A decision filed in state court at the beginning of the week, penalized Bank of America’s credit card unit, FIA Card Services, $5 million. It also barred the bank from settling customer debts through arbitration in the state of California for the next two years.
The case against Bank of America (NYSE: BAC) was filed after a report by Public Citizen, a public interest lobby, demonstrated that Bank of America’s debt arbitration client, National Arbitration Forum, routinely and systematically ruled in favor of creditors against consumers.
Up until 2009, Bank of America’s credit card contracts contained mandatory binding arbitration clauses, which forced customers to settle disputes with the bank through NAF. NAF, a Minneapolis-based firm, employs hundreds of arbitrators to help claimants settle disputes outside of a court setting. They have also been a magnet for controversy due to their tendency to side against consumers, with big businesses.
In 2007, Public Citizen published a lengthy report titled The Arbitration Trap: How Credit Card Companies Ensnare Consumers. After examining about 34,000 cases handled by NAF in California (which, unlike many states, requires private arbitrators to release public records), Public Citizen came to some startling conclusions.
They found that NAF was essentially captured by its clients’ interests. In their words, NAF is “the credit card industry’s go-to dispenser of swift decisions against its customers.”
Virtually all of the disputes brought before NAF in the study’s scope were filed by credit card companies or collection agencies, 99.6 percent to be exact. And of all the cases that were seen through to completion (about 19,000), the NAF arbitrators ruled on the side of the creditors almost 94% of the time.
As the report explains, there are financial incentives for arbitrators and arbitration firms to side with creditors, as demonstrating a business-friendly attitude will ensure that there will be more work in the future. In this regard, NAF worked like an third-party collection agency for the bank.
Since August of 2009, Bank of America has ceased to use mandatory arbitration clauses in its credit card contracts, and it stopped working with NAF at the same time.
Now, in a victory for all consumers, Bank of America will not be allowed to use NAF’s services for five years, and will not turn to arbitration while settling customer debts for the next two years in California.