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New Searle Study: Consumer Debt Arbitration is Fair

A new study comparing arbitration and court results in consumer debt collection cases finds debtors are getting a fair shake in ADR, and that creditors do better in court than they do in arbitration.

Creditor Claims in Arbitration and in Court Interim Report No. 1,” by the Searle Center on Law, Regulation, and Economic Growth at Chicago’s Northwestern School of Law, compares outcomes for business claimants in arbitration and outcomes for business claimants in comparable cases in court.

The report--prepared in the midst of last summer’s consumer debt arbitration controversy that spilled over into Congressional hearings and saw the departure from the consumer debt arbitration business of the Minnesota ADR provider National Arbitration Forum following a suit against it by the Minnesota Attorney General--focuses on consumer debt cases at the nation’s largest ADR provider, the New York-based American Arbitration Assocation.

The “Interim Report” builds on the “Preliminary Report, Consumer Arbitration Before the American Arbitration Association,” a March 2009, study by the Searle Civil Justice Institute.  

You can view the report, an executive summary, and an introductory video featuring Christopher R. Drahozal, a professor at the University of Kansas School of Law in Lawrence, Kan., and chairman of Searle’s Consumer Arbitration Task Force, here.

The study compares the outcomes of the association’s debt collection arbitrations to the outcomes of debt collection cases in court to help in evaluating arbitration as a means of resolving consumer disputes.

In July, the association announced it was suspending consumer debt collection arbitrations, and asked Congress for guidance in the area.  

The report finds that

  • Creditors prevailed less often, and consumers prevailed more often, in the arbitrations studied than in court.
  • Creditor recovery rates in the arbitrations studied were lower than, or comparable to, creditor recovery rates in court.
  • Consumer response rates in the arbitrations studied did not differ systematically from consumer response rates in court.
  • The rate of other case dispositions (e.g., dismissals and settlements) did not differ systematically between the arbitration and court cases studied.

The report concludes that its empirical findings “have important implications for the formulation of public policy regarding arbitration.”  

It says that the data “should dispel the notion that high creditor win rates and recovery rates in debt collection arbitrations in and of themselves show that arbitration is biased in favor of businesses. In fact, in the cases studied, creditor win rates and recovery rates were as high or higher in court than in arbitration.”

The report also concludes that high win and recovery rates for creditors is due more to the “characteristics of debt collection cases rather than the venue.”

The study examines 105 debt collection cases closed from April through December 2007,  and includes the cases analyzed in the Preliminary Report.  The cases are supplemented by more than 47,000 cases closed from March 2008, through June 2009, and brought by “a single debt buyer as part of a consumer debt collection program” administered by the American Arbitration Association.

--Russ Bleemer, Editor, Alternatives