Big arbitration firm pulls out of credit card business

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.