Bernadita Duran, a disabled resident of New York State, got taken in by a “last-dollar” scam. She wound up paying $4,000 to a “debt settlement” company, which pocketed the whole amount in fees without settling any of her debts.

Earlier this week, Duran learned just what she would need to do to have a hope of recovering any of that money. Not only would she have to take her complaint outside the public court system to a private arbitration firm of the company’s choosing; in addition, the Second Circuit Court of Appeals decided, the essentially destitute Duran would have to take herself from New York to Arizona, where both the company and its designated arbitrator are located. If she considered that an unfair burden, well, Duran was free to raise the point – with the Arizona arbitrator, once she got there.

Hard to believe? Not to those familiar with a wave of recent federal court decisions enshrining the practice of binding mandatory (or forced) arbitration as a way for companies to dodge liability, even for blatant violations of the law.

Thirty years ago, arbitration was a rarity in consumer contracts. Now it’s routine. In the world of consumer finance, the practice has become especially widespread and especially insidious. Buried in the fine print of contracts for student loans, credit cards, checking accounts, auto title loans, payday loans and other common products are clauses requiring consumers to submit any disputes to private arbitration and to accept the findings as pretty much final.

Supporters portray arbitration as a cost-saving way to get a fair hearing. But the process tends to be prohibitively expensive for individual consumers, who can be made to pay hundreds of dollars in up-front fees as well as travel costs.

And it’s inherently unfair. That’s because the companies choose the arbitrators, who know they’re unlikely to be re-hired if they make a habit of giving consumers an obviously fair shake. A recent Pew study found that even when the process leads to financial compensation, the average amount is only about half what a court would bestow.

The financial industry has many reasons to be fond of this form of dispute resolution. Perhaps its greatest appeal, though, involves the ability to contend with complaints one at a time, leaving victims unable to join forces or even (since arbitration records are generally kept under wraps) to unearth evidence of a pattern of bad conduct.

The concept of mandatory arbitration arose a century ago as a way of settling disagreements between business entities – shipping lines and shippers, for example. Down to the recent past, that’s how arbitration was used, with the states retaining wide latitude to restrict the practice in disputes between businesses and consumers.

Then the Supreme Court weighed in – first, by authorizing businesses to insert such clauses into consumer contracts, and, in a 2011 case, AT&T Mobility v. Concepcion, by permitting them to make class-action bans part of the arbitration deal. With that ruling, the  court “wiped away” a host of state laws limiting the ability of the strong to enforce harmful terms against the relatively weak, says Deepak Gupta, who argued the case on the consumer side.

Two months ago, the Supreme Court went further. In American Express Co. v. Italian Colors Restaurant, the Court ruled that corporations could force individuals and small businesses into one-on-one arbitration even if the evidence showed that it would be prohibitively expensive to try to vindicate their rights that way.

That is often true in consumer finance, where claims can be large in the aggregate but individually too small to justify the cost of pursuing them. By isolating complainants and making it hard for them to assert their rights, companies set themselves up to accumulate profits through small rip-offs repeated over and over – penalties levied on cedit-card payments that come in after 8 a.m. on the due date, for example. Arbitration becomes a get-out-of-jail free card for those seeking to “cheat a whole lot of people in little ways that they probably won’t notice,” as consumer-rights lawyer Paul Bland puts it.

The Supreme Court based its Concepcion and Italian Colors rulings on a musty 1924 law, the Federal Arbitration Act, which was plainly designed for dealings between sophisticated equals.

More recently, in a provision of the Dodd-Frank Act of 2010, Congress acknowledged the dangers of arbitration in the unequal world of consumer financial services. The statute empowered federal regulators to study the problem and to end or restrict the use of forced arbitration in financial contracts if such measures are deemed to be “in the public interest and for the protection of consumers.”

The statute handed this task to two agencies – the Consumer Financial Protection Bureau, for loans and other consumer financial products, and the Securities and Exchange Commission, for the investment world, where forced arbitration has become similarly common, with similarly abusive results.

The CFPB has begun to tackle its assignment. It expects to release a first set of findings this year, and recently put out a draft plan for a nationwide telephone survey of credit card holders on the issue of arbitration. By contrast, there has been no sign of action from the SEC. In June, 16 consumer and investor groups wrote to SEC chair Mary Jo White, urging the commission to proceed with a study of the impact of forced arbitration on investors, including workers and retirees with pension plans, and to do what’s necessary to preserve their access to the courts.

Meaningful action won’t come without a fight. Congress and federal and state regulators have laid down some badly needed new rules since the financial meltdown of 2008, and more rules remain in the works. But none of them will have real force as long as lenders and financial companies are free to immunize themselves against lawsuits. Regulators cannot do the enforcement job alone.

That’s why Wall Street and the financial industry can be counted on to raise a storm of protest over the prospect of serious limits on the use of forced arbitration. And that’s why it’s crucially important for the CFPB and SEC to use the authority they clearly have to curtail a practice that, if left untouched, threatens to undermine the effectiveness of everything else that is done in the name of consumer or investor protection.

– Jim Lardner

Originally published on USNews.com