Forced Arbitration Impedes Credit Card Reform Effort

If you read the paper or the US PIRG blog this weekend, then you know about an editorial in Sunday’s edition of the NY Times that appealed to Senators Obama, McCain and Biden to urge Senate and House leadership to support the  Credit Cardholders’ Bill of Rights.  We agree with the Times‘ assessment of the bill’s importance:

Too many people are finding that even if they pay their bills

regularly, their interest rates can still be jacked through the roof.

The Credit Cardholders’ Bill of Rights would help rein in some of the

worst abuses. It would stop creditors from applying interest rates

retroactively to balances incurred under an old rate, or charging late

fees for checks mailed days before the due date.

Doing away with the punitive practices that credit card and other consumer service industries use to penalize consumers and line their own pockets is a worthy goal, but enacting this legislation is not enough.  Credit card reform will not be comprehensive until Congress has made sure that consumers are able to fight for their rights, and that the fight is a fair one.

Just as the Bill of Rights would not be complete without the Seventh

Amendment right to a jury trial in civil cases, the Credit Cardholders’ Bill

of Rights will not be complete until consumers who have been wronged are able to bring their

claims in an unbiased court of law.  Congress can restore this right to consumers by banning the practice of pre-dispute binding mandatory arbitration (BMA), whereby a wide range of consumer service companies, including credit cards, impose a private, for-profit dispute resolution forum on their customers as a condition of service.

BMA helps corporations evade liability under consumer credit protection

laws in two ways.  First, many arbitration clauses contain class action

bans, even though several states prohibit them.  Since many credit card

fees are small but widely imposed, companies have immunity for their

unfair practices.  Arbitrators are also free to ignore federal law

because courts cannot overturn arbitrators’ decisions, even when an

arbitrator has misapplied the law or failed to apply the law

altogether. Their decisions are virtually beyond review, allowing companies to stay above the law.

In another Times article on credit card regulation, our friend Ed Mierzwinski at PIRG emphasized that the credit card reform effort has, to this point, failed to address BMA:

None of the bills or proposals deals with the lenders’ mandatory

binding arbitration clauses that became standard in the late 1990s.

Those clauses made class-action lawsuits charging lender wrongdoing

almost impossible to bring, said Mr. Mierzwinski.

Private enforcement is important because, as we have seen recently, the federal government cannot be everywhere at once.   BMA has rendered the part of the Consumer Credit Protection Act providing for private cardholder enforcement

of some of its provisions through civil law suits, including class

actions, virtually useless.

How do we rectify this problem?  The answer is simple:

Legislation called the Arbitration Fairness Act of 2007, written by Senator Russell D. Feingold, Democrat of Wisconsin, and Representative Hank Johnson Jr., Democrat of Georgia, ensures consumers the choice of jury trials.

Congress must fully address the problems facing average Americans by passing the Arbitration Fairness Act.  Without it, credit card companies will be able to continue some of their most predatory practices without any fear of having to answer to their customers.

The new proposed credit card reforms are positive, and we support them.  But consumers will not have complete protection from abusive business practices until Congress has prohibited BMA.

Consumers deserve the right to hold the companies that have injured them accountable.