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Rights of the second-chance cardholder

In the wake of the Great Recession, America has a good many consumers who would like — and may need — to have credit cards, but they are higher risk, or “sub-prime” borrowers.  There has been, for some years, a financial industry to serve them: the community of “credit repair organizations” willing to give those consumers a second chance.  Congress took steps, back in 1996, to make sure such consumers were not duped, adding the Credit Repair Organizations Act as a title in the Consumer Credit Protection Act.  On Monday, the Supreme Court agreed to spell out what legal remedies that law provides: a right to sue, or only a right to go to arbitration?  The appeals courts are split on the issue.

The Court granted review of CompuCredit Corp., et al., v. Greenwood, et al. (10-948), a challenge to a Ninth Circuit Court ruling that the 1996 law guarantees a right to sue, and will not allow the consumer to waive that right even though obliged, by a credit card agreement, to take any dispute to arbitration.   The case will be heard and decided in the Court’s next Term, starting Oct. 3.

As a general matter, consumer advocates would rather have the chance to sue, instead of going to arbitration, on the theory that they can do better in court — especially since the Supreme Court has been in the process of discouraging group arbitration by a number of consumers with the same commercial complaint.  Businesses, though, prefer arbitration, because they fear risks of being taken before a jury in a position to award sympathetic damages, and that risk may force them to settle.  Arbitration, too, is a less expensive process than a court case.

Both sides thus have a keen interest in the new case, the latest in a series of disputes the Court has taken on in the past several terms to clarify the role of arbitration in consumer disputes.

The case involves a “sub-prime credit card” that CompuCredit Corp. marketed under the brand name, “Aspire Visa.”  It promoted the card, especially to high-risk, poor-credit consumers, through mass mailings and Internet advertising.  One of the issuers of the card was a Georgia bank, Columbus Bank and Trust (recently taken over and now a part of Synovus Bank, a Florida-based regional banking firm).

Wanda Greenwood and several other consumers obtained the cards from the bank.   They later would say they were attracted because no deposit was required and there was a promise that they would immediately have $300 in credit available to them.  Later, after they were signed up, they discovered that a total of $257 in first-year fees were being charged.  Although those fees are spelled out in the fine print, the consumers contended that they did not get proper notice of those fees.   The card agreements they entered in order to get the cards required them to arbitrate any disputes.

Their lawsuit, including some Californians, was filed as a class-action case in a federal court in San Francisco, relying on the 1996 federal law and on California state law (as to the Californians in the class; the California-related issues are no longer involved in the case).  The lawsuit contended that the card agreement deceived them about the fees that would be charged in the first year.

Under the federal law, credit repair organizations are required to make a number of disclosures to their potential customers, including a statement that “you have a right to sue.”  That is a part of a civil liability section of the law, that specifies that any person who fails to obey the law is liable for damages.   Another provision says that “any waiver by any consumer of any protection provided by or any right of the consumer…shall be treated as void.”

CompuCredit and the bank asked the District Court to compel arbitration of the dispute over the entry fees, citing the binding arbitration clause in the card agreements.  The judge refused, ruling that claims under the Credit Reporting Organizations Act were not subject to arbitration.  The Ninth Circuit Court agreed, declaring: “We conclude that Congress meant what it said in using the term ‘sue,’ and that it did not mean ‘arbitrate.’ “  Noting that other Circuit Courts had ruled the arbitration agreement had to be enforced, the Ninth Circuit panel said it disagreed.

CompuCredit and Synovus Bank, in their petition to the Supreme Court, relied heavily upon the fact that the Circuit Courts are split on the issue.  They contended that the Ninth Circuit’s decision conflicts with Congress’s preference for arbitration of commercial disputes, under the Federal Arbitration Act.

Recommended Citation: Lyle Denniston, Rights of the second-chance cardholder, SCOTUSblog (May. 2, 2011, 2:10 PM),