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Do Not Be Fooled Arbitration is an Inexpensive Option

posted on 2008-05-12 by Mark Hutchins

By Mark Hutchins

Consumer lending contracts often contain arbitration agreements which provide that disputes arising under the contract can be taken to arbitration rather than court. Arbitration is a private process where claims are decided by arbitrators who are legal experts. One advantage of arbitration over court litigation is that parties receive the same legally binding outcome that they would have received in court, but they get to that outcome more quickly and less expensively than in court. Once the prevailing party obtains an arbitration award, the award can be “confirmed” into an enforceable judgment by trial courts in all states.

Arbitration has received increased media attention lately, as a national association of trial lawyers has named eliminating consumer arbitration as their top agenda item for 2008. As a part of this push, legislators have introduced federal and state bills that would curb or kill consumer arbitration. The most visible bill is the “Arbitration Fairness Act” (H.R. 3010, S. 1782) that was heard in Senate and House subcommittees in late 2007.

Unfortunately, much of the lobbying, public relations and advocacy that has driven these bills has contained fundamental inaccuracies about how consumer arbitration actually works. From my experience, arbitration is a much quicker and less expensive method of resolving collections disputes. Of course, these savings benefit not just lenders, collectors, and debt buyers, but they also benefit consumer borrowers in the form of better and less expensive consumer lending products.

Because of the trial lawyers’ push to ban consumer arbitration, it is especially important to recognize arbitration’s benefits and to educate others about it. I want to take the opportunity here to address a few of the most important points that have been subject to misinformation.

First, arbitration does not stack the deck against consumers. No one wants a system that is unfairly tilted in favor of one type of party over another, and courts reviewing arbitration awards would never allow it. The available data about arbitration outcomes clearly establishes that business and consumer parties win in arbitration at the same rate that they win in court. Even consumer advocacy groups seeking to ban arbitration have now conceded this point.

Second, arbitration is clearly less expensive than court, particularly in default cases. According to the National Arbitration Forum website, the arbitration filing fee for a $4,999 claim is only $70 where the opposing party does not file a response. For a $7,499 claim the arbitration filing fee is also only $70, and for a $25,000 claim the fees is only $120. All of these filing fees are lower than the corresponding fees to file a lawsuit in Texas and in California, for example (see chart below).

Debt N.A.F. Texas California
$4,999 $70 $72 $95
$7,499 $70 $72 $120
$25,000 $120 $287 $280

Third, arbitration procedures are more efficient than court procedures in several important areas that magnify arbitration’s cost savings. For example, instead of hiring local counsel in each jurisdiction where litigation must be filed, arbitration claims can be filed from a central location against respondents in any U.S. jurisdiction. Also, arbitration proceedings can be conducted as “document hearings” that do not require in-person appearances. Finally, arbitration’s procedural rules apply nationwide, eliminating the need to comply with varying state and local procedures in each jurisdiction where a claim is filed.

Lastly, there are many advantages to be found in integrating arbitration into an organization’s collections procedures. The filing of an arbitration claim opens up “work with” opportunities that could potentially lead to settlement before the arbitration proceeds to its conclusion.

From my experience, arbitration’s lower fees and procedural conveniences combine to make arbitration a much less expensive option than court to resolve collections disputes. It is important to understand these facts so that we are not swayed by the anti-arbitration pundits who are presenting inaccurate information. Keep your eyes open for any anti-arbitration bills in your state, and stand ready to educate decision makers and others about arbitration.

Mark Hutchins is the Managing Owner for Catalina Consulting, a company he started to provide consulting services to the credit and collection industry upon leaving his position as Vice President of Business Development for Asset Acquisitions Group LLC. Prior to consulting, Mr. Hutchins worked for Asset Acceptance LLC from December 2001 through March 2007. He held several management positions in the Legal Department including Outsourcing, Arbitration, Collections, and Pre-Legal until he was promoted to Assistant Vice President – Legal in December 2003. In April, he was transferred to the Marketing Department as an Assistant Vice President – Marketing and Acquisitions. Prior to joining Asset Acceptance, Mr. Hutchins held varying positions of responsibility in the Credit and Collection area for Ford Motor Credit Company. Mr. Hutchins has a BA in Material Logistics and Marketing from Michigan State University, and a MBA in Management and Information Systems from Wayne State University. Mr. Hutchins has been in the collection industry since 1999.