Bank of America Settles Allegations That it Rigged Credit Card Dispute System

After a three-year legal battle, Bank of America has agreed to pay $5 million in fines for allegedly forcing consumers who were behind on their card payments to use a mandatory arbitration program that illegally favored the bank, according to an announcement this week by San Francisco City Attorney Dennis Herrera.

The program, which is supposed to be as neutral as any court, decided in favor of consumers in 30 cases out of 18,000, or two-tenths of one percent, Herrera’s investigation found.

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Bank of America said it settled to rid itself of the lingering financial uncertainty associated with the case. “This is an old matter, the suit was filed in March 2008,” Shirley Norton, a Bank of America spokeswoman, said in a prepared statement to Credit.com. “Bank of America discontinued the use of mandatory arbitration for consumer credit card agreements in August 2009.”

In the lawsuit, filed in 2008, Herrera alleged that Bank of America, its subsidiary FIA Card Services, and a Minnesota-based company called National Arbitration Forum (NAF) engaged in a myriad of deceptive and illegal practices that tipped the scales in favor of the bank. The companies failed to require that debt collectors prove a consumer had received notice of the arbitration practice, failed to honor consumers’ demands for hearings, and ignored evidence and arguments submitted by consumers.

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The companies also allegedly forced consumers to pay inflated bills to cover Bank of America’s legal costs, and used lawyers who were suspended or otherwise ineligible to practice law in California, according to the lawsuit.

“When arbitration is fair and impartial, it can hold significant benefits in terms of efficiency and access to justice,” Herrera said. “But the evidence is clear that NAF is anything but fair or impartial. It is little more than a collection agent masquerading as a neutral party.”

In the settlement, Bank of America and its subsidiary did not admit guilt. FIA agreed to pay $5 million in fines to the city of San Francisco, and agreed not to arbitrate credit card debt disputes in California for two years. The company also agreed not to contract with National Arbitration Forum for the next five years. The settlement leaves open the possibility for victims to bring a class-action lawsuit against FIA.

Perhaps the most important change came in August 2009, a year after Herrera filed his lawsuit, when Bank of America announced it would no longer require consumers with credit card disputes to enter binding arbitration rather than pursue lawsuits in actual courts, according to a press release by Herrera’s office. Herrera said he is still pursuing his suit against National Arbitration Forum to try to win further financial penalties against the company.

Image: Alex Proimos, via Flickr.com