CFPB Rulemaking

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A report by the majority staff of the House Financial Services Committee concludes that there is a “valid and factual basis” for instituting contempt of Congress proceedings against Director Cordray.  The report states that it was issued in furtherance of “the Committee’s on-going investigation into the CFPB’s arbitration rulemaking.”

The report recites the history of what the majority staff calls “the CFPB’s longstanding failure to fully comply with the Committee’s on-going oversight regard pre-dispute arbitration. The report describes the Committee’s request for records relating to the CFPB’s arbitration rulemaking issued in April 2016, the CFPB’s failure to produce the requested records, the subpoena issued by the Committee to Director Cordray in April 2017 requiring production of the requested arbitration-related records as well as documents requested by the Committee on other topics, and Director Cordray’s default on the subpoena.

The report focuses on the two specifications in the subpoena related to the arbitration rulemaking.  One specification required production of “all documents relating to pre-dispute arbitration agreements between the CFPB and [specified consumer advocacy groups.]”  The other specification required production of “all communications from one CFPB employee to another CFPB employee relating to pre-dispute arbitration agreements.”  The majority staff provides a detailed explanation for their finding that Director Cordray has defaulted on the two specifications and that due to such default, there is “ample basis to proceed against [him] for contempt of Congress.”

Politico has reported that Jen Howard, a CFPB spokesperson, issued a written statement in which she indicated that the CFPB has “been working diligently to comply with the committee’s oversight on a number of fronts,” and “[o]n this particular matter, we have produced thousands of pages of documents thus far, and by next week we will have completely responded to one of the two specifications at issue.”

The Committee has not yet taken a contempt vote.  We hope the report may help persuade Republican Senators who are reportedly undecided on how they will vote on the resolution introduced in the Senate to disapprove the CFPB’s arbitration rule under the Congressional Review Act to vote in favor of the resolution.

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.

The CFPB’s Spring 2017 rulemaking agenda has been published as part of the Spring 2017 Unified Agenda of Federal Regulatory and Deregulatory Actions.  The preamble indicates that the information in the agenda is current as of April 1, 2017.  Accordingly, the agenda does not reflect the issuance of the CFPB’s final arbitration rule on July 10 or other rulemaking actions taken since April 1 such as the proposed changes to the CFPB’s prepaid account rule and various recent mortgage-related developments.  In addition, the agenda and timetables are likely to be significantly impacted should Director Cordray leave the CFPB this fall to run for Ohio governor as has been widely speculated.

The agenda sets the following timetables for key rulemaking initiatives:

Payday, title, and deposit advance loans.  The CFPB released its proposed rule on payday, title, and high-cost installment loans in June 2016 and the comment period ended on October 22, 2016.  The Spring 2017 agenda gives a June 2017 date for completing the initial review of comments (which the CFPB states in the preamble numbered more than one million) but does not give an estimated date for a final rule.  There has been considerable speculation that a final rule will be issued by the end of next month.

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  In July 2016, it issued an outline of the proposals it is considering in anticipation of convening a SBREFA panel.  The coverage of the CFPB’s SBREFA proposals was limited to “debt collectors” that are subject to the FDCPA.  When it issued the proposals, the CFPB indicated that it expected to convene a second SBREFA panel in the “next several months” to address a separate rulemaking for creditors and others engaged in debt collection not covered by the proposals.  However, Director Cordray announced last month that the CFPB has decided to proceed first with a proposed rule on disclosures and treatment of consumers by debt collectors and thereafter write a market-wide rule in which it will consolidate  the issues of “right consumer, right amount” into a separate rule that will cover first- and third-party collections.

In the Spring 2017 agenda, the CFPB gives a September 2017 date for a proposed rule.  Presumably, that date is for a proposal that will deal with disclosures and treatment of consumers by debt collectors.  The new agenda gives no estimated dates for the convening of a second SBREFA panel or a proposed second rule.  In the preamble to the new agenda, the CFPB states only that it “has now decided to issue a proposed rule later in 2017 concerning FDCPA collectors’ communications practices and consumer disclosures.  The Bureau intends to follow up separately at a later time about concerns regarding information flows between creditors and FDCPA collectors and about potential rules to govern creditors that collect their own debts.”

Larger participants.  The CFPB states in the Spring 2017 agenda that it “expects to conduct a rulemaking to define larger participants in the markets for consumer installment loans and vehicle title loans for purposes of supervision.”  It also repeats the statement made in previous agendas that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  The new agenda estimates a June 2017 date for prerule activities and a September 2017 date for a proposed rule.

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the Spring 2017 agenda, as it did in its Fall 2015 agenda and Fall and Spring 2016 agendas, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  Although the Fall 2016 agenda estimated a January 2017 date for further prerule activities, the new agenda moves that date to June 2017.  As we have previously noted, the extended timeline may reflect that the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process electronic debits because most of the banks subject to its supervisory jurisdiction have already changed their processing order.

Small business lending data.  Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data includes the race, sex, and ethnicity of the principal owners of the business.  The new agenda estimates a June 2017 date for prerule activities.  The CFPB repeats the statement made in the Fall 2016 agenda that it “is focusing on outreach and research to develop its understanding of the players, products, and practices in business lending markets and of the potential ways to implement section 1071.  The CFPB then expects to begin developing proposed regulations concerning the data to be collected and determining the appropriate procedures and privacy protections needed for information-gathering and public disclosure under this section.”

Mortgage rules.  Earlier this month, the CFPB issued a proposed rule dealing with a lender’s use of a Closing Disclosure to determine if an estimated charge was disclosed in good faith.  The Spring 2017 agenda gives a March 2018 estimated date for issuance of a final rule.  This past March, the CFPB issued a proposal to amend Regulation B requirements relating to the collection of consumer ethnicity and race information to resolve the differences between Regulation B and revised Regulation C.  The Spring 2017 agenda gives an October 2017 estimated date for a final rule.

 

 

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.)