AG Swanson to House panel: Many consumers unknowingly give up right to impartial debt arbitration

WASHINGTON, D.C. — Minnesota Attorney General Lori Swanson brought her fight against unfair consumer debt arbitration to the U.S. Capitol today during testimony before a House Oversight and Government Reform subcommittee.

“The right to have disputes resolved impartially is something that we as Americans value very much,” said Swanson in opening comments during today’s hearing on the misuse of mandatory arbitration to collect consumer debts. “Yet many Americans are giving away that right without even knowing it.”

Swanson filed a lawsuit this month against the National Arbitration Forum (NAF), the country’s main arbitrator of consumer credit disputes, alleging that the organization was not neutral and in fact had significant connections to debt collectors.

In her testimony, Swanson mentioned finding evidence of “backroom hustling” to have mandatory arbitration clauses included in contracts, which then forced consumers to have their disputes resolved by an arbitrator of the creditor’s choice. Swanson also touched on the discovery of marketing materials, which presented a situation skewed in favor of the creditors.

”The bottom line is that the NAF represented to the public, to consumers, to the courts that it was independent and neutral and operated impartially,” Swanson said. “When in fact, it had ties to the … industry.”

In a settlement reached with the state of Minnesota earlier this week, NAF has agreed to stop administering arbitrations involving consumer debt, including credit cards and consumer loans.

Swanson told the House panel today that she would like to see mandatory arbitration clauses banned.

“I think what Congress ought to do is say, in these situations where consumers have no leverage … [that] mandatory pre-dispute arbitration clauses should not be allowed,” Swanson said.

When asked what this would mean for a consumer who refused to pay a debt, Swanson said that the consumer and the creditor could still choose to go to arbitration or court; it just wouldn’t be a predetermined arrangement.

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Comments (3)

  1. Submitted by James Hamilton on 07/23/2009 - 11:24 am.

    Is it re-election season? AG Swanson’s recent attack on arbitration leaves me wondering what her motives are.

    There is no doubt that arbitration has its disadvantages: relaxed standards for the admission of evidence, lack of any right of appeal in all but the most unusual circumstances, etc. But it also has its advantages, primarily speed and cost, for both parties. Yes, there is a danger of bias among the arbitrators selected by the arbitration authority. Minnesota’s No-Fault Insurance arbitration process is more than sufficient evidence of that.

    Banning arbitration is likely overkill, in that it will increase the cost of collection at the ultimate expense of the debtor, particularly those with no justification for their default. (Unless, of course, we prohibit clauses assessing attorneys’ fees and other collection costs against the debtor.)

    A more reasonable approach might be to require that consumers be advised of the availability of arbitration and be given the right to opt out, with the creditor then being permitted to decline the application, cancel the account or charge an increased rate of interest which reflects the additional risks and costs entailed.

    Let’s make sure that consumers have the information they need to make informed choices. But let’s also leave the choices to them.

  2. Submitted by Nancy Gertner on 07/23/2009 - 01:48 pm.

    Does it have to be ‘re-election season’ for an AG to file a lawsuit against a business that is exploiting consumers, and appear to give testimony at a Congressional committee?

    Here’s what some credit card companies say about arbitration in their card offers:

    CitiBank, South Dakota: “Arbitration: The Card Agreement provides that disputes are subject to binding arbitration. Arbitration replaces the right to go to court, including the right to a jury and the right to participate in a class action or similar proceeding. Read the “Arbitration” provision of the Agreement carefully.”

    Capital One: “Arbitration: I understand that the customer Agreement contains an Arbitration Provision that may limit my legal rights, including my right to go to court, to have a jury trial, and to participate in class actions. I Will receive the Capital One Customer Agreement and am bound by its terms and all future revisions.”

    Which they should provide you with whenever they make revisions . . .

    I wonder what NAF’s agreement with the state to not perform arbitrations will do for their revenue stream . . .

  3. Submitted by James Hamilton on 07/24/2009 - 03:29 pm.

    Ms. Swanson’s term is up at the end of 2010. Like her predecesor and mentor, Mike Hatch, she shows a proclivity for high profile litigation which coincides with the beginning of the election cycle.

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