Tax & Financial Consulting Services
Banks /Courts vs. Consumers
(Guess Who Wins)
by Robert Berner
The business of resolving credit-card disputes is booming. But critics
say the dominant firm favors creditors that are trying to collect from
What if a judge solicited cases from big corporations by offering them a
business-friendly venue in which to pursue consumers who are behind on
their bills? What if the judge tried to make this pitch more appealing
by teaming up with the corporations' outside lawyers? And what if the
same corporations helped pay the judge's salary?
It would, of course, amount to a conflict of interest and cast doubt on
the fairness of proceedings before the judge.
Yet that's essentially how one of the country's largest private
arbitration firms operates. The National Arbitration Forum (NAF), a
for-profit company based in Minneapolis, specializes in resolving claims
by banks, credit-card companies, and major retailers that contend
consumers owe them money. Often without knowing it, individuals agree in
the fine print of their credit-card applications to arbitrate any
disputes over bills rather than have the cases go to court. What
consumers also don't know is that NAF, which dominates credit-card
arbitration, operates a system in which it is exceedingly difficult for
individuals to prevail.
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
"NAF is nothing more than an arm of the collection industry hiding
behind a veneer of impartiality," says Richard Neely, a former justice
of the West Virginia supreme court who as part of his private practice
arbitrated several cases for NAF in 2004 and 2005.
A DIFFERENT REALITY
NAF presents its service in print and online advertising as quicker and
less expensive than litigation but every bit as unbiased. Its Web site
promotes "a fair, efficient, and effective system for the resolution of
commercial and civil disputes in America and worldwide."
But internal NAF documents and interviews with people familiar with the
firm reveal a different reality. 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 and Bank of America 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
NAF, which is privately held, employs about 1,700 freelance
arbitrators-mostly moonlighting lawyers and retired judges-who handle
some 200,000 cases a year, most of them concerning consumer debt.
Millions of credit-card accounts mandate the use of arbitration by NAF
or one of its rivals. NAF also resolves disputes involving Internet
domain names, auto insurance, and other matters. In 2006 it had net
income of $10 million, a robust margin of 26% on revenue of $39 million,
according to company documents.
NAF's success is part of a broader boom in arbitration dating back to
the 1980s, when companies began introducing language into employment
contracts requiring that disputes with workers be resolved out of court.
Mandatory arbitration spread to other kinds of agreements, including
those involving credit cards.
NUMEROUS LOYAL PATRONS
Now, with the economy stumbling, NAF's focus on consumer credit could
prove even more lucrative. U.S. credit-card debt hit a record high of
$957 billion in the first quarter of 2008, up 8% from the previous year,
according to Federal Reserve data. People who had relied on home-equity
loans are seeing that money evaporate in the mortgage crisis and are
running up card balances. Card providers, meanwhile, are increasingly
turning to arbitration to collect on delinquent accounts.
Even consumer advocates concede that most people accused of falling
behind do owe money. But the amounts are often in dispute because of
shifting interest rates, fees, and penalties. Sometimes billing mistakes
or identity fraud lead to confusion. Plenty of acrimony surrounds the
traditional collections process in which lenders' representatives or
companies that buy debt at a discount pressure consumers to pay up.
Arbitration is supposed to be different. Endorsed by federal law, it
purports to offer something akin to the evenhanded justice of the court
system. That's why state and federal judges overwhelmingly uphold
arbitration awards challenged in their courtrooms. This confidence may
be misplaced, however, at least in many cases that come before NAF. (Its
main competitors-the nonprofit American Arbitration Assn. in New York
and JAMS, a for-profit firm in Irvine, Calif.-tend to attract employment
disputes and contractual fights between companies.)
NAF has numerous loyal patrons among the country's financial titans.
Chase says in a statement that it "uses NAF almost exclusively in its
collection-arbitration proceedings due to NAF's lower cost structure."
Companies pay from $50 to several hundred dollars a case, depending on
its complexity. "Many legal commentators have found arbitration to be
fair, efficient, more consumer friendly, and faster than the court
system," Chase adds. Roger Haydock, NAF's managing director, says: "This
is like the Field of Dreams: Build a ballpark, and they will come."
Others argue that NAF umpires make calls that put debtors at a
disadvantage. In March, Dennis J. Herrera, San Francisco's city
attorney, sued the firm in California state court, accusing it of
churning out awards for creditors without sufficient justification. The
lawsuit cites state records showing that NAF handled 33,933 collection
arbitrations in California from January, 2003, through March, 2007. Of
the 18,075 that weren't dropped by creditors, otherwise dismissed, or
settled, consumers won just 30, or 0.2%, the suit alleges. "NAF has done
an end run around the law to strip consumers of their right to a fair
collection process," Herrera says in an interview.
The firm counters in court papers that federal law intended to encourage
arbitration precludes the suit. NAF's "neutral decision-makers
constitute a system that satisfies or exceeds objective standards of
fairness," the firm says in a press release. NAF adds in an e-mail that
the suit obscures thousands of cases in which consumers prevail because
creditors abandon their claims or the disputes are "otherwise
So far, the San Francisco litigation relies mostly on publicly available
information about NAF. Internal documents and interviews provide a more
detailed picture of the firm.
The September, 2007, marketing presentation, which NAF left with a
prospective customer, boasts that creditors may request procedural
maneuvers that can tilt arbitration in their favor. "Stays and
dismissals of action requests available without fee when requested by
Claimant-allows Claimant to control process and timeline," the talking
A current NAF arbitrator speaking on condition of anonymity explains
that the presentation reflects the firm's effort to attract companies,
or "claimants," by pointing out that they can use delays and dismissals
to manipulate arbitration cases. "It allows the [creditor] to file an
action even if they are not prepared," the arbitrator says. "There
doesn't have to be much due diligence put into the complaint. If there
is no response [from the debtor], you're golden. If you get a
problematic [debtor], then you can request a stay or dismissal." When
some creditors fear an arbitrator isn't sympathetic, they drop the case
and refile it, hoping to get one they like better, the arbitrator says.
The firm goes out of its way to tell creditors they probably won't have
to tussle with debtors in arbitration. The September, 2007, NAF
presentation informs companies that in cases in which an award or order
is granted, 93.7% are decided without consumers ever responding. Only
0.3% of consumers ask for a hearing; 6% participate by mail.
NAF says in a statement that it legitimately markets its services. As
for the evenhandedness of the process, it adds: "Arbitration procedures
are quite flexible and make stays and adjournments available to both
claimants and respondents."
Arbitrators have quit NAF for unfair practices a reason. Elizabeth
Bartholet, a Harvard Law School professor and advocate for the poor,
worked as an NAF arbitrator in 2003 and 2004 but resigned after handling
24 cases. NAF ran "an unfair, biased process," she said in a deposition
in September, 2006, in an Illinois state court lawsuit. NAF isn't named
as a defendant in the pending case, which challenges a computer maker's
use of an NAF arbitration clause. Bartholet said that after she awarded
a consumer $48,000 in damages in a collections case, the firm removed
her from 11 other cases. "NAF ran a process that systematically serviced
the interests of credit-card companies," she says in an interview.
In response, the firm says that both sides in each case have the right
to object to one arbitrator suggested by NAF, based on the arbitrator's
professional biography, which is provided to the parties. Creditors had
simply exercised that option with the Harvard professor, NAF says.
Even arbitrators who speak highly of NAF say that the decision-making
process often takes very little time. Anita Shapiro, a former Los
Angeles superior court judge, says she has handled thousands of cases
for the company over the past seven years. Creditors' lawyers have
always assured her that consumers are informed by mail when they are
targeted in arbitration, as NAF rules require, she says. But in the
majority of cases consumers don't respond. She assumes this is the
consumers' choice. Shapiro says she usually takes only "four to five
minutes per arbitration" and completes "10 to 12 an hour." She is paid
$300 an hour by NAF. If she worked more slowly, she suspects the company
would assign her fewer cases.
Asked about Shapiro's account, NAF says: "Arbiters alone determine the
amount of time required to make their decisions." It adds that
collections cases tried in court are often decided swiftly when
consumers don't respond. NAF says its "arbitrators provide much greater
access to justice for nonappearing consumer parties by ensuring that the
[corporate] claimant submits sufficient evidence."
But some consumers, including those on whose behalf the city of San
Francisco is suing, complain that they don't have a real opportunity to
contest NAF arbitration cases. By design, arbitration rules are less
formal than those of lawsuits. The target of an arbitration can be
informed by mail rather than being served papers in person. Evidence can
be introduced without authentication.
In March the law firm Wolpoff & Abramson settled a class action in
federal court in Richmond, Va., alleging unfairness by the firm in NAF
arbitrations. The suit, filed on behalf of 1,400 Virginia residents
pursued by the credit-card giant MBNA, claimed that Wolpoff & Abramson,
which represented the company, promised them in writing that they could
appear at hearings before an NAF arbitrator but then failed to arrange
for the hearings. NAF wasn't named as a defendant in the suit. Denying
wrongdoing, Wolpoff & Abramson agreed to pay a total of $60,000 in
damages. The firm, based in Rockville, Md., declines to comment. NAF
denies that consumers were falsely promised hearings.
Diane McIntyre, a 52-year-old legal assistant and one of two lead
plaintiffs in the Virginia class action, says she was gradually paying
down $9,000 she owed MBNA. She had reduced her debt to about $6,000 when
she got word in May, 2005, from Wolpoff & Abramson of an arbitration
award against her for $6,519, plus $977 in legal fees. She intended to
contest the amount of the award and the fees at a hearing but never had
a chance. "I wanted to pay the debt" but not all at once, she explains.
As part of the class action settlement, Wolpoff & Abramson agreed to
accept $4,000 from McIntyre.
A number of other NAF arbitrators BusinessWeek contacted independently
say that even apart from the absence of debtors contesting most cases,
NAF's procedures tend to favor creditors. What most troubled Neely, the
former West Virginia supreme court justice, was that NAF provided him
with an award form with the amount sought by the creditor already filled
in. This encourages the arbitrator to "give creditors everything they
wanted without having to think about it," says Neely.
In the three NAF cases he decided, Neely says he granted the credit-card
companies the balances and interest they claimed but denied them
administrative fees, which totaled about $300 per case. Neely says such
fees wouldn't be available to creditors who filed suit in court. "It's a
system set up to squeeze small sums of money out of desperately poor
people," he asserts. Neely stopped receiving NAF assignments in 2006
after he published an article in a legal publication accusing the firm
of favoring creditors.
NAF says that Neely's accusations lack "any shred of truth." The
independence of its arbitrators ensures they will decide cases
diligently, NAF adds. "Arbitrators are in no way discouraged from
deviating from the [creditor's] requested relief."
Lewis Maltby, a lawyer in Princeton, N.J., decided six credit-card cases
for NAF in 2005 and 2006 but says he stopped because, like Neely, he
became "uncomfortable" with the process. Maltby runs a nonprofit group
promoting employee rights and has served as a director of the American
Arbitration Assn. (AAA). Working for NAF, he was surprised at how little
information he received to make his decisions. Files contained printouts
purporting to summarize a consumer's debt and an unsigned, generic
arbitration agreement, he says. "If you wanted free money, you could do
[each case] in five minutes."
Maltby says the most difficult cases to decide were three claims by MBNA
to which consumers did not respond. The files lacked any evidence that
the consumer had been notified, he says. He ruled in MBNA's favor,
having assumed that the debts were "probably" genuine. But he adds: "I
would have liked to have been more confident that was the case." He did
slice the fees requested by creditors' lawyers, because he thought they
had expended little effort. He decided one other case for MBNA after the
debtor conceded in writing that he owed money but couldn't afford to
pay. MBNA withdrew another claim after the consumer said he had been the
victim of identity theft, Maltby says.
In a statement, NAF says that BusinessWeek misrepresented Maltby's
views. But Maltby later said he stands by all his comments. In a
statement, Bank of America, which acquired MBNA in January, 2006,
declines to comment because of the suit filed by San Francisco against
EASING THE COURT'S LOAD
Most judges are favorably disposed toward arbitration as a way of
alleviating the courts' litigation load. In one case in which customers
questioned the use of an arbitration clause by credit-card issuer First
USA Bank, a federal judge in Dallas ruled in 2000: "The court is
satisfied that NAF will provide a reasonable, fair, impartial forum."
But some courts have found reason to question NAF awards. In May, 2005,
a state judge in Oregon threw out a $16,642 arbitration judgment
favoring MBNA. Judge Donald B. Bowerman didn't explain his reasoning,
but the consumer in the case, Laurie A. Raymond, had appealed the award,
saying she had been complaining to MBNA since 1990 that the charges
attributed to her were the result of fraud or a mistake. Raymond, a
54-year-old family-law attorney in Portland, also told the court that
she had never signed an arbitration agreement. Unlike most alleged
debtors, Raymond energetically disputed NAF's jurisdiction. The
credit-card company at certain points in the past had conceded that she
didn't have to pay, she says. Nevertheless, in July, 2004, the
arbitrator entered the award for the bank without holding the hearing
Raymond says she had requested.
After Raymond got the award canceled, she sued MBNA for violations of
debt collection and credit reporting laws. MBNA settled the suit on
confidential terms. MBNA parent Bank of America declines to comment
specifically, citing privacy obligations. "The referral to arbitration
was consistent with the practices in place at the time," the bank says.
"We believe arbitration can be an efficient and fair method of resolving
disputes between our customers and the company."
NAF declines to comment on the Raymond case. But generally, the company
adds: "Litigants, on either side, do not always see the facts, the law,
or the process through an unbiased eye."
Raymond felt equipped to take on NAF and MBNA because of her legal
training, she says. "One reason I went on with the process was that if
[NAF] can do this to someone who understands this stuff, what are they
doing to the little grandma next door?"
Cheryl C. Betts of Cary, N.C., was one layperson who felt overwhelmed.
She learned that she'd been taken to arbitration in May, 2007, when Mann
Bracken sent her a letter about $6,027 she owed on a Chase credit card.
The letter informed her that she'd have to pay an additional $602 in
legal fees related to arbitration but offered to settle for 75% of the
total, or $4,972. Betts, a 55-year-old former administrative assistant
for an energy company, says she always intended to pay her debt but
didn't want to cough up nearly $5,000 at once. "I'm not a deadbeat," she
Betts says her troubles began after she was late with one $128 minimum
payment in August, 2005. Chase lowered her credit limit from $6,000 to
$4,900. Fees and penalty interest soon pushed her over that limit,
setting off a spiral of rising minimum- payment demands that she says
she couldn't afford. Betts says she repeatedly contacted the bank to try
to work out a payment plan. "This should never have happened," she says.
Chase declines to comment on particular credit disputes, citing customer
privacy. The bank points to a 2000 opinion by U.S. Supreme Court Justice
Ruth Bader Ginsburg saying that "national arbitration organizations have
developed similar models for fair cost and fee allocation.... They
include National Arbitration Forum provisions that limit small-claims
The May, 2007, letter to Betts from Mann Bracken announcing its
intention to arbitrate set off a nine-month flurry of paperwork. In
August, after she filed an 11-page response to the arbitration claim,
Mann Bracken requested an adjournment, which was granted. Four months
later, Betts fired off a long fax further disputing the case, and the
law firm responded by seeking a 45-day extension. Betts thought she
would have another opportunity to contest the case.
But on Feb. 15, 2008, the day after the extension expired, an NAF
arbitrator issued a ruling ordering her to pay $5,575 to Chase. She has
taken the case to a state court in Raleigh. "Many people," she says,
"would have thrown in the towel because they don't have the time to
pursue this, or they are just totally confused.... The only thing that
kept me going was that I knew that I hadn't done anything wrong."
NAF declines to comment on the Betts case but reiterates that its
procedures are fair. It adds that "parties can become confused about
court procedures or about arbitration procedures.... "
In a nutshell, the courts(arbitrators)and the banks are in no way looking out for
your best interest. You have to better understand what you are reading and
signing to know what steps can take place to move decisions in your favor.
Better yet, don't even get yourself in this situation at all. Eliminate your debt and
you will not have to succumb to this unfair and biased treatment.
On this Thursdays G&G Training Conf Call, I'll be going into strategies to put yourself
in place to avoid the scrutiny of scrupulous creditors and courts who continuously try
rob you of your labor and wealth. For more details on the call, visit G&G Associates website, click on the "calendar" link and you'll get the call in information.
Tax & Financial Consultant, RFC
866-361-3872 toll free fax
"Those who do not learn the lessons of history indeed are condemned to relive them."
LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. G&G Associates expressly forbids from having a financial interest in any security that is recommended to our subscribers