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Read the fine print: Arbitration clause can sting you

By Eileen Ambrose
Baltimore Sun

Mar. 15, 2005 - When consumers shop for a credit card, they’re looking for the lowest interest rate, no annual fee or the best perk, such as frequent-flier miles.

Few pore over the fine print of card agreements. If they did, they might see they agreed to settle disputes with the card issuer through binding arbitration, giving up the right to sue.

Since the 1990s, large card issuers have been adding arbitration clauses to card agreements hoping to stave off expensive class-action lawsuits. Supporters of arbitration say having a third party hear the facts and make a binding decision is a lot quicker and cheaper for both sides than going to court.

Consumer advocates, however, say arbitration overwhelmingly favors card companies that select which arbitration company will handle thousands of credit disputes each year.

A report this month by the National Consumer Law Center warns that a couple of big issuers use arbitration as a fast-track means of collecting debts from consumers who often are confused or unaware of the legal proceeding, and thus are likely to lose. These consumers can be forced to pay debt they don’t owe plus arbitration costs, the group said.

Recently, more than a dozen public-interest organizations launched a campaign to stop the spread of binding arbitration clauses, which have been cropping up in mortgages, car loans, health insurance plans and employer handbooks.

Arbitration rules vary, but it generally works like this: Notified that a claim is going to arbitration, consumers have, say, 30 days to respond. The arbitration may be done by mail, over the phone or in person.

If the arbitrator rules against consumers, they have 90 days to contest the decision. Grounds for overturning a decision are limited and difficult to meet. If consumers don’t challenge the ruling, the card issuer can get court approval to enforce the arbitration award by, say, garnisheeing wages.

Many consumers will never reach arbitration with a card company. But when it happens, the process can lead to confusion and years of frustration.

Take the case of Beth Plowman, an international public health adviser who suspects that her identity was stolen after she used her MBNA card to pay a hotel bill during a business trip to Nigeria in 2000.

The Damascus, Md., resident said she rarely used the card and didn’t notice she wasn’t getting statements. But after six months, MBNA called her to collect more than $26,000 in debt incurred by someone buying sporting goods in Europe.

Plowman said she asked why the company had waited so long to contact her and was told by MBNA that Plowman’s “sister” had called to change the address on the account from Maryland to London. “I don’t have a sister,” Plowman said.

She filed an identity-theft report with the police and, when she didn’t hear from MBNA, figured the problem was resolved. Two years later, she got a letter from a debt-collection agency that had acquired her debt from MBNA and the right to take her to arbitration, which was part of her card agreement.

Plowman said she figured the problem would be cleared up after she wrote to the debt collector about her identity theft. That’s why she didn’t respond to the letter a short time later from the National Arbitration Forum, stating that a claim had been filed against her. The company administers arbitrations.

That proved costly. In August 2003, an arbitrator ruled against her, saying she owed more than $27,000. Plowman hired a lawyer, who got the debt-collection agency to drop its claim last year. Plowman said other card issuers diligently monitor her card activity, contacting her whenever something seems unusual. “MBNA, they were asleep at the wheel,” she said.

MBNA is one of the issuers cited by the National Consumer Law Center for aggressively using arbitration through the National Arbitration Forum to pursue claims against consumers.

Louis J. Freeh, former FBI director and now MBNA’s general counsel, said in a statement that the country’s No. 3 credit card issuer doesn’t discuss customer information with the media. He added that MBNA reviewed the cases cited by the law center’s report, which included Plowman’s, and that “we are confident that arbitration awards were granted appropriately.”

Taking charge

• If you’re worried about arbitration clauses, shop for a card that doesn’t have one.

• When signing up for a new card, consumers can cross out the arbitration clause in the card agreement or write the issuer and say they don’t accept binding arbitration, said Greg McBride, senior financial analyst with Bankrate.com. But “you may have to be prepared to take your business elsewhere if they reject it,” he said.

• A card issuer may notify customers that it is adding arbitration to its cardholder agreement. Typically, the company allows customers to opt out of changes and remain under the old terms, said Curtis Arnold, founder of CardRatings.com, a provider of card information for consumers. If the customer opts out, he warned, the issuer will close the account after the card expires.

• If you receive a notice for arbitration, don’t ignore it.