Big Arbitration Firm Pulls Out of Credit Card Business

Posted by: Dan Beucke on July 19

By Robert Berner

After coming under increasing fire for bias towards major credit-card companies, the nation’s largest arbitration firm involved in adjudicating delinquent credit-card debt has agreed to pull out of the business, Minnesota Attorney General Lori Swanson disclosed on Sunday, July 19.

The settlement with the National Arbitration Forum comes after the Minnesota AG sued the firm on July 14 for consumer fraud, deceptive trade practices, and false advertising. The civil suit, filed in state district court in Minneapolis, alleged conflicting ties between the NAF and debt-collection law firms that represented major credit-card companies. The suit also alleged that New York hedge fund Accretive LLC owned stakes in such collection law firms and the NAF, sending arbitration business between the two.

Under the terms of the consent decree, dated July 17 and signed by the AG and NAF officials, the arbitration firm by the end of this week will stop accepting new consumer arbitrations of any sort. These include arbitrations over disputed credit-card debt as well as new lines of business the NAF has moved into, such as arbitrating consumer debts in healthcare, telecommunications, utilities, mortgages, and consumer leases. The only business NAF can now be involved with is in arbitrating Internet domain disputes, a business it has long been in.

The settlement throws in turmoil an increasingly favored venue for credit-card companies to collect disputed debts from card holders. Since the beginning of the decade, most card companies have included mandatory arbitration clauses in credit-card contracts, forcing consumers to arbitrate rather than use the courts.

The Minnesota suit said that Bank of America, JP Morgan Chase, Citigroup, Discover Card, and American Express use NAF, which is based in St. Louis Park, Minn.

In a prepared statement, NAF acknowledged that it is exiting the consumer arbitration business. “The National Arbitration Forum remains committed to consumer arbitration as the best and most affordable option for consumers to resolve disputes quickly and efficiently,” said Michael Kelly, CEO of Forthright, an NAF affiliate. “However, the Forum lacks the necessary resources to defend against increasing challenges to arbitration on all fronts, including from state Attorneys General and the class action trial bar.”

Arbitration is a private judicial process that is supposed to be fair, more efficient, and less costly than using the courts. But NAF, which had cornered the market in credit-card arbitrations, had been facing increasing complaints that it was biased towards the card industry. Last year, the San Francisco city attorney sued NAF in California state court, charging bias. That suit showed that only a fraction of California credit-card debtors win cases against creditors through the NAF. That case is still pending.

BusinessWeek made many of these assertions of bias in a story on the NAF last year. The story showed how NAF worked closely with debt-collection firms to develop business with credit card companies and buyers of delinquent credit-card debt. The story revealed a system where NAF arbiters – lawyers and former judges hired on a contract basis – had incentives to rule in the creditor’s favor.

In an interview with BusinessWeek, Swanson says that showing the alleged cross ownership between the collection law firms, the NAF, and Accretive gave her the leverage to force NAF out of consumer arbitration. The AG says she uncovered such additional allegations as that the NAF would help creditors write cases. Swanson says she and her staff negotiated with NAF founder Edward Anderson and Forthright’s Kelly and NAF’s lawyers late into Friday night over the terms of the consent decree.

Swanson says she is also sending a letter to the American Arbitration Association, an NAF competitor that has been trying to build its credit-card arbitration business. The letter, which makes no allegations of bias, asks the AAA to exit the business because most consumers don’t realize they must use arbitration, rather than going through the courts, as part of credit-card contracts, the AG says. “I am asking the AAA to show some leadership,” Swanson says. AAA General Counsel Eric Tuchmann says he wasn't prepared to comment on the AG's proposal until he saw a copy of the letter.

Reader Comments

About Time

July 19, 2009 12:41 PM

The National Arbitration Forum had better brace for some huge consumer group lawsuits. I can't believe how long it has taken for someone to finally catch up with the NAF. Love to see them go up in a cloud of smoke. Hopefully some of the liability will reflect directly on Bank of America, JP Morgan Chase, Citigroup, Discover Card, and American Express if it can be proven they had any part of this consumer fraud, deceptive trade practices, and false advertising.

NLS

July 19, 2009 02:23 PM

NAF knew that Swanson had the goods on them since they caved this quickly.

Asking AAA to get out of the business regarding credit card arbitration is great, but the truth is, ALL forced arbitration clauses should be banned from ALL consumer contracts.

AAA, CAS, and DeMar arbitration in home builder contracts and the illusory warranties that builders "give" buyers is exposed in this recent report by Public Citizen http://www.fairarbitrationnow.org/uploads/HomeCourtAdvantage.pdf

The only way to hold corporations accountable is through the civil justice system where there is an unbiased Judge and jury and a public record available for consumers to research.

Clearly, it is urgent that the Arbitration Fairness Act of 2009 be passed by the House and Senate and signed into law by the President.

Jim

July 19, 2009 02:23 PM

This is way overdue. Perhaps credit card issuers will be driven to take a more reasonable attitude towards consumers who dispute their balances, particularly if the next logical step is taken, and Congress introduces legislation prohibiting any credit agreement that limits or attempts to negate a consumer's right to seek redress within the legal system.

Terence

July 19, 2009 04:37 PM

Great news for consumer. This arbitration firm and process was a huge scam. The hedge fund owns not only the NAF, but has interests in the largest law firms that send them cases. The consumer rarely won. I hired an attorney and beat them, but my case is rare because most people ignore the notices and end up getting a judgement against them. Congrats to a fellow named Bud Hibs in Texas who has been a consumer advocate on these issues and also thanks to the States that investigated here and called BS.

Cindy

July 19, 2009 05:05 PM

NLS, is right that they probably knew settling this case was the wiser choice because the MN AG 'had the goods on them!' Corporations 'settle' even criminal complaints this way on a regular basis, then often keep doing the same things!

I am thrilled to see NAF exiting the credit card market but this is just one small step in the huge battle ahead.

There is no way that an arbitration industry that does repeat business with corporations can be neutral. Consumers do not have the repeat business for them, the inside knowledge, the experience w/the process or good lawyers. Corporations have the upper hand and they have legal depts w/many lawyers at their disposal. Many times these cases are not worth enough to interest lawyers, so the consumer can't even get one. They may even be told they "don't need a lawyer," only to go to arbitration unarmed while the corporation has lawyers.

At least in court, it's public record, and jurors and judges are not picked from a pool that relies on corporations for future income.

The scam that is arbitration needs to be put to an end by passing the Arbitration Fairness Act in congress now. Otherwise some equally biased company will just keep filling the hole left by the NAF's of the world, perhaps even by NAF's principals starting up another company.

The next one that needs to go is Construction Arbitration Services (CAS)! Just one reason is that it was partly owned by a disbarred lawyer. I believe one of the co's under CAS's umbrella also does most of the car warranty arbitrations, and frighteningly also owns a company that makes voting machines, Elections Unlimited. YIKES!

Put an end to this sham now.

Tiffany

July 19, 2009 05:23 PM

This is excellent news and good work from the AG's office in MINN.
It also came to my attention that the BBB also uses MBA to settle disputes.
Consumers should be very aware of MBA. Let's hope AAA stops their practices in all consumer contracts.
Arbitration should be a choice adn not binding. I have heard horror stories from people who had no choice but to go through it.

Rosemary Shahan

July 19, 2009 05:28 PM

Attorney General Swanson deserves tremendous credit for standing up for consumers and helping restore vital consumer protections. If more politicians had her backbone, our economy would be in much better shape.

I'm president of a consumer group who hears regularly about auto arbitrations that are obviously rigged. For example, one car owner in San Diego has been forced to wait for more than 2 years just to get a hearing at an arbitration company picked by the dealership that sold him a cleverly-disguised unsafe junker. No date for a hearing has even been set. Meanwhile, he has to keep making payments on the car, while it sits in his driveway -- or his credit would be ruined.

If he were able to go to court, chances are the dealer would not have cheated him in the first place.

Please, Congress, pass the Arbitration Fairness Act NOW.

Rosemary Shahan
President
Consumers for Auto Reliability and Safety
Sacramento, CA

Mark

July 19, 2009 06:02 PM

I work in customer service at a major banks credit card division. I see the effects up front of legislation. To think that legislation will help creditors is naive. There DOES need to be a retooling but what this administration is proposing will only make lawyers richer and make credit more expensive and harder to secure. Shareholders in a bank will demand more restrictions to reduce risk. As a result look for less credit availability not more such as the govt. is promising.

Strategery

July 19, 2009 06:16 PM

Maybe now that these issuers will have to face REAL courts, they will stop engaging in illegal business practices. I don't have much faith in our "justice" system either, but at least the CC companies will have less influence. Just the threat of a liability is often enough for a big corporation to change business practices and cross their t's and dot their i's. I agree with the first poster, I think the lawsuits are just beginning. One after another, lawyers will see just how much these issuers are liable, basically for fraud (including credit scores, higher interest rates, etc.). After these lawsuits and the Obama administration, for better or worse, this will be a niche industry that caters to businesses and the rich.

Ima American

July 19, 2009 06:19 PM

It's about time!! MAJOR KUDOS to Attorney General Lori Swanson and her team for the phenomenal investigative and legal work that brought down the utter MOCKERY of justice known as the National Arbitration Forum or NAF (aka Not About Fairness.) I've had the opportunity to interact with many consumers who had to deal with these ARBI-TRAITORS and saw with my own eyes how BAD the NAF has been. We're better off in a REAL court, thank you very much. Again, many thanks to the MN AG office, and to the many hardworking people out there who took the time to learn their rights, file complaints, and help put a stop to this bought and paid for "private justice" scam.

Snoz

July 19, 2009 06:31 PM

Big Banks and their affiliates have the gall to accept trillion dollars of bailout money and at the same time abuse the taxpayers-consumer. All the while, our fearless and morally upright politicians do nothing but sell out the American people for their re-election. Mortgaging the future of our children for the benefit of the Big Bankers, our government, which is supposed to represent and protect the interest of the American people, has joined ranks of the Big Banks in robbing the people for the benefit of the wealthy Bankers. Permitting mandatory arbitration in credit card contract clause to bypass the legal system; allowing exorbitant interest rate; tolerating excessive users' fees as well as other credit card abuses, our government has joined the Big Banks in their crime spree. All these evils and more are evidence that the prolific bank lobbists and their political contribution are corrupting the morals of our politicians, assuming they have any. Mean while, the wealthy Bankers are laughing as they creat more bogus arbitration firm to rope-in the American people for more money. By comparison, Roman had collapsed on lesser sins of its Senators.

Allen

July 19, 2009 06:50 PM

We live in a world in which success is defined by possession. So, obviously everyone wants to buy using credit and when they can't pay, they declare bankruptcy. There is no end to this social malady. (And stop STOP defining this as a an economic problem). We have enslaved ourselves by getting into interest based economy.

This is like critizing us of having pre and extra marital sex. Every American is involved in this sin, hence feel like an hypocrite to stop their progenies from getting into this deep-hole.

Michelle

July 19, 2009 07:59 PM

Forced arbitration is not good for ANY consumer. The sooner we get rid of it the better off the country and the consumer will be. Getting rid of forced arbitration will also weed out the fraudulent businesses. Good bye forced arbitration; hooray for consumers rights!!!

Jordan Fogal

July 19, 2009 09:12 PM

This is the first fair step for consumers in a long time. Please see my web sight. It is about NAF's sibling AAA. The atrocious American Arbitration Association. See proof of how they have been ripping homeowners and consumers off for years. AAA along with brother NAF have contibuted mightly to the housing debacle. .Want to see how...
www.jordan-fogal.com

Screwed by NAF

July 19, 2009 09:23 PM

I am a victim of NAF, MBNA, Mann-Bracken, et al. I was a small business owner caught in their web of concealment and refusal to work with me while I got solvent - and it was possible with a little leniency. I tried to pay, but they wanted it all, and they wanted it now. They made an award in favor of Portfolio (Mann-Bracken) last week; and yet today I get a hang-up call from Mann-Bracken even after AG Swanson, in effect, shut them down. God Bless American and AG Swanson.

cj

July 19, 2009 10:08 PM

Well...I will believe it when I see it.
We have collectively launched ourselves into a runaway mode that does not care about fairness, honesty, or any kind of real investment that takes time to earn
a reward. It's all about the get by with it, push-shove, force my way of doing business, of deceit filled negotiations, of impatient (sometimes sneaky)personal conduct, and most definitely raw shock, tactics that are nothing more than (if you fall for their crap) dangerous displays of contempt. It all comes from the same source, the desire for get it quick, get it now, get it all regardless of the toll it takes on others. BANKS, and other FINANCIERS with your sneaky crap, you have proven that you are ultimately traitors to the American people. Those who support your
way of doing business are enabling
criminal activity. I hope the convoluted mess of conspiracies and the conspirators will be revealed to the fullest extent. People! Put them out of business before they do further damage!

Adam

July 20, 2009 01:23 AM

Now credit card holders who can't pay their bills and/or control their spending force the taxpayer to support their lack of judgment by paying with further burdens on the court systems. In a binding arbitration forum where the credit card companies and the individual card holder pay for their private dispute resolutions.

Corrupt business practices are one thing, but binding arbitration in itself isn't evil.

Tim

July 20, 2009 05:44 AM

To Allen:

This article is about FRAUD on the part of entities that purport to stand in as more efficient but EQUIVALENTLY JUST alternatives to the court system. What does that have to do with the ethics of consumer debt?

Are you saying that borrowing money from a bank is some kind of ethical transgression that merits being CHEATED out of the right to a fair trail in a contract dispute?

truth in lending

July 20, 2009 06:52 AM

This scam that developed with NAF just shows how bad things can get when you force people into a private "justice" system to bypass our public justice system. Remember why we have a Bill of Rights and tell the people representing you in Congress to sign onto the Arbitration Fairness Act.

Sonya Smith-Valentine

July 20, 2009 09:11 AM

Having represented consumers in arbitrations, I am happy to see NAF exit the consumer arbitration business. The process clearly favored the credit card and debt collection companies. I will not miss NAF arbitrations.

Sonya Smith-Valentine
Identity Theft & Credit Expert
Sonya Smith-Valentine International
www.sonyasmithvalentine.com

Richard

July 20, 2009 10:00 AM

NAF and the AAA have always been bordellos for "repeat player" major customers. The AAA should also get out of arbitration of "big business" vs. small businesses. AAA has rigged its Rules to favor the large businesses that pay it millions every year. It arbitrarily removes arbitrators appointed by small business (who can act as watchdogs on the case), demands huge fees on short notice and does everything it can behind the scenes to help its' "repeat player" large customers. When caught it yells that it is a "non-profit", ($105,000,000 annually) as though that excuses and immunizes its corrupt behavior. The truth is that AAA arbitration is far more expensive and much slower than the courts. There is also no right of appeal and the AAA can be wrong on the law without the award being vacated.

Of course, the one question the AAA won't really answer is, "If AAA arbitration is so wonderful, why not allow arbitration clauses to only be effective if agreed AFTER the dispute arises?" Requiring full disclosure of all of the fees, costs and expenses before AAA arbitration is agreed should be mandatory. The improper relationship between the credit card industry and NAF and the AAA is merely the tip of the iceberg. Congress should subpoena the AAA and the NAF to expose their operations.

Consumers, small business, franchisees and employees need help now. The proposed Fairness in Arbitration Act is a good first step, but needs to explicitly protect small businesses from being forced into arbitrations they can not afford.

Hudson Henley

July 20, 2009 10:01 AM

Good riddance to NAF and its credit card Kangaroo Courts. Part of their system was to send lengthy, arcane notices to cardholders around the country which called upon the cardholder to either request arbitration (with the cardholder paying possibly several hundred dollars in fees) in his home state or waive that right. Naturally, it was cost-prohibitive to travel to Minnesota, and too late by the time the NAF had entered a binding award "by submission" (i.e., without a hearing of any kind). It was a complete rig job. I am an attorney in Dallas who had seen a few of these ripoffs, and they were disgraceful.

JohnMD

July 20, 2009 10:33 AM

The problem is that the NAF was obviously involved in a level of fraud that was criminal in nature. Without charging them, and many of the executives in the banks they conspired with, with criminal violations, they will just move on to create other fraudulent enterprises. The Attorney General should have used the fact that she had the goods on them, to put them in jail. Indeed, I suspect that a criminal prosecution is still possible. Let's hope they do it!

Squeezebox

July 20, 2009 11:00 AM

AT&T done me wrong! I owed them some money. They sold the acount to a bill collector. Apparently the little @#$%^&*es also sold my caller ID information to the collector. They've been harassing my friends over my debts ever since!!!! Isn't that illegal? I paid the bill, but I recommend that you drop AT&T like a hot potato!

WS

July 20, 2009 11:57 AM

Terrific. Now consumer's will get 'their day in court' where the public can pay a Judge to tell them to pay their bills, instead of a private arbitrator doing so. The outcome is the same in court or arbitration for the consumer: they used the credit card; they are not paying the bills; but the law says...they have to pay. The only people who will benefit from this are trial lawyers who make their living in court.

Rick

July 20, 2009 12:03 PM

Now perhaps all AG of each and every state can use this as a precedent to go after all arbitration companies who force each and every one of us who have some type of arbitration clause, back to the courts, far too long have these companies been in bed so to speak with the companies they represent, how can any arbitration organization be fair and impartial when it continues to do business, with these same organizations? How can arbitration be fair and impartial especially when the arbitration fees are never disclosed in any consumer contract? Please keep up the good work and lets expose the arbitration firms for what they represent- any organization that is willing to represent a business who promotes fraudualent business practices, and who is willing to take away the consumer's right needs to be abolished, I know this from personal experience. One crooked organization exposed and many more to follow!

On the other hand

July 20, 2009 12:12 PM

>>>...only a fraction of California credit-card debtors win cases against creditors through the NAF.

So what? Only a fraction of California credit-card debtors win cases in court. A TINY fraction. They owe the money, so guess who should win?

Then what would happen?

July 20, 2009 12:16 PM

>>>ALL forced arbitration clauses should be banned from ALL consumer contracts.

Great. Then they have to go to court. And lose there. This isn't medical malpractice or personal injury, where liability is in good faith dispute. It's a matter of contract--they OWE THE MONEY. And my interest rates skyrocket when they won't pay!

Doublespeak

July 20, 2009 12:20 PM

You're all saying it's great that arbitration is on its way out. How come so many of you who get sued for your credit card debts file petitions to compel arbitration? In the vast majority of cases, an arbitrator, judge, or jury is going to come to the same conclusion: PAY UP!

MikeGuerrero

July 20, 2009 01:59 PM

is is definitely about time. Now small claims court should refuse to accept cases from collection firm that buy unpaid credit card accounts in bulk then use the small claims court to intimidate consumers into paying up some even after the statude of limitation has expired and most times when the collectiom firms do not even have payment records nor account informatin.

Edward Cherry

July 20, 2009 03:05 PM

This is excellent news. The banks relied upon this corrupt forum to obtain illegal awards against consumers who could not fight back. I bet that they quit because the investigation was leading into the boardrooms of the banks who probably funded the firm through their securities divisions.

Rocco Brac

July 20, 2009 03:46 PM

All of you that want the arbitration process go for it but don't cry about it when you get the shaft by those outfits. The courts are the way to go and that is a right no private company should be able to take away from us but they have with these forced agreements thanks to their political friends in Washington. It's about time this has happened thanks to Minnesota Attorney General Lori Swanson. Consumers should not be involved with arbitration; abrogation if agreed to because with that if you want you can still use the courts. If big business (to business)wants arbitration that's fine--they have the big bucks anyway and the legal powers to control each other. Someone mentioned that now the taxpayers will be paying judges....etc.... My response to that is so what? We're paying them anyway whether they are actually working or doing nothing. And, keep in mind that there are always court costs that are supposed to pay the bill!

COURT RULES

July 20, 2009 04:11 PM

Absolutely ALL forced arbitration clauses should be banned from ALL consumer contracts! This "private justice" system is a breeding ground for rampant corruption, bought and paid for by big businesses who run over consumer rights with impunity knowing their hired gun arbitrators will issue whatever awards they're paid to issue Furthermore by using the "private arbitration system" they can HIDE from judicial review and even public review of the cases and decisions.

Then there's the REPEAT PLAYER BIAS - the businesses/clients know which arbitrators will play the game they want played and select them while the consumer has no way of knowing who's affiliated with whom, what the arbitrator's previous rulings have been, etc.

I'D RATHER BE IN COURT ANY DAY!!!

www.DebtExecutioner.com

July 20, 2009 04:28 PM

Excellent news, but don't expect to get a much better deal in the courts unless you hire an attorney that really knows consumer law and understands the card agreements.

Do you know who owns the majority of National Associations
(NA's) ie credit card banks?

Greg

July 21, 2009 08:52 PM

The Feds should offer a credit card (other countries do this), at about 8% fixed. It would bring in additional and much needed revenue, and put these suckers out of business over night.

kim

July 22, 2009 06:21 AM

I just wonder why we American people would still use credit.These banks didn't give a care when they raised the interest rates so high that people could not afford to pay,and with all the job loses this is insane.Wouldn't the bailout money they got be enough,no they still feel the need to screw people over even more by charging off their accounts then selling them to some scum sucking collection agency for pennies on the dollar then they turn around and try to collect on the whole amount then sue people through this binding arbitration (as they are hired by credit company) so they rule in favor of credit card co.and the poor consumer has no rights.I pray God takes down all those who show no mercy like the NAF and others like them,like Phillip & cohen,all those who were in bed with these crooked hurtful lying cheaters.

John

July 22, 2009 06:02 PM

It's about time.

I am a veteran of the collections and debt resolution industries. NAF's complicity with the credit card industry completely shut out the court system and an individual's right to their day in court.

Once NAF had their award against the debtor, it was simply a case of transferring the file to the debtor's state of residence and filing the award with the court as an automatic judgment. The final nail in the coffin was the local law firm recording a copy of said judgment through the county recorder's office.

Another scam I recently ran into was a company doing business (cannot remember the name) that stated in their agreements that their contract could not be recorded with the county because it would render the agreement null and void. I think it was some kind of sales scam.

chere

July 24, 2009 03:15 AM

The banks that naf and aaa represent are rouge.
How can naf, aaa or a collection firm collect on debt that the tax payers have already paid.
Remember the bailout?
Could be what they mean when they say toxic debt?

Now that the arbitration companies are pulling out
all their previous arbitration awards should be null & void.
Half of them are rubber stammped anyway, [I've seen them].
Many Judges were already not granting rubber stammped arbitration award.

As far as raising credit card rates, while we are in the "Great Ression" ...
That's pretty stupid. This too can be now be blammed on sub-prime, as more people are using cc's to pay debts as their inflating interest rate continues to climb.
RUN NAF RUN!
THERE'S NO MORE MONEY IN IT FOR YOU!!


Pat

July 27, 2009 09:55 AM

Arbitration isn't necessarily gone or a bad thing--it's bad when it is FORCED upon you and that arbitration decisions are forced upon you. If the consumer wants arbitration and gets the pick the arbitrator it might be more fair if the costs are shared.

Mediation is better because, if you don't like the outcome you can still sue and the costs are usually fair.

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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