credit union issued the card to one where the new issuer might use it," Russell said. "Credit unions considering selling their portfolios should be aware of it."
For the record, Russell said TMG's disclosures say that it can use arbitration, but that it has never done so.
Bank of America, parent company to noted CU card buyer FIA Card Services, has been quoted in
the media that it is still considering its options in the wake of the arbitration changes.
As of press time, Elan Financial Services, a subsidiary of US Bank that is also a significant purchaser of CU card accounts, had not returned calls for comment about whether or not it uses arbitration.