A Corrupted Process - Debt Collectors, Credit Cards, and Mandatory Arbitration

One tool of the credit card companies has always been to force consumers into unfair arbitration proceedings, where very little is done to help strapped borrowers get back on top of debts. While most people who were involved in such negotiations had a feeling they horribly biased against the consumers, the full extent of the corruption of the process has finally come out in a recent court settlement.

The attorney general for the state of Minnesota recently sued the National Arbitration Forum (NAF), alleging deception and bias in their treatment of credit consumers. Amazingly, the NAF agreed to cease all consumer arbitrations nationwide beginning July 24, 2009, which will effect huge numbers of credit card companies and borrowers. Millions of credit agreements name NAF as the company to handle any arbitration.

The reason for the National Arbitration Forum ceasing operations is that it was found to have been biased in its business dealings, and had failed to disclose these biases. Corporations controlled by a hedge fund ended up owning part of NAF and a national collection agency that used NAF in lawsuits against borrowers. NAF and the debt collector, Mann Bracken, failed to disclose this relationship to consumers.

The Minnesota attorney general's complaint alleges that the collectors had filed 125,000 collection attempts with the National Arbitration Forum in 2006, while neither party ever disclosed the relationship between the two companies. And this is after NAF had represented itself, according to the attorney general's complaint, as "independent, operates like an impartial court system, and is not affiliated with any party."

Obviously, NAF and Mann Bracken were closely affiliated, owned by the same corporations through the hedge fund, and using their business relationship to sue consumers and then throw the cases into arbitration proceedings. In fact, the complaint further alleges that NAF worked with credit card companies to persuade them to include mandatory arbitration clauses in cardholder agreements. In many cases, NAF was appointed the arbitrator in these contracts.

Now that the National Arbitration Forum has ceased administering consumer arbitration proceedings, all of these former contracts are now invalid as written. A further development is that, due to the NAF complaint, the American Arbitration Association has also decided to cease handling collection actions against borrowers. This will be their decision until appropriate standards are developed.

For the present time, it seems that mandatory arbitration clauses in credit card agreements may be worthless. While it is no surprise to consumers that have been forced into the system that it is totally biased in favor of debt collectors, the Minnesota attorney general's investigation has proved that companies can work together to gain interests in arbitrators and collection agencies and hide these affiliations from consumers.

How many credit card borrowers were pressured to agree to unfair repayment plans or were forced into bankruptcy due to the corrupt practices of the National Arbitration Forum and its affiliated credit card and collection companies? Out of 125,000 complaints that Mann Bracken filed with NAF, how many ended up fairly? It may be safe to assume, based on the claims raised in the AG lawsuit, that none of the arbitrations ended up fairly for borrowers.