The letter-writing war between Director Cordray and Acting Comptroller Keith Noreika continues. Director Cordray sent a letter dated July 18, 2017 to Acting Comptroller Noreika in which he purports to respond to Acting Comptroller Noreika’s July 17 letter to Director Cordray and continues to question how there could be “any plausible basis for [Acting Comptroller Noreika’s] claim that the arbitration rule could adversely affect the safety and soundness of the banking system.” To support his conclusion, he relies on the CFPB’s economic analysis of the rule which “shows that its impact on the entire financial system (not just the banking system) is on the order of less than $1 billion per year.” He then compares this to banking industry profits last year of over $171 billion. He also points to the mortgage market (in which the use of pre-dispute arbitration provision is prohibited) which he states “is larger than all other consumer financial markets combined” and states that nobody suggests that the lack of arbitration poses a safety and soundness issue. He states, “So on what conceivable basis can there be any legitimate argument that this poses a safety and soundness issue?”
Although I am sure that Acting Comptroller Noreika will respond to Director Cordray’s question, let me try to respond myself.
First, why is it a “given” that the CFPB’s cost estimates are reasonable? The CFPB said it could not quantify expected costs of additional state court class actions and just assumed that they would be less than the costs of additional federal court class actions. Shouldn’t the OCC be entitled to review the CFPB’s methodology and to conduct its own study of costs? Let’s not forget that it is the OCC and the other prudential banking regulators, not the CFPB, that is responsible for ensuring the safety and soundness of the banking system.
Second, while banking industry profits last year were $171 billion, there is no assurance, as Director Cordray implies, that industry banking profits will continue to increase. Indeed, during the last economic recession, particularly during 2008 and 2009, banking industry profits were minuscule with many banks sustaining large losses. Furthermore, in assessing the impact of the arbitration rule on safety and soundness, it is not enough to focus on the industry as a whole. Those numbers include the overwhelming majority of banks that are community banks who are rarely the target of class action litigation. Instead, the CFPB and the OCC should focus on the larger banks that are often targeted by the class action lawyers. As we learned from the economic crisis of 2008-2009, the failure of one large bank could have a domino effect and result in multiple failures which certainly would create safety and soundness concerns. The point is that while the CFPB has estimated costs to the industry for the arbitration order, it has not conducted, and it lacks the expertise and experience to conduct, a study to assess the impact of the rule on bank safety and soundness.
Director Cordray has also overlooked why arbitration came into vogue about 15 or 20 years ago. It was because banks and other consumer financial services providers were being crushed by an avalanche of class action litigation. At the time, it was becoming a safety and soundness issue. There is every reason to expect a similar avalanche of litigation to occur sometime after the compliance date of the rule. Indeed, things may actually be worse now than they were 15 years ago because of the enactment of new federal and state consumer protection laws, like the TCPA, where there is no cap on class action liability.
Finally, Director Cordray’s reference to the mortgage industry is misplaced. While arbitration provisions are prohibited in mortgages, the Uniform Mortgage Instruments contain language requiring a borrower to provide notice to the lender of a dispute and an opportunity to resolve the dispute before the borrower may participate in any litigation. That language would potentially preclude a class from being certified.