Effective Immediately: Bank of America renounces mandatory arbitration
Posted by Trevor Reid on August 14, 2009
“Bank of America Corp. said that as of Thursday it will stop requiring that disputes with its credit card holders and banking and lending customers be settled by binding arbitration, opening the door for class-action and other lawsuits to push up the bank’s legal costs.” Bank of America spokeswoman Shirley Norton “acknowledged that the bank may face more lawsuits now, but said Bank of America is hoping to work out most disputes directly with customers.” David Robertson, “publisher of the Nilson Report, which tracks the credit card industry, said he believes Bank of America’s decision was a result of” the recent decisions by the National Arbitration Forum and the American Arbitration Association-two major groups in the field-to stop handling arbitration disputes, as well as by increased “congressional scrutiny.” As reported by AP.
“The change as of today also covers auto, recreational vehicle and marine loans, spokeswoman Betty Riess said. The bank wouldn’t disclose how many arbitration cases occur annually, though the number of credit-card disputes handled through arbitration has declined sharply since mid-2008, she said.” Per Bloomberg.
Bank of America’s change, according to the Wall Street Journal, extends beyond collecting debts to encompass all consumer disputes. Citigroup, a financial company that does not routinely resort to arbitration, announced it will monitor developments.
It is not yet clear what impact this will have on other large banks. Clearly Bank of America is a huge influence on this market. Consumers and bankers alike look to this institution to set the bar. As discussed here, the benefits of consumer relationships outweighed the results of the legal analysis–Bank of America believes its arbitration clauses are fair and enforceable. But it recognizes that its customers are the first adjudicator of a fair deal.
August 18th, 2009 at 9:33 pm
August 18, 2009
Trevor:
Thank you for posting this news. I think that Bank of America’s move is a significant step towards restricting mandatory arbitration in accordance with its intended 1925 Federal Arbitration Act purpose. Congress never meant the FAA to apply to consumers. Instead, Congress meant the FAA to apply in the commercial context as it existed in 1925. That commercial context involved disputes between businesses and other commercial organizations, not individual consumers and businesses. For most individuals, the arbitration process has been more expensive, extensive, and time-consuming than the court system. Many individuals have lost their arbitration cases through inability to pay the arbitration fees. Finally, many arbitration organizations and arbitrators have a built-in bias to overcome, because corporations and other large organizations can offer repeat business, while individuals cannot. So, I welcome Bank of America’s move.
Howard Yale Lederman
August 18th, 2009 at 10:11 pm
Thanks for your comment, Howard, and for expanding on the context of arbitration. I’m interested in alternative dispute resolution and international commercial arbitration in particular. I agree that mandatory arbitration is best suited to policing agreements between sophisticated bargainers–businesses with managers and lawyers that should know exactly what they are gaining and what they are giving up by submitting to arbitration. These are also the scenarios where both parties, win or lose, are most likely to benefit from mitigated costs.
You’re right that arbitration structurally favors large businesses over consumers.