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BofA Drops Credit Card Arbitration Requirement

Bank of America 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 branch, New York City.
Oliver Quillia for cnbc.com
Bank of America branch, New York City.

Many consumers are unaware that card agreements typically include a clause that waives a card holder's right to sue. Lenders instead use arbitration to go after delinquent accounts and consumers can employ arbitrators to fight disputes with their banks.

Banks have said arbitration is less costly for everyone than lawsuits, but consumer groups have criticized it as tilted in favor of banks.

Bank of America spokeswoman Shirley Norton said the change covers the company's credit cards, consumer RV and marine loans, and banking customers. She acknowledged that the bank may face more lawsuits now, but said Bank of America is hoping to work out most disputes directly with customers.

"We've always maintained that arbitration was a very fair process, but we got feedback from our customers that they didn't feel that way, so we decided to make a change," she said.

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The arbitration industry has also been getting feedback from the government.

Last month the biggest arbitration group, the National Arbitration Forum in St. Louis Park, Minn., agreed to stop arbitrating credit card disputes after being sued by Minnesota Attorney General Lori Swanson, who alleged violations of state consumer fraud, deceptive trade practices and false advertising laws by hiding financial ties to collection agencies and credit card companies.

Swanson said the group handled more than 214,000 collection claims in 2006. The group had denied wrongdoing but said it got out of the business of arbitrating consumer finance loans because of legal costs.

A few days later the American Arbitration Association said it would stop arbitrating consumer debt collection until the process is reformed. And a Congressional committee has held hearings on a proposal to ban arbitration clauses from credit card agreements.

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 those shutdowns and the congressional scrutiny. He compared the credit card industry to a baseball game in that, "one thing after another goes bad, and it becomes a rout. And that's what's going on now with the card industry."

He said that arbitration made it much easier for card issuers to know how much they could expect to spend on disputes. Now that at least some disputes will end up as lawsuits, there's no way to predict how much disputes will cost credit card issuers, he said.

"There's no way in the world that you're not going to face increased costs," he said.

It wasn't immediately clear whether Bank of America would be alone in dropping arbitration. Spokespersons for Capital One Financial, Citigroup and Discover Financial Servicesdid not immediately return phone messages for comment.

American Express spokeswoman Joanna G. Lambert said the company's agreements do not require arbitration, but said if the customer files a lawsuit the company can "elect to have the case directed to arbitration."

"In any event, we always work hard to resolve our differences with our cardmembers without the need to litigate or arbitrate," she said.

Shares of Charlotte, N.C.-based Bank of America rose $1.07, or 6.7 percent, to close at $17 on Thursday.