Arbitration: No longer an easy out for credit card companies?

You may not even realize it, but up until this week, if you had a dispute with your credit card company or your cell phone company, you likely could not sue them. You had to settle the dispute through arbitration. That's in the fine print of most credit card and cell phone company contracts. You'll find it in the fine print of other consumer credit contracts as well.

Well, the Minnesota Attorney General Lori Swanson has made major strides in giving consumers more rights when it comes to disputes with credit card companies. And the credit card companies likely will end up with higher costs fending off lawsuits now that they can no longer depend on their friends in the arbitration industry.

After Swanson sued the National Arbitration Forum because of its ties to the debt-collection industry and lack of disclosure -- which violated Minnesota laws against consumer fraud, deceptive trade practices and false advertising -- NAF caved. It quickly settled the case and agreed to stop taking new consumer-debt cases beginning Friday.

One of the ties questioned by Swanson was the fact that the NAF "is financially affiliated with a New York hedge fund group that owns one of the country's major debt-collection agencies," according to the lawsuit filed. NAF spokeswoman told The Wall Street Journal that the forum has been hit with a wave of lawsuits and "it has come to the point where the forum has decided to stop administering consumer arbitrations."

The second major arbitration firm, American Arbitration Association, saw the writing on the wall and decided not to wait until it got sued. The company said yesterday it would stop participating in consumer debt-collection disputes.

This is a big win for consumers. Companies prevail over consumers in 94 percent of the cases that go into arbitration. The NAF processed 214,000 consumer-debt obligation claims in 2006. It oversees 1,000 attorneys and former judges who handle the cases.

In addition to the fallout from the decisions by NAF and AAA, problems for credit card and cell phone companies will be compounded by legislation now being considered in Congress to form a consumer financial protection agency. In fact Obama targeted arbitration companies when he proposed the new agency. He thinks the agency "should be directed to gather information and study mandatory arbitration clauses in consumer financial services and products contracts to determine to what extent, and in what contexts, they promote fair adjudication and effective redress."

I know from personal experience how stacked the cards have been against consumers. I bought a new car that turned out to be a lemon. The lemon laws were not yet as strong as they are today. I was forced into arbitration because of my car loan agreement. Even though my brand new car required repair on the same part -- the starter -- four times in the first year, the arbitrator took the position that I had no leg to stand on. I traded in the car soon afterward. It was the last American car I ever bought because the company refused to back its product and forced me into a sham of arbitration.

I'm sure many other consumers have faced a similar situation when forced into arbitration. The credit card industry says that arbitration is cheaper than lawsuits. I can certainly believe it because I'm sure the courts would not rule in favor of the companies 94 percent of the time.

I agree with Swanson when she said to the Journal that "This is beyond any one problem company. It is a systemic industrywide problem. Consumers are giving away rights without even knowing it."

Both major arbitration firms say they will not handle consumer credit cases until new rules are in place. Hopefully, when those new rules are in place, they will protect consumers better than the current ones.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score."

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