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Mandatory Arbitration Enables Credit Card Companies To Trap Consumers

Sept. 27, 2007

Mandatory Arbitration Enables Credit Card Companies To Trap Consumers

Statement of Joan Claybrook, Public Citizen President

We all get junk mail and toss it. If you toss one from a sinister-sounding company called “The Forum,” you may later regret it. Months later, a legal judgment against you can suddenly appear, accusing you of owing thousands of dollars on a credit card you also got in the mail but never opened and never used. 

Sounds impossible? It’s not. You investigate and find that a company called the National Arbitration Forum, also called “The Forum,” hired a private arbitrator who issued a judgment based only on documents submitted by the credit card company. Further, you could spend years appealing this arbitrator’s decision, and your credit rating could become tarnished.

The problem is that the hidden “gotchas” in credit card contracts not only are in dense legalese but in tiny print that even the most intrepid among us are challenged to plough through. If you want a credit card, you must accept all the terms. It’s a system in which the credit card company holds, well, all the cards.

In recent years, credit card companies have tucked an outrageous term into their agreements – one that requires credit cardholders to give up a fundamental right, and that is the right to go to court in the event of a dispute with the bank that issued the card. Instead of our public courts, you are forced to struggle to be heard in a bizarre and jerry-rigged private system called “binding mandatory arbitration.”

 As the report Public Citizen is releasing today reveals, this one obscure term can trap its victims in a nightmarish system with virtually no way out.  It’s exceptionally unfair and should be prohibited by law. 

With binding mandatory arbitration, hearings are in secret. No transcripts are produced. Written explanations of decisions often are not provided so no precedents can be set and appeal is nearly impossible. Consumers can be forced to pay thousands of dollars in arbitration fees compared to several hundred dollars in filing fees in court. 

Our report, titled “The Arbitration Trap: How Credit Card Companies Ensnare Consumers,” highlights a unique source of data from   California that vividly shows how big corporations stack the deck against consumers, who have little or no chance to defend themselves against the terrible abuses of the credit card companies and their life-wrecking penalties and interest rates. The banking companies hand-select the arbitration firm as the recipient of all their claims, driving millions of dollars in business to for-profit arbitration firms and the arbitrators they hire, which – surprise! – issue rulings that favor business.

Consider this: In a sample of nearly 34,000 California cases, we found that consumers lose to companies in arbitration proceedings between 96 and 99 percent of the time. Further, virtually all were collection cases filed against consumers by credit card companies or firms that buy debts from these companies, indicating that credit card companies are using arbitration as a means to collect debts.

There is a solution. Salvation for consumers can be found in a bill introduced by Sen. Russ Feingold (D-Wis.) and Rep. Hank Johnson (D-Ga.), the Arbitration Fairness Act of 2007 (S. 1782 and H.R. 3010).

Here today is Tony Cornock, from New Hampshire, who has his own sad tale to tell about being ensnared for years in the arbitration trap. I want to applaud Mr. Cornock’s courage in being here to tell his story.