Consumer Law & Policy Blog

AAA Joins NAF in Quitting Arbitration of Consumer Debt Disputes

by Deepak Gupta

The Wall Street Journal is reporting that the American Arbitration Association "will stop participating in consumer-debt-collection disputes," at least--according to an unnamed AAA official quoted in the story--"until some standards or safeguards are established."  I'm not sure what that caveat means, but it suggests a lobbying strategy, consistent with AAA's prior positions, to get Congress to adopt minimum standards instead of making arbitration truly voluntary.  It's also unclear whether the AAA's withdrawal will extend beyond consumer debt, as NAF's does, to include other forms of consumer or employment disputes. AAA doesn't currently handle a lot of collection cases--certainly nowhere near as many as NAF. 

Whatever the scope of AAA's pullout, this is big news in the battle over arbitration fairness.  And the timing is no coincidence. The news follows close on the heels of the Minnesota AG's lawsuit against NAF, the resulting consent decree, and today's report from the House of Representatives. Indeed, the Minnesota Attorney General released a letter to the AAA on Sunday asking it to take this very step. The announcement also appears to have been deliberately released on the eve of tomorrow's House oversight hearing.  Even before the news from AAA, the tort deformers at Point of Law were forced to concede that consumer arbitration is "in retreat" and "has taken a big hit in the political and PR world."

So far the Journal appears to be the only news outlet reporting on the AAA announcement. The Chicago Tribune and the San Francisco Chronicle, among other papers, had additional coverage today on the victory over NAF. You can learn more about the arbitration fairness legislation pending in Congress here.

So what happens now in consumer disputes involving NAF and AAA clauses?

Big Delay on Consumer Financial Protection Agency

 As reported by U.S. PIRG's Consumer Blog, Rep. Barney Frank, Chair of the House Financial Services Committee, has announced that his committee's consideration of legislation establishing a Consumer Financial Protection Agency has been delayed from next week until September.

House Oversight Committee Looks Into Forced Arbitration

The Domestic Policy Subcommittee of the House Oversight and Government Reform Committee will hold a hearing tomorrow afternoon entitled "Arbitration or ‘Arbitrary’: The Misuse of Arbitration to Collect Consumer Debts." The witnesses are Minnesota Attorney General Lori Swanson, Michael Kelly of the NAF, co-blogger Paul Bland, Christopher Drahozal (a pro-forced-arbitration law professor), and Richard Naimark of the AAA. In light of this week's developments, it promises to be a very interesting hearing. Lucy Colby has the details at the Fair Arbitration blog.

In advance of tomorrow's hearing, the Committee has released this staff report, which documents numerous problems with NAF's handling of consumer cases.

Is CARS a Good Idea?

The Consumer Assistance to Recycle and Save Act of 2009 (CARS) is meant to encourage people to trade in their gas guzzlers and buy new "fuel efficient" cars. You trade in the gas guzzler and the federal government funds a $3,500 to $4,500 credit toward the new car. And the car dealer is required to scrap the gas guzzler, so that it doesn't continue its gas-guzzling ways. The idea is that the consumer saves money, new car purchases increase, and the environment is benefited.

But in a column entitled "One Lemon of a Law," the Washington Post's Michelle Singletary really takes after CARS. She says that "in truth, this is welfare for the limping auto industry. The National Highway Traffic Safety Administration (NHTSA) has been given $1 billion to fund the program. But the law does not apply to the purchase of used cars, encourages people to take on more debt and doesn't require the new cars to get substantially better gas mileage." On this latter point, under CARS, new passenger cars can get as little as 22 combined city/highway miles per gallon (mpg) and SUVs, small and medium pickup trucks, and small and medium passenger and cargo vans can get has little as 18 combined mpg. Check out the government's CARS website for all the details.

Senator Chambliss Lifts "Hold" on Cass Sunstein for OIRA Position

Quite a while back, President Obama nominated Cass Sunstein, a famous law professor, to head the Office of Information and Regulatory Affairs (OIRA) in the Office of Management and Budget. In the past, OIRA has had a lot of power over federal agencies' regulatory agendas. Sunstein's nomination stalled after Senator Saxby Chambliss of Georgia placed a "hold" on the nomination because Sunstein had supported animal rights and, specifically, the right of animals to sue (with humans as surrogates of course). Now, according to a news report, Chambliss has lifted his hold because Sunstein has pledged in a letter not to "'take any steps to promote litigation on behalf of animals' and agree[d] the law does not give animals ... rights. Sunstein in the letter also says he believes the Second Amendment protects the right of individuals to bear arms."

The Obama's Administration Consumer Financial Protection Agency Bill and Abusive Practices

by Jeff Sovern

Subtitle C of the Obama administration's bill to create a Consumer Financial Protection Agency would give the CFPA the power to promulgate rules "identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service."  The bill would also permit the agency to take action to prevent someone from engaging in such a practice.  The phrase "unfair and deceptive" has a long history in litigation under the Federal Trade Commission Act, and in fact the bill copies the FTC Act's definition of unfair, drawn in turn from a 1980 FTC Policy Statement, that acts cannot be declared unfair unless "the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers ot to competition."  So those phrases seem relatively well understood.  But what are abusive practices?  The Fair Debt Collection Practices Act bars abuse in debt collection, § 1692d, but presumably the CFPA's authority to ban abusive practices would extend beyond debt collection.  For example, suppose the CFPA declared that it is an abusive practice to provide for a balloon payment in a mortgage in which the borrower has no real expectation of a substantially higher income when the balloon payment comes due (as might be true of a medical student, for example).  Should courts uphold such a determination?  Here's a definition of abusive from dictionary.com:

1.	using, containing, or characterized by harshly or coarsely insulting language: an abusive author; abusive remarks.

2.	treating badly or injuriously; mistreating, esp. physically: his abusive handling of the horse.

3.	wrongly used; corrupt: an abusive exercise of power.

It seems unlikely that the word as used in the bill should be confined to use of bad language, and obviously it isn't directed to physical abuse.  That third definition--wrongly used; corrupt--seems more relevant.  Most practices that satisfy that definition would also seem unfair.  But abusive must mean something that is neither unfair nor deceptive; otherwise, why include it?  And it should also mean something different from unconscionable, because the drafters didn't use that term either.  My own guess is that it would give the CFPA the power to ban clauses that permit a business to take advantage of a consumer because the business has power the consumer doesn't, perhaps because of information asymmetries.  But it's just a guess.

Check out Wal-Mart Watch

If you're interested in all things Wal-Mart, check out Wal-Mart Watch, a (largely) critical website devoted to discussion of the world's largest retailer. There's an emphasis on efforts to improve wages and benefits for Wal-Mart workers. Today's top story is about venomous snakes causing serious injury to customers in Wal-Mart garden centers.

Consent Decree in Minnesota v. NAF

Here's the consent decree that Richard mentions in the post below.  And here's the text of the press release from the Minnesota Attorney General's office:

Minnesota Attorney General Lori Swanson and the National Arbitration Forum—the country’s largest administrator of credit card and consumer collections arbitrations—have reached an agreement that the company would get out of the business of arbitrating credit card and other consumer collection disputes.

“I am very pleased with the settlement. To consumers, the company said it was impartial, but behind the scenes, it worked alongside credit card companies to get them to put unfair arbitration clauses in the fine print of their contracts and to appoint the Forum as the arbitrator. Now the company is out of this business,” said Swanson.

Swanson sued the National Arbitration Forum on Tuesday, alleging that the company--which is named as the arbitrator of consumer disputes in tens of millions of credit card agreements--hid from the public its extensive ties to the collection industry. The lawsuit alleged that the Forum told consumers and the public that it is independent and neutral, operates like an impartial court system, and is not affiliated with and does not take sides between the parties. The lawsuit alleged that the Forum worked behind the scenes, however, to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appoint the Forum to decide the disputes. The suit also alleged that the Forum has financial ties to the collection industry. The suit alleged that the company arbitrated 214,000 consumer arbitration claims in 2006, nearly 60 percent of which were filed by laws firms with which the Forum is linked through ties to a New York hedge fund.

Under the settlement, the National Arbitration Forum will, by the end of the week, stop accepting any new consumer arbitrations or in any manner participate in the processing or administering of new consumer arbitrations. The company will permanently stop administering arbitrations involving consumer debt, including credit cards, consumer loans, telecommunications, utilities, health care, and consumer leases.

NAF Exits Consumer Arbitrations

by Richard Alderman

In a major victory for consumers, the nation’s largest arbitration firm involved in adjudicating delinquent credit-card debt has agreed to pull out of the business. As reported by BusinessWeek, the move was announced today by Minnesota Attorney General Lori Swanson, who had filed suit against the National Arbitration Forum, alleging fraud, deceptive trade practices, and false advertising.

Under the terms of the consent decree, signed by the AG and NAF officials, the arbitration firm by the end of this week will stop accepting new consumer arbitrations of any sort. These include arbitrations over disputed credit-card debt as well as new lines of business the NAF has moved into, such as arbitrating consumer debts in healthcare, telecommunications, utilities, mortgages, and consumer leases. The only business NAF can now be involved with is in arbitrating Internet domain disputes, a business it has long been in.

The question now is where will all these arbitrations go, and will more lawsuits follow them.

John Infranca on Protecting Exempt Social Security Payments from Freezes and Garnishment

John Infranca of NYU has written Safer than the Mattress? Protecting Social Security Benefits from Bank Freezes and Garnishments, 83 St. Johnb's Law Review (2009). Here's the abstract:

This Article analyzes the tensions between the anti-assignment provision of the Social Security Act-which exempts benefits from garnishment by creditors seeking payment for outstanding debts-and state-law garnishment procedures. Although federal law explicitly prohibits the garnishment of Social Security and other federal benefits, recipients routinely discover that these funds, which they believed were safely deposited in a bank account, have been temporarily frozen or, even worse, permanently garnished at the behest of a judgment creditor. The problem has been exacerbated in recent years as the collection industry has grown and changes in state laws have made it easier for creditors to garnish bank accounts. At the same time, increasing numbers of benefit recipients are receiving direct electronic deposits, further complicating matters.

Banks, seeking to avoid liability under state law, typically comply with garnishment orders and automatically freeze accounts. This often causes substantial hardship for low-income benefit recipients, who can be left for weeks without access to funds they rely upon for subsistence. A few states have attempted to remedy the problem through legislative and administrative solutions, with mixed success. Congress has also recently held hearings on the issue and federal agencies have proposed a possible response. This Article analyzes these efforts and discusses their limitations before urging a federal legislative response in the form of a five-part policy proposal.