Chase becomes first bank to drop arbitration clause

JP Morgan Chase became the first bank to drop its arbitration clause from its credit card contracts, so Chase credit card holders will have the right to go to court to dispute a problem with its credit card decisions.

This decision was part of a settlement of an antitrust lawsuit filed by Minnesota Attorney General Lori Swanson that involved the largest arbitration company, the National Arbitration Forum, in July. The Forum is no longer part of the process of consumer-debt arbitration, but the banks have not yet settled the suit. This move by Chase will likely encourage other banks to do the same thing.

While Bank of America became the first one to announce that it would no longer require credit card, bank account and auto loan customers to sign away their right to sue and force arbitration, it has not yet settled the existing lawsuit. Capital One Financial, HSBC Holdings and Discover Financial are among the other financial institutions named in the suit.Much of the case centers around alleged practices of the National Arbitration Forum, which was by far the largest of the companies that arbitrated credit card disputes. The suit alleges they masked their connections to collection firms, which won the vast majority of arbitration cases.

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 in July as part of the settlement.

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.

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 stopped participating in consumer debt-collection disputes in July as well.

This will be 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.

Now that Chase has settled, it's only a matter of time before the others decide to settle as well. Consumers everywhere may soon have the right to go to court if they have a problem with their credit card company.

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