UPDATE 3-Bank of America ends arbitration of card disputes

* Ends arbitration of card disputes

* Could cause more lawsuits; bank eyes more settlements (Adds American Express, Discover comments, paragraphs 15-16)

By Jonathan Stempel

NEW YORK, Aug 13 (Reuters) - Bank of America Corp (BAC.N), the largest U.S. bank, said on Thursday it is dropping a requirement that forces consumers with disputes on credit cards and other accounts into an arbitration process, which critics say favors card issuers.

The new policy applies to credit card, auto, marine and recreational vehicle loans, as well as deposit accounts, and means unhappy consumers will be able to file lawsuits against the bank to address perceived unfair or illegal activity.

Bank of America is the first major U.S. bank to say it is curtailing arbitration in a wide array of consumer accounts.

"It is certainly significant," said Alan Kaplinsky, a partner and head of the consumer financial services practice at Ballard Spahr Andrews & Ingersoll LLP in Philadelphia. "Whether others follow is an open question. Other banks and companies have used arbitration for years and are happy with it."

The change comes as the Obama administration pushes for a new consumer finance protection agency and as card companies prepare for new limits on rates and fees that take effect next February.

Consumer advocates have faulted the arbitration process, saying it is biased in favor of companies and that consumers often do not realize they are waiving their right to sue when they accept services. Supporters of arbitration say the process can be faster and less costly than going to court.

"While the bank thinks arbitration is a very fair way to go, customers do not," Bank of America spokeswoman Shirley Norton said. "It is in everyone's best interest to change it. We're hoping we'll be able to resolve more disputes directly with our customers."

Norton said the bank will review consumer cases already in arbitration on a case-by-case basis.

Bank of America's change follows announcements last month by two major arbitration firms that they would stop accepting new cases.

The American Arbitration Association said it would halt consumer debt collection arbitrations until new fairness standards were established.

The National Arbitration Forum agreed to cease consumer arbitration disputes as part of a settlement with Minnesota Attorney General Lori Swanson.

She had accused the firm in a lawsuit of deceiving consumers about its impartiality and instead working closely with card companies and other creditors to insure it would handle more arbitrations.

The National Arbitration Forum has estimated that lenders prevail over consumers in 94 percent of debt collection arbitrations.