28 July 2009

The Death Of Consumer Debt Collection Arbitration

Congress is considering legislation that would invalidate contracts requiring consumer debt collection arbitration before a dispute arises, called the Arbitration Fairness Act. Testimony on the issue before Congress can be found here. The association of state securities law administrators supports the legislation, which one version of would ban.

But, the two largest providers of these services have left this market.

The National Arbitration Forum, one of the leading providers of consumer debt collection arbitration, left the market entirely on July 19, in the face of an action by the Minnesota Attorney General alleging that their conduct was improper because they were owned by the very credit card companies whose disputes they were resolving and often ceased to employ arbitrators who ruled in favor of consumers. It assigned a majority of its cases to just six of its 131 panelist. A majority of cases in a Congressional investigator drawn sample resulted in default judgments in violation of the arbitration system's own rules and the company also appeared to have violated California's state arbitration outcome disclosure rules.

On July 21, the American Arbitration Association, another leading provider of arbitration services, also announced that it had left the consumer debt collection arbitration market in June "until new guidelines are established." (See also here from the source in Congressional testimony and here in a press release.) Unlike the NAF, the AAA does a great deal of employment and business to business arbitration. There is little evidence that AAA was a bad actor in these cases, but it wants to avoid the reputational taint associated with a line of business that was dominated by a bad actor.

Cell phone and credit card disputes make up a large share of these cases.

With the two largest arbitration providers out of the field, and the debt collection mechanisms of cell phone and credit card companies thrown into disarray as a result, it seems likely that much of the political opposition to the consumer debt collection elements of the Arbitration Fairness Act will become law.

Studies showing that consumers overwhelming default in these cases when brought in court anyway also suggest that the macroeconomic impact of the demise of consumer debt collection arbitration, if it happens, may be modest. Consumers overwhelmingly lose in court in these kind of cases, often by default, often in violation of the applicable laws, in any case. But, the appearance of impropriety and secrecy of private arbitration of these disputes is not present in a court setting.

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