From real estate sales contracts to home warranties, arbitration clauses are more and more often seen as a scourge against homeowners' rights and an all-out consumer uprising appears to be emerging.

• Public Citizen recently asked 12 states to investigate insurers' and home warranty companies' use of a questionable arbitration firm headed by a disbarred attorney. Eleven of those states ban arbitration clauses from insurance contracts.

• A coalition of consumer groups from AARP to the NAACP says Citigroup's failure to stop requiring mandatory arbitration in its subprime loans puts it out of step with Freddie Mac and Fannie Mae and other large lenders.

• Earlier this year, looking to avoid controversy, Fannie Mae and Freddie Mac backed away from investing in mortgages with mandatory arbitration provisions.

The arbitration clauses are found more and more often in home loan contracts, home improvement contracts, new-home contracts and many more real estate transaction contracts.

"From mortgage loans, to mobile homes to managed care, mandatory arbitration has become an ever-present and unfortunate fact of life for American consumers," said Travis Plunkett, legislative director of Consumer Federation of America.

One type of alternative dispute resolution, arbitration is having a dispute settled by one or more impartial persons for a final and binding decision outside the legal system. Contractual provisions determine issues open for arbitration, the scope of any relief to be awarded, as well as the procedural aspects of the process, according to the American Arbitration Association.

Arbitration does help reduce the legal case backlog and it can save money over the cost of a legal trial, but consumer advocates are most chagrined by contracts that come with mandatory arbitration clauses. That's because such clauses undermine the constitutional right to use the legal system to settle disputes.

"If predatory terms like discriminatory prepayment penalties and unnecessary fees are the bricks of the predatory lender's house, mandatory arbitration is the cement that holds it together. We ask that Citigroup show real courage as it has done in the past in standing up for the rights of African-Americans and all borrowers in demanding this practice be stopped," said Hilary Shelton, director of the Washington Bureau of the NAACP.

Public Citizen's broadside includes criticism of contracts that call for the lender, builder, home warranty insurer or other entity writing the contract to also select the arbitrator.

"Mandatory arbitration is already skewed against consumers even without the involvement of dishonest persons or illegal operations," said Jackson Williams, legislative counsel for Public Citizen.

"When arbitrators are selected by the business defending the lawsuit, the arbitrator's bias will be to rule in the business's favor or award less than full damages," he added.

The Responsible Lending coalition also says arbitration can:

• Impose high costs to the consumer, in terms of filing fees and the additional expense of arbitration proceedings.

• Introduce inexperienced arbitrators to rule on complicated issues without the right to appeal.

• Place a secretive non-public shroud over the proceedings to prevent exposure of unfair business practices to the public at large.

"Mandatory arbitration clauses undermine hard won consumer protections by barring homeowners from obtaining judicial scrutiny of their loans," said Chris Hansen, associate executive director of AARP.

Published: September 24, 2004

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.