Although perceptions of unfairness have long followed them, it took just one lawsuit to knock two leading arbitration associations out of the consumer debt resolution game. After a year-long investigation, Minnesota Attorney General Lori Swanson filed suit July 14 against the National Arbitration Forum (NAF) for deceptive practices, alleging it hid financial ties with debt-collection companies and law firms.
Arbitration clauses became standard in credit card agreements to help companies avoid litigation, says William O'Connor, chair of Crowell and Moring's financial services group. Arbitration provides a quick, cheap way for companies to resolve consumer debt disputes without the necessity of counsel.
Whether or not arbitration is fair, the NAF lawsuit won't help public perception, Cole says. "I don't think most people are going to look at it as an isolated situation," she says.
With both NAF and AAA bowing out of the consumer debt arbitration business, experts say the number of lawsuits to collect consumer debt will increase significantly. And if legislation barring mandatory arbitration clauses passes, companies are likely to see an increase in class action lawsuits since many of those clauses contain provisions prohibiting them.