FTC Calls for Reform on Debt Collection Arbitration

The Federal Trade Commission has announced the release of a new report recommending improvements to the current debt collection arbitration system in place in the United States. Here’s a look at what that might mean for you.

What Is Debt Collection Arbitration?

On many forms of credit (like credit cards), one part of the agreement paper you have to sign is an “arbitration clause,” which indicates that, should a disagreement about a debt arise, the consumer (you) and the creditor (the card issuer) must come to an agreement outside of court; that means turning to arbitration.

Ideally, arbitration involves an impartial judge deciding the case based on a review of relevant facts, but a Business Week report published two years ago explains that arbitration most commonly works in creditors’ favor, following a troublingly predictable pattern:

A creditor files paperwork (often with the National Arbitration Forum) indicating that a consumer owes money and/or that there’s been some disagreement about the amount owed.
The consumer gets a letter in the mail indicating that the issue has gone into arbitration.
An arbitrator working for the NAF decides that the consumer owes money to the creditor.
The consumer gets a letter in the mail indicating that he or she needs to pay.

Sources note that this summary isn’t just an exaggeration—a reported 99.8 percent of cases that went to NAF arbitrators were ruled in favor of creditors (meaning the consumer had to pay). What’s more, it seems that in as many as 93.7 percent of cases, consumers took no action at all on their own behalf.

Time for a Change

The FTC announced more than a year ago that it would study the problem, and now has issued recommendations for the improvement of the debt collection arbitration industry, which include the following:

Consumers should have a meaningful choice in debt collection disputes, rather than almost no say in the matter.
Arbitrators and their organizations need to get rid of bias and anything that suggests bias.
Arbitration forums should alter their methods of settling disputes to increase the odds of consumer participation.
Decisions from arbitration forums need to include more information about how a case was decided and how the amount owed was settled upon.
Arbitration forums should, generally, increase transparency.

As an added suggestion, the FTC reportedly urged Congress to temporarily ban mandatory arbitration for settling credit disputes until the industry has shown itself to meet the criteria listed above.

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