Arbitrator hid ties to debt collectors, new report says

A report released yesterday claims the National Arbitration Forum, a Minnesota company that handled most consumer debt-collection arbitrations in the United States, misled consumers and hid ties to debt-collection firms.

Kucinich, an Ohio Democrat, summarized the findings at a hearing into the use of mandatory arbitration clauses by credit card, mobile phone, and other companies to collect consumer debts. “The debt collection industry and the alternative legal system that has been created around it can no longer be ignored by the federal government,’’ Kucinich said.

Bills to crack down on abuses of mandatory arbitration are being considered by Congress. Hearings before a House subcommittee chaired by Kucinich began yesterday.

The National Arbitration Forum agreed July 17 to settle a lawsuit filed by Minnesota Attorney General Lori Swanson that bars the firm from taking on any new consumer debt-collection disputes. In testimony, Swanson asked Congress to add new consumer protections to federal law governing arbitration.

NAF was “part of one big debt-collection conglomerate,’’ Swanson told the committee.

Michael Kelly, chief operating officer of NAF, blamed the costs of defending against suits and investigations, uncertainty about possible legislation, and a difficult economic environment for the company’s decision to drop debt-collection arbitrations. Kelly denied that NAF was biased in favor of its corporate clients.

“Arbitration is a simple, fair, and cost-effective way for consumers and businesses to resolve disputes outside of the traditional litigation system,’’ he said.

The American Arbitration Association, the world’s biggest provider of out-of-court dispute resolution services, said it has decided to stop taking debt-collection cases until new standards for resolving the disputes are established.

“A series of important fairness and due process concerns must be addressed and resolved before we will proceed with the administration of any future debt collection arbitrations,’’ AAA vice president Richard Naimark said in prepared testimony.

Naimark said one of the most difficult issues surrounding the consumer debt arbitration caseload is that consumers rarely appear or participate in the process. As a result, the companies win almost all the time. Naimark said AAA has been cooperating for months with the subcommittee investigating the industry.

Some companies that use arbitration services said they will simply shift to different firms to resolve disputes with consumers.

“We’ll work with another vendor to do that,’’ said Sprint spokesman John Taylor. “Our view of this is that consumers are well served by the arbitration process, and it’s cheaper and it’s quicker for all parties.’’

Often, the companies that include arbitration clauses in their contracts with consumers sell their delinquent accounts to debt-collection firm for cents on the dollar, Public Justice staff attorney Paul Bland testified. The debt collectors then file arbitrations to recover the money.

JPMorgan Chase & Co. spokesman Paul Hartwick said Chase is no longer filing new consumer credit arbitration claims. Less than 1.5 percent of accounts in default are arbitrated, Hartwick said.