BofA $5 million Collection Arbitration Settlement May Impact the ARM Industry

Bank of America is trying put to rest some lingering consequences of its credit card subsidiary’s decision to use National Arbitration Forum, Inc. to settle disputed consumer credit card debt claims. The nation’s largest bank agreed this week to settle an arbitration lawsuit filed by the City of San Francisco that accused FIA Credit Services of unfair and unlawful business practices.

FIA Card Services agreed to pay the city $5 million and not arbitrate any consumer credit card collections in California for two years.  The credit card issuer also will not enforce any of NAF’s arbitration awards that have not been confirmed by a judge or collect attorney fees on those awards that have been confirmed, said Christine Van Aken, deputy attorney for the City of San Francisco.

The latter two provisions could still impact the debt collection industry. Aken said the San Francisco attorney’s office believes there are still some unconfirmed NAF awards to Bank of America out there.

“We don’t know how many, but we believe there are still some unconfirmed awards,” she said.

If some debt buyers or collection agencies have NAF awarded accounts that have not been confirmed by a judge, they may be considered invalid. However, Fred Hanna of Frederick J. Hanna & Associates PC in Marietta, Ga. said he doesn’t believe there are any remaining credit card arbitration awards that have not been affirmed by a court.

“In my opinion they have either dismissed all arbitrations or reduced the arbitration to a judgment over three years ago.  I just don’t think there is anything pending out there for the major banks or debt buyers,” Hanna said.

Kaulkin Ginsberg Analyst Mark Russell said many debt buyers, nonetheless, are being proactive in trying to ferret out any potential NAF awards that may be among the major banks’ credit card debt portfolios for sale in their due diligence.

“I do know that a lot of debt buyers get concerned with buying portfolios that have any legal accounts that were worked on by NAF because those judgments may become invalid,” Russell said.

Aken said the settlement doesn’t void the debt, so it can be pursued in court. But the agreement does call for debt buyers or collection agencies that are still collecting on NAF awarded and court confirmed debt to remove the attorney fees that were included in the balances.  The agreement applies to open accounts, so any attorneys’ fees that have been collected on those accounts must be returned.

Aken said the City of San Francisco fought for the refund because NAF tacked on attorney fees of 25 percent of the principal when it issued the awards.  She called the fees excessive because the paperwork was “boilerplate documents” generated by a database that contained electronic signatures.

“In some cases the fees were thousands of dollars,” she said.

Bank of America was one of several major banks accused of participating in an NAF arbitration system that was rigged in its favor in credit card debt disputes with consumers. After the Minnesota Attorney General filed a lawsuit against NAF accusing it of misleading the public into believing it was an independent arbitration company, while at the same time working against the interests of consumers, NAF agreed to stop mediating consumer debt collection disputes and terminated its consumer-arbitration business.

NAF’s decision, in the wake of numerous lawsuits against it, marked the beginning of the end of most arbitration in consumer credit debt-collection disputes as American Arbitration Association, the industry’s second largest arbitration firm, also shut down its consumer debt division.

Aken said the San Francisco City Attorney continues to pursue its case against NAF to keep it from ever doing any consumer related arbitration cases in California. She didn’t know if the city will continue to pursue claims against other banks that used NAF to arbitrate consumer debt disagreements.

“I can’t say if we’re finished with this issue. I just don’t know,” she said.