Arbitration

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A report prepared by the Democratic staff of the House Financial Services Committee takes aim at Republicans for “attempt[ing] to ensure that the country reverts back to a big bank-oriented regulatory environment and to ‘functionally terminate’ the [CFPB].”

After recounting the 2008 financial crisis that led to the CFPB’s creation and lauding various regulatory, supervisory, and enforcement actions taken by “the highly successful Consumer Bureau,” the report describes Republican efforts to “undermine” the CFPB, including through the Financial CHOICE Act (which the report refers to as the “Wrong Choice Act”) and appropriations bills.

The report uses the CFPB’s issuance of the final arbitration rule and “the significant pushback received from Republicans in Congress and Acting OCC Comptroller Keith A. Noreika” as a “case study” that illustrates “the importance of having an independent Federal agency, dedicated to ensuring that consumer financial markets are fair, transparent, and competitive.”  The report describes Republican plans to use the Congressional Review Act to override the rule (which are moving forward with the House’s passage yesterday of H.J. Res. 111) and the letters exchanged between CFPB Director Cordray and Acting Comptroller Noreika about OCC concerns regarding the rule’s impact on the safety and soundness of the U.S. banking system.

The report labels those concerns “disingenuous” and characterizes the Acting Comptroller’s July 10 letter to Director Cordray as “a misguided ‘Hail Mary” tactic to [attempt to use the Financial Stability Oversight Council] to overturn the final rule.”  The report (perhaps signaling what will be a Democratic “talking point” to build public support for the rule) also claims that because Acting Comptroller Noreika defended the use of arbitration agreements when he was in private practice, his “persistence…in attempting to block the Consumer Bureau is not shocking.”  According to the report, he “is now trying to nationalize his prior tactics and prevent all consumers from having their day in court.”

The report urges Congress to “support and encourage the swift implementation” of the CFPB’s arbitration rule and “strive to ensure that, a decade from now, consumers will still have an equally strong and successful watchdog in the Consumer Bureau to stop abusive and predatory practices as they do today.”

 

 

A group of 11 trade associations have sent a letter to members of Congress expressing their “strong disapproval” of the CFPB’s final arbitration rule and urging Congress to pass the resolutions introduced in the House and Senate that provide for Congressional disapproval of the rule under the Congressional Review Act.  (The House resolution, H.J. Res. 111, was passed yesterday by the full House.)  The trade associations include the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Financial Services Roundtable, and U.S. Chamber of Commerce.

In the letter, the associations discuss the following reasons for their disapproval of the arbitration rule:

  • The CFPB’s arbitration study is incomplete and the data that was accumulated, and conclusions based on that data, does not support the rule
  • The rule is contrary to the public interest and fails to enhance consumer protection
  • The rule enriches trial attorneys at the expense of consumers

 

Yesterday afternoon, the House of Representatives, by a 231-190 partisan vote, passed H.J. Res. 111 which provides for Congressional disapproval under the Congressional Review Act (CRA) of the CFPB’s final arbitration rule.  The rule was published on July 19, 2017 in the Federal Register.

Under the CRA, to override the arbitration rule, both the House and Senate must pass a resolution of disapproval within 60 legislative days by a simple majority vote.  While a disapproval resolution has already been introduced in the Senate, a vote is not expected to take place until September.  Several Republican Senators are reported to be undecided on how they will vote.  Assuming all Democratic Senators oppose the resolution as expected, Republicans can only lose two votes and still pass the resolution.

The White House also issued a “Statement of Administration Policy” setting forth its support for H.J. Res. 111.   The Statement describes the resolution as consistent with Executive Order 13772, Core Principles for Regulating the United States Financial System, because it “would protect consumer choices by eliminating a costly and burdensome regulation and reining in the bureaucracy and inadvisable regulatory actions of the CFPB.”  The Statement indicates that “[i]f H.J. Res. 111 were presented to the President in its current form, his advisors would recommend that he sign it into law.”

 

Yesterday at 5:00 p.m., the House Rules Committee, by a 9-4 partisan vote, reported a rule on H.J. Res. 111 with a recommendation that the resolution be adopted.  H.J. Res. 111 provides for Congressional disapproval under the Congressional Review Act (“CRA”) of the CFPB’s Arbitration Rule which was published on July 19, 2017 in the Federal Register.  The full House is scheduled to vote on H.J. Res. 111 today.  It is widely expected that the House will easily pass the resolution.

Under the CRA, in order to override the CFPB’s Arbitration Rule, within 60 legislative days both the House and the Senate must pass a resolution by a simple majority vote overriding the Arbitration Rule and President Trump must sign the resolution.  Since the Republicans have a slim 52-48 margin in the Senate with Vice President Pence getting a tie-breaker vote, they can only lose 2 votes and still pass the resolution, assuming as expected, that all Democratic Senators will oppose the resolution.  Reportedly, there are a few Republican Senators who are undecided on how they will vote.  While a resolution has already been introduced in the Senate, it is not expected that a vote will take place until September.

House and Senate Republicans announced today that they are sponsoring Congressional Review Act resolutions to override the CFPB’s final arbitration rule, which was published in yesterday’s Federal Register. 

In the House, a press release published on the House Financial Services Committee’s website announced that a joint resolution (H.J. Res. 111), sponsored by Committee member Keith Rothfus and co-sponsored by all other Republican Committee members, has been introduced to disapprove the arbitration rule.

In the Senate, a press release on the Senate Banking Committee’s website announced that Committee Mike Crapo and Republican colleagues “will file” a CRA resolution to disapprove the arbitration rule.  The resolution has 23 co-sponsors in addition to Mr. Crapo, several of whom are not Banking Committee members.  Only one Republican Banking Committee member, Louisiana Senator John Kennedy, is not listed as a co-sponsor.

Neither press release includes or links to the resolution text.

 

 

In an opinion article published by The Hill entitled “The ‘consumer’ financial bureau chooses lawyers over consumers,” Rob Nichols, President and CEO of the American Bankers Association, explains why the CFPB’s final arbitration rule gives “a regulatory windfall to trial lawyers at consumers’ expense.”  Mr. Nichols urges Congress to use the Congressional Review Act to override the rule.

Click here to read the full article.

 

 

In a letter dated July 18, 2017 to Acting Comptroller Noreika purporting to respond to Acting Comptroller Noreika’s July 17 letter, Director Cordray continued 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.”  We shared how we would respond to Director Cordray’s question, pointing out the many flaws in his rationale for questioning the existence of “any plausible basis” for safety and soundness concerns arising from the CFPB arbitration rule.

In his July 17 letter to Director Cordray, so the OCC could complete its analysis of the arbitration rule’s impact on the federal banking system, Acting Comptroller Noreika repeated his prior request for the data used by the CFPB to develop and support its proposed rule.  Despite questioning Acting Comptroller Noreika’s basis for raising safety and soundness concerns, Director Cordray wrote in his July 18 response that “we are happy to share the data underlying our rulemaking.  I understand that our teams are in communication and we are in the process of assembling the data your staff has requested.”

Perhaps choosing to wait to respond to Director Cordray’s question until the OCC has reviewed the CFPB data and completed its analysis, Acting Comptroller is reported to have said only the following in a prepared statement released yesterday:

“Consenting to share the data is important progress.  I look forward to working with the OCC staff to conduct an independent review of the data and analysis in a timely manner to answer my prudential concerns regarding what impact the final rule may have on the federal banking system.”

The CFPB final arbitration rule was published in today’s Federal Register and has an effective date of September 18, 2017 and a mandatory compliance date of March 19, 2018.  The rule’s publication is a trigger for the filing of a petition with the Federal Stability Oversight Council to set aside the rule.

 

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.

The CFPB final arbitration rule is scheduled to be published in the Federal Register tomorrow, July 19.

The rule’s effective date will be the 60th day after publication and the mandatory compliance date will be March 19, 2018.  Based on our calculation, the effective date will be Monday, September 18, 2017 (since the 60th calendar day is Sunday, September 17).

The final rule’s publication in the Federal Register is a trigger for the filing of a petition with the Federal Stability Oversight Council to set aside the rule.  The Dodd-Frank Act (DFA) provides that such a petition must be filed “not later than 10 days” after a regulation has been published in the Federal Register.  The 10th calendar day after publication would be Saturday, July 29.  Since the DFA does not specify whether the term “day” means a “calendar” or a “business” day, it is uncertain whether the deadline for filing a petition with the FSOC will be July 29 or Monday, July 31.

A resolution of disapproval under the Congressional Review Act (CRA) is another potential route for overturning the arbitration rule.  According to a report prepared by the Congressional Research Service (CRS), the receipt of a final rule by Congress begins a period of 60 “days-of-continuous-session” during which a member of either chamber can submit a joint resolution disapproving a rule under the CRA.

For purposes of the CRA, a rule is considered to have been “received by Congress” on the later of the date it is received in the Office of the Speaker of the House and the date of its referral to the appropriate Senate committee.  The arbitration rule was received by the Speaker of the House on July 10 and referred to the Senate Banking Committee on July 13.

In calculating “days of continuous session,” every calendar day is counted, including weekends and holidays.  However, because the count is suspended for periods when either chamber (or both) is gone for more than three days (i.e. pursuant to an adjournment resolution), the deadline for when a CRA resolution to disapprove the arbitration rule would have to be submitted cannot be calculated with certainty.  Assuming no adjournment of the House or Senate, the 60th calendar day after the arbitration rule’s receipt by Congress would be September 11, 2017.

In order to be eligible for the special Senate procedure that allows a CRA disapproval resolution to be passed with only a simple majority, the Senate must act on the resolution during a period of 60 days of Senate session which begins when the rule is received by Congress and published in the Federal Register.  That deadline would appear to be either September 17 or 18, 2017.  (The CRS report indicates that if the House passes a joint resolution of disapproval, the Senate might only be able to use its special procedure if there is a companion Senate resolution.)

 

 

 

 

State bankers associations from all 50 states and Puerto Rico have sent a letter to Senate Majority Leader Mitch McConnell and Senate Minority Leader Charles Schumer urging them to support efforts to override the CFPB’s final arbitration rule under the Congressional Review Act.

The associations state that the rule “would create a windfall for unscrupulous class-action attorneys, provide little or no relief to harmed consumers, and effectively eliminate an accessible alternative to the often-daunting judicial system.”  They assert that because most consumer disputes are unique and not appropriate for class actions, “shutting down arbitration will leave this vast majority of consumers with only one option: the expense and frustration of courtroom litigation.”  They also state that the CFPB ignored data showing that the average award to consumers in arbitration is substantially greater than the average amount received by consumers in class actions and effectively eliminated arbitration “without proposing a reasonable alternative process for timely, low-cost resolution of consumer disputes.”