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Trapped in the Fine Print


Kevin Drum makes note of one of the more appalling practices of credit card companies: writing the fine print of your card agreement such that you can't sue them. In general, those tiny letters at the bottom of your contract state that disputes need to be settled by an outside arbitrator. (What percentage of Americans even know what that means?) And that outside arbitrator is chosen by the credit card company. The results are predictable. As Business Week explained, "Corporations seldom lose. In California, the one state where arbitration results are made public, creditors win 99.8% of the time in NAF cases that are decided by arbitrators."

These arbitrators aren't always particularly neutral. One of the largest -- the National Arbitration Forum -- was bought up in a complicated scheme by hedge fund manager Kevin Cline, who also owns a massive debt collection company. As Drum puts it, "Result: synergy! NAF rules against the consumer and one of Cline's companies collects the debt." Lori Swanson, the attorney general of Minnesota, seems to have used a well-aimed lawsuit to put an end to this project, and NAF recently announced that it wouldn't be taking any new cases. But it's a good reminder that while consumers often don't understand the fine print of this stuff, corporations really, really do, and are pretty good at using it to maximize profits at the expense of customers.

You know, it's almost enough to make one think we need an agency dedicated to protecting us from the fine print and chicanery that goes into some of these financial products...

Photo credit: Bloomberg News Photo .

By Ezra Klein  |  July 24, 2009; 6:02 PM ET
Categories:  Financial Regulation , Solutions  
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Next: Tab Dump


I had to sign a form agreeing not to sue and to use arbitration when I recently went to an eye treatment center. It made me somewhat nervous but I was in urgent need of medical attention. Definitely troubling.

Posted by: corkbored | July 24, 2009 6:53 PM | Report abuse

Don't worry, the credit card companies will regulate themselves.

Posted by: bluegrass1 | July 24, 2009 6:56 PM | Report abuse

The other key point about arbiters is that they know who pays their bills. The repeat players are the corporations, and they pay for it. In arbitration, which has seen itself as perfectly legal, the repeat players are the companies. The arbiters make money if these people come back to them. This sort of runs against our idea of neutral arbitration.

On the other hand, the notion of arbitration is to cut down on transaction costs. Civil litigation is expensive for anyone. Furthermore, you do not know what judge you can get. Perhaps this requires regulation too, because such regulation could actually reduce transaction costs ex ante by providing a clearer affirmative defense should a company follow the law.

Posted by: blpanda | July 24, 2009 7:55 PM | Report abuse

How is that worse than the legalistic stanglehold you want Congress to inflict upon the Healthcare industry?

Posted by: fallsmeadjc | July 24, 2009 8:27 PM | Report abuse

Re: Don't worry, the credit card companies will regulate themselves.
Posted by: bluegrass1 | July 24, 2009 6:56 PM

I love this posting. Truer words (satire) were never spoken. Just ask the don't regulate and stay out of businesses way crowd. Just may be the reason we are in our current financial crisis.

Posted by: jslivesay | July 26, 2009 12:12 PM | Report abuse

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