Credit Card Fine Print: Arbitration Clauses
Reading the fine print of a credit card agreement before signing can be an important step, since that's often where the penalties, fees and interest rate adjustments are buried. And an article in Business Week highlights another reason why it's important to know the terms of your credit cards before you begin using them: the arbitration clause.
What is Arbitration?
Arbitration is a method for settling disputes without going to court. In theory, both sides of the argument agree to have an impartial judge hear the case and determine its outcome. According to Business Week's report, though, this is not always how arbitration works in practice.
- Arbitration Clause: Many credit cards include an arbitration clause as part of their terms and conditions (fine print). When you sign the paperwork, you agree to settle any disputes through arbitration, rather than in court.
- National Arbitration Forum (NAF): NAF is one of the country's largest for-profit arbitration forms. It specializes in settling debts for banks, credit card companies and retailers that claim consumers owe money. Business Week's report suggests that NAF's practices are biased to favor creditors.
How Does Arbitration Work?
If you owe money to a company that works with NAF, you can reportedly expect your arbitration to work something like this: your creditor files paperwork with NAF; you receive mail stating your case is going to arbitration; an arbitrator working for NAF decides your case; you receive mail stating that you owe money.
If this process seems a little confusing, don't worry: sources suggest that the NAF system is designed to favor large companies, which have high levels of sophistication and access to teams of lawyers with arbitration experience.
Consumers, who may not even notice the mail informing them that arbitration has begun, apparently often feel as if a decision has been made without their having had a chance to offer input.
The House Always Wins
Most states don't require arbitration results to be made public, but in California (where results are made public), NAF's track record reveals some troubling numbers, including the following.
- In 99.8% of NAF cases, arbitrators find in favor of creditors, meaning that only .2% of rulings favor consumers.
- 93.7% of NAF cases proceed without any action at all from consumers. Of the remainder, 6% participate via mail and only .3% of debtors actually ask for a hearing.
Figures like this contributed to the city attorney for San Francisco's decision to sue NAF for awarding money to creditors without adequate justification, among other things. They also led one arbitrator who chose to leave NAF to describe the company as "nothing more than an arm of the collection industry."
Other arbitrators who left NAF because they disagreed with the company's practices described techniques creditors could use to make sure cases were decided in their favor. One method allegedly involves filing cases before adequate evidence exists to prove that a debtor owes a certain amount; if the debtor doesn't reply to the notice of arbitration, the creditor is "golden;" if the debtor does respond, the creditor can file stays and dismissals of action.
If a creditor gets handed an arbitrator who isn't sympathetic to its case and likely won't find in its favor, the creditor can reportedly drop the case and file it again later, hoping to get a different arbitrator.
Deceptive Marketing
As mentioned before, NAF is a for-profit company. Business Week highlights its aggressive pursuit of creditors by offering them a venue where they will be favored and describing ways to make arbitration work for their best interests. It also quotes a NAF presentation pitching its services as offering a "marked increase in recovery rates over existing collection methods."
But on its website and in marketing to the general public, NAF emphasizes its presence as an impartial resolver of disputes and its quick efficiency when compared to litigation.
While working within the court system may take a longer time, consumers have the advantage of having a lawyer on their side to protect their interests.
Protect Yourself from Unfair Arbitration
Companies with enormous US presences like JPMorgan Chase and Bank of America are evidently loyal NAF customers. If you have cards or do business with either of these corporations, chances are any disputes concerning your accounts will end up in NAF arbitration.
- Re-read the fine print of your cards and accounts. Some card issuers allow consumers to opt out of the arbitration clause, but few do because it's so deeply embedded in the terms and conditions.
- Review your mail carefully. Be sure you don't throw away or ignore communications that could concern settling of debts in your accounts.
- Contact a lawyer. If creditors are demanding money you don't think you owe, you may have been victimized by identity theft or fraud. Don't hesitate to seek legal help.