B of A to Impose Arbitration in Customer Disputes : Banking: Believed to be the first in the nation, the policy is an aggressive effort to contain legal costs.

In a pioneering and controversial move to cut its legal bills, Bank of America said Tuesday that it will begin forcing customers to submit to binding arbitration in lieu of a court trial to resolve disputes involving their checking, savings and credit card accounts.

The San Francisco-based bank said the move is allowed under the contracts customers routinely sign when they open an account or receive a credit card. It is the first known attempt by a bank in the United States to require its retail customers to submit to arbitration with an independent party. Also affected would be class-action lawsuits brought by customers, which would be submitted to a process similar to arbitration called “judicial reference.”

The action by Bank of America, which plans to notify customers of the policy change in their upcoming bank statements, drew immediate criticism from consumer groups and trial lawyers, some of whom called the policy unconstitutional because customers are being forced to give up their right to a jury trial.

“Does the signature card you signed maybe 20 years ago give them the right to include an insert in your bank statement that waives your right to a jury trial?” asked Ken McEldowney, executive director of Consumer Action in San Francisco.

But Winslow Christian, a Bank of America senior vice president and director of litigation, called the arbitration process fair for customers, adding that they benefit by saving time and legal costs. He said that for four years the bank has required commercial loan customers to submit to arbitration, a policy that has withstood legal challenges. Arbitration is also used in the securities industry, although consumer groups have complained that the procedure is often tilted against securities customers.

The action comes less than two months after the bank’s parent, BankAmerica Corp., acquired its biggest rival, Los Angeles-based Security Pacific Corp., forming the second-largest bank in the nation. Some lawyers complained that the new policy is a heavy-handed move from what is now by far California’s largest and most influential bank.

“It’s another example of how Bank of America wants to control the lives of its customers and credit card holders,” said Santa Barbara lawyer A. Barry Cappello, who specializes in suing banks on behalf of borrowers and customers.

But others praised and defended the program, including San Diego lawyer John Seitman, president of the state Bar and a strong advocate of arbitration. “A lot of disputes that arise lend themselves to being arbitrated or mediated. No one is being forced to do this, because they can choose where they bank,” Seitman said.

The policy is an aggressive effort by the bank to contain legal costs by as much as two-thirds on a typical case. Bank of America officials said legal costs for the bank leading up to a trial can reach one-fourth to one-third of the amount being asked, compared to about 10% in an arbitrated case. In a hypothetical $100,000 case, for example, the costs under arbitration might be about $10,000, compared to $30,000 or more if a case went to court.

Bank of America’s move comes as businesses are seeking ways to cut legal costs. Lawsuits--many of them frivolous--were cited in an April report by the Peter V. Ueberroth-led Council on California Competitiveness as a major problem for the state’s firms. Increased use of arbitration and mediation was suggested as a way to cut those costs. Arbitration also enjoys widespread support of many business executives who believe that juries are more likely to side with individuals over corporations in trials.

The exact number of customers affected by the program is unknown, although the bank has 11.5 million checking and savings accounts in California and has issued a total of 7 million Visa and Mastercards nationwide. Bank of America now has about 185 lawsuits pending related to customer accounts. Bank officials said most customer disputes are resolved well before they would reach the arbitration stage.

Because Bank of America is so large, the move is likely to be copied by others. Bank of America’s program begins in California, but the bank expects to expand it throughout the West.

The policy change comes as Bank of America is fighting a class-action lawsuit alleging that it conspired with other banks to fix credit card interest rates in the mid-1980s. A bank spokesman said the lawsuit had no influence on the policy change.

Competitors Wells Fargo and First Interstate chose to settle the lawsuit for $55 million while denying the charge.

Bank of America’s arbitration program is triggered when a lawsuit is filed. Either the bank or the customer can force arbitration. Although it is possible that neither side would agree to it, bank executives indicated that they plan to choose arbitration in all but the smallest cases.

Bank of America said it is allowed to do so because people who open accounts or are issued credit cards agree to let the bank freely change the terms, a clause that gives a bank flexibility to change the rates of interest paid.

The arbitrator, which the bank said usually would be a practicing attorney, would be appointed by the American Arbitration Assn. with the consent of both the bank and customer.

Lawrence J. Appel, a San Francisco lawyer who sued Bank of America over the credit card issue, said that using an arbitrator from the available pool guarantees that few customers will not be judged by their peers.