Companies like to claim that mandatory arbitration is easy and unbiased (is this why they like to hide in it in so many contracts?). This Business Week article pokes some big holes in that myth. It focuses on credit companies and banks that use arbitration to collect debts from ordinary citizens, in particular one of the country’s largest arbitration firms, the National Arbitration Forum (NAF). While the system is supposed to be neutral, consumers going up against a panel of NAF arbiters have virtually no chance of winning.
Some current and former NAF arbitrators say they make decisions in haste—sometimes in just a few minutes—based on scant information and rarely with debtor participation. Consumers who have been through the process complain that NAF spews baffling paperwork and fails to provide the hearings that it promises. Corporations seldom lose. In California, the one state where arbitration results are made public, creditors win 99.8% of the time in NAF cases that are decided by arbitrators on the merits, according to a lawsuit filed by the San Francisco city attorney against NAF.
Worst of all is how the NAF pitches its services to creditors.
Behind closed doors, NAF sells itself to lenders as an effective tool for collecting debts. The point of these pitches is to persuade the companies to use the firm to resolve clashes over delinquent accounts. JPMorgan Chase (JPM) and Bank of America (BAC) are among the large institutions that do so. A September, 2007, NAF PowerPoint presentation aimed at creditors and labeled "confidential" promises "marked increase in recovery rates over existing collection methods." At times, NAF does this kind of marketing with the aid of law firms representing the very creditors it's trying to sign up as clients.
Consumers who lost unfairly share some pretty shocking stories. So do former NAF employees who left their posts because they had ethics.
William A. Gould Jr., a Sacramento lawyer with a general private practice, says he stopped handling arbitrations for the company after doing several in 2003 and 2004 because the process "just seemed to be pretty one-sided." He says he didn't observe specific instances of bias but became concerned about the imbalance between creditors and their law firms—which were highly sophisticated about NAF procedures—and most consumers, who were naive and lacked legal representation. "The whole organizational mechanism was set up to effect collections," Gould says.
This a must-read for anyone who has ever been in debt, so if you haven’t already clicked on it, do it here. News like this just reminds us why the court system is so critical to keeping a level playing field for consumers.
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