Suburban company will stop handling credit disputes

  • Article by: CHAO XIONG
  • Star Tribune
  • July 19, 2009 - 9:40 PM

Less than a week after being sued by the Minnesota attorney general's office, the nation's largest arbitrator of credit card and consumer collections has agreed to stop performing such work.

Attorney General Lori Swanson announced the settlement, reached Friday, at a news conference Sunday in St. Paul.

"The playing field [had been] tilted against the consumer toward the company," Swanson said. "This [agreement] is a major, major reform for consumers."

The state's lawsuit, filed last Tuesday, accused the National Arbitration Forum, based in St. Louis Park, of deceiving consumers into thinking it was a neutral arbitrator in debt collection.

In reality, the suit alleged, the company worked behind the scenes with credit card companies and other creditors, such as cell phone service providers, to write itself into small-print purchase agreements as the sole arbitrator consumers could use if they had problems with creditors. Consumers thereby forfeited their legal right to file claims against the provider of the goods or services purchased.

The National Arbitration Forum is owned by a New York hedge fund that also runs a large debt collection agency, Swanson said Sunday. The National Arbitration Forum was involved in more than 200,000 arbitration proceedings each year and is listed in "hundreds of millions" of consumer contracts, she said. The profit it made from those arbitration cases is unknown; the company is not publicly traded.

According to Swanson's office, the company's sales pitch to credit card companies included these lines: "The customer does not know what to expect from arbitration and is more willing to pay. They ask you to explain what arbitration is, then basically hand you the money."

Employees at the firm told investigators that they were instructed not to pass along evidence that would benefit consumers in arbitration and to use an extremely small print font on such documents, Swanson said.

Under the terms of the agreement, the company must stop administering arbitrations by this Friday.

No admission of guilt

The company didn't admit guilt or responsibility for anything alleged in the lawsuit.

"The National Arbitration Forum remains committed to consumer arbitration as the best and most affordable option for consumers to resolve disputes quickly and efficiently," said Mike Kelly, CEO of Forthright, which provides administrative services for the company.

Kelly said the company is stopping consumer arbitration because of mounting legal costs, the economic climate and legislative uncertainty about the industry's future.

"Notably, nothing in the Minnesota attorney general's complaint alleges that the arbitration proceedings administered by the Forum are unfair; the fairness of arbitration is ensured by the independence of the neutral arbitrators," the statement said.

The company was given a week to stop consumer arbitration because active cases must be completed. It can still arbitrate Internet domain name disputes, personal injury claims and other cases.

"The decision is a huge step forward for consumers," said Julia Duncan, associate director of the American Association for Justice, a group based in Washington, D.C., that is active in lobbying against forced arbitration.

The city of San Francisco is in litigation with Forum, and other state attorney generals have contacted Swanson about the case. Although Swanson maintains that Forum deceived consumers and acted unethically, her office cannot pursue criminal charges, a process that can only be executed at the county or federal level.

On Wednesday, Swanson will testify before the Congressional Committee on Oversight and Government Reform to ask Congress to prohibit the use of mandatory arbitration clauses in consumer contracts.

Without federal protection, Swanson and Duncan said, they fear that another company will simply fill the company's empty shoes.

"Ultimately, National Arbitration Forum is just one company," Duncan said.

Chao Xiong • 612-673-4391

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