This Wednesday, July 19, the U.S. Chamber’s Center for Capital Markets Competitiveness  and U.S. Chamber Institute for Legal Reform will hold an event in Washington, D.C. entitled “CFPB’s Anti-Arbitration Rule: Analysis & Implications.”

The scheduled speakers include Senator Tom Cotton, who has announced the he plans to draft a resolution of disapproval to overturn the arbitration rule under the Congressional Review Act.

 

As we have previously reported, in October 2015 the CFPB adopted significant revisions to the Home Mortgage Disclosure Act (HMDA) rule, most of which become effective January 1, 2018.  Among the revisions, the reporting of home equity lines of credit under HMDA, which currently is voluntary, will become mandatory for both depository institutions and non-depository institutions that originated at least 100 home equity lines of credit in each of the two preceding calendar years.

The CFPB is now proposing to temporarily increase the threshold to the origination of 500 home equity lines of credit in each of the two preceding calendar years.  The temporary increase would apply for data collection years 2018 and 2019.  The CFPB notes that through outreach it “has heard increasing concerns from community banks and credit unions that the challenges and costs of reporting open-end lending may be greater than the Bureau had estimated when adopting the 100-loan threshold.  Additionally, the Bureau’s analysis of more recent data suggests changes in open-end origination trends that may result in more institutions reporting open-end lines of credit than was initially estimated.”  The temporary increase will allow the CFPB to assess the appropriate threshold for smaller-volume lenders.

Comments on the proposal are due by July 31, 2017.  The CFPB notes that at a later date it will issue a separate proposal with a longer notice and comment process to consider adjustments to the permanent threshold.

In its final arbitration rule issued on July 10, 2017, the CFPB responds to our calculation, made when the proposed rule was issued in May 2016, that the rule will cause 53,000 providers who currently use arbitration agreements to incur between $2.6 billion and $5.2 billion over a five-year period to defend against an additional 6,042 class actions. Those numbers are expected to be repeated every five years.

The CFPB acknowledges the accuracy of our calculations except that it disagrees that $5.2 billion “ is a reasonable upper bound.”  In both the proposed rule and the final rule, the CFPB calculated the costs associated with additional federal court class actions to be $2.6 billion, and estimated that there will be an equal number of additional state court class actions.  As it did in the proposed rule, however, the CFPB states that “it does not have reliable data to estimate the cost of additional State class actions.”  While the CFPB “acknowledges again that the total additional litigation costs to providers will exceed costs from Federal class actions” when the state class actions are accounted for, it believes that the state class actions will not add an additional $2.6 billion to the calculation, although it is unable to estimate what the upper bound number should be.

We arrived at the $5.2 billion estimate as follows:  In the proposed rule, the CFPB concluded that there would be as many additional state court class actions as federal court class actions.  (“Based on the Study’s analysis of cases filed, the Bureau believes that there is roughly the same number of class settlements in state courts as there is in Federal courts across affected markets.”)  They monetized the additional federal cases as $2.6 billion.  They estimated that the state court costs would be lower but were unable to monetize them “because limitations on the systems to search and retrieve state court cases precluded the Bureau from developing sufficient data on the size or costs of state court class action settlements.”  However, the CFPB also stated that they were not including the cost of providing in-kind relief, because they could not quantify it, and also were not including the cost of providing injunctive relief, which “could result in substantial forgone profit (and a corresponding substantial benefit to the consumers), but cannot be easily quantified.”  They further noted that “for several markets the estimates of additional Federal class action settlements are low.”  Looking at all of these factors, including the “substantial forgone profit” that the CFPB did not include, it was reasonable to project $5.2 billion as the maximum cost of federal and state court cases combined.  We were merely estimating that the combined cost of additional federal and state class actions would be somewhere between $2.6 billion and $5.2 billion based on the CFPB’s calculations and analysis.  (Of course, it might even be more than $5.2 billion).

We believe our calculations are consistent with the CFPB’s in that everyone estimates that the cost to providers from additional federal and state court class actions will exceed $2.6 billion.  The only disagreement is on the amount of the excess.  Given the CFPB’s belief that there will be as many additional state court class actions as additional federal court class actions, and the CFPB’s omission of other relief that will impose “substantial” costs on providers that the CFPB could not calculate, we continue to believe that $5.2 billion is a reasonable upper bound.  The CFPB disagrees, which it is certainly entitled to do.  In fact, we hope that if the rule is implemented, it does not cost providers an additional $5.2 billion every five years.  Unfortunately, even the lower bound estimate of $2.6 billion will exact a very heavy and unnecessary toll on providers but do little, if anything, to help consumers. Only their lawyers will benefit.

Director Corday has sent a letter to Keith Noreika, the Acting Comptroller of the Currency, responding to Mr. Noreika’s July 10 letter in which he stated that OCC staff had expressed safety and soundness concerns arising from the proposed arbitration rule’s potential impact on U.S. financial institutions and their customers.

In his response, Director Cordray stated that he “was surprised” to receive Mr. Noreika’s letter and that the CFPB had “consulted repeatedly” with OCC representatives and other prudential regulators regarding “prudential, market, or systematic objectives administered by such agencies” as required by Section 1022 of the Dodd-Frank Act (DFA).  Director Cordray claimed that “at no time during this process did anyone from the OCC express any suggestion that the rule that was under development could threaten the safety and soundness of the banking system” and that Mr. Noreika did not “express such concerns to [Director Cordray] when [they] have met or spoken.”  

Anticipating that Mr. Noreika’ letter could signal an attempt by the OCC to file a petition with the Financial Stability Oversight Council (FSOC) to set aside the final arbitration rule, Director Cordray stated that the points raised in Mr. Noreika’s letter “do not satisfy the statutory requirement that an agency ‘has in good faith attempted to work with the Bureau to resolve concerns regarding the effect of the rule on the safety and soundness of the United States banking system or the stability of the financial system of the United States’ and has been unable to do so.”  Under the DFA, satisfying the good faith requirement is a prerequisite to the filing of a petition by an agency with the FSOC to set aside a CFPB regulation.

Director Cordray also asserted that no basis exists for a claim that the arbitration rule puts the federal banking system at risk and provided a memorandum prepared by the CFPB’s Arbitration Agreements Rulemaking Team that “analyzes the suggestion in [Mr. Noreika’s letter] that the arbitration agreements rule…implicates the safety and soundness of the federal banking system.”

In his response, Director Corday highlighted several of the memorandum’s “key points” and stated that he believed those points “conclusively put to rest any safety and soundness concerns.”  Among the points highlighted by Director Cordray was that a majority of depository institutions operate without arbitration agreements and there was no evidence such banks and credit unions are less safe and sound than their counterparts with such agreements.  He also attempted to minimize the significance of the more than 500 million dollars that the CFPB has projected the rule will cost banks annually to defend against class action litigation.  

As we have previously observed, although the “majority” of banks may not use arbitration agreements, that is because most banks are small community banks in rural areas that are typically not the target of class action litigation.  However, the CFPB’s own data in its March 2015 empirical study of arbitration showed that 45.6% of the 103 largest banks with accounts representing 58.8% of insured deposits use arbitration clauses and it is those banks that are more likely to be the targets of class actions.

 

In addition to the passage of legislation amending the Dodd-Frank Act (DFA), disapproval under the Congressional Review Act, and a legal challenge filed in court, a fourth potential route for stopping the CFPB’s final arbitration rule from taking effect at the end of the 240-day grandfather period is garnering attention.  That route is a petition to the Financial Stability Oversight Council (FSOC) to set aside the rule.

The FSOC, which was created by the DFA, has ten voting members consisting of: the Treasury Secretary (who serves as FSOC Chairperson), the Federal Reserve Chairperson, the Comptroller of the Currency, the CFPB Director, the SEC Chairperson, the FDIC Chairperson, the Commodity Futures Trading Commission Chairperson, the Federal Housing Finance Agency Director, the National Credit Union Administration Board Chairperson, and an “independent member” with “insurance expertise” appointed for a six-year term by the President and confirmed by the Senate.  There are also five nonvoting members who serve in an advisory capacity.

The DFA provides that the FSOC can set aside a final CFPB regulation or any provision thereof on the petition of a member agency if the FSOC decides “that the regulation or provision would put the safety or soundness of the United States banking system or the stability of the financial system of the United States at risk.”  A member agency can file a petition with the FSOC to set aside a regulation if the member agency “has in good faith attempted to work with the Bureau to resolve [safety and soundness or financial system stability] concerns” and files the petition no later than 10 days after the regulation has been published in the Federal Register.

If a petition is filed, any member agency can ask the FSOC Chairperson (i.e. the Treasury Secretary) to stay the effectiveness of a regulation for up to 90 days from the filing.  For an FSOC member to vote to set aside a regulation, the member’s agency must have considered any relevant information provided by CFPB and the agency that filed the petition and made an official determination, at a public meeting where applicable, that the regulation in question would put the safety or soundness of the U.S. banking system or the stability of the U.S. financial system at risk.

A decision by the FSOC to set aside a regulation requires the affirmative vote of 2/3 of the FSOC members then serving and must be made by the later of 45 days from the filing of a petition or, if a stay has been issued, the expiration of the stay.  An FSOC decision to set aside a regulation is subject to judicial review under the Administrative Procedure Act.

On July 10, Keith Noreika, the Acting Comptroller of the Currency, sent a letter to Director Cordray in which he asked the CFPB for the data it used to develop and support its proposed arbitration rule.  In the letter, Mr. Noreika stated that a variety of OCC staff had reviewed the CFPB’s proposal from a safety and soundness perspective and expressed concern about its potential impact on U.S. financial institutions and their customers.  He also discussed the potential detrimental effects of the CFPB’s proposal, including the potential adverse effects that the increased litigation cost associated with the loss of arbitration as an alternative dispute resolution mechanism could have on the “reserves, capital, liquidity, and reputation of banks and thrifts, particularly community and midsize institutions.”  Mr. Noreika stated that he had directed OCC staff to work expeditiously with CFPB staff to examine the CFPB’s data and “determine if our concerns are allayed by the data or to work with the CFPB to resolve any safety and soundness concerns that persist.”

Mr. Noreika’s letter would appear to position the OCC as the most likely FSOC member agency to file a petition to set aside the CFPB’s final arbitration rule.  However, since five FSOC members (the CFPB Director, FDIC Chair, Federal Reserve Chair, FHFA Director and insurance representative) are currently Democratic appointees and 7 votes would be required to set aside a regulation, two current members would need to be replaced with Republican nominees for the final arbitration rule to be set aside with only Republican votes.  If the final arbitration rule is not published in the Federal Register until late August, an FSOC set aside with only Republican votes is theoretically possible since the term of the FSOC’s insurance representative member expires in September 2017 and the term of the current FDIC Chairperson expires on November 29, 2017.  (It is also possible that Director Cordray will leave the CFPB in the fall and a successor appointed by the Trump Administration will be in place.)

In the final arbitration rule, the CFPB provided the following response to comments it received on the proposed rule from the Conference of State Bank Supervisors:

An association of State regulators expressed concern that the compliance costs of the proposal could be substantial, and that requiring institutions to incur those costs could pose safety and soundness concerns for the depository institutions that the association’s members supervise.  The commenter urged the Bureau to engage in a more rigorous analysis of current and future compliance costs before finalizing the rule.  The Bureau notes that arbitration agreements are not universal, such that for the markets covered by the final rule and that are subject to the authority of State regulators, there are depository institutions that do not currently employ such agreements.  Indeed, as discussed below, the Bureau estimates that the majority of depository institutions do not use arbitration agreements.  It is evident that depository institutions without arbitration agreements are able to remain safe and sound despite their exposure to class action liability.  The Bureau has no reason to believe that depository institutions with arbitration agreements are less financially sound than those without or that requiring certain depository institutions to amend their agreements will cause them to become less financially sound.  For the reasons above the Bureau believes that increasing class action exposure for depository institutions currently using arbitration agreements will not pose safety and soundness risks.  In addition, as discussed in Part III, no class action in the Study went to trial.  As further discussed in the findings in Part VI, courts are generally able to consider the financial condition of the defendant when evaluating the reasonableness of class settlements and litigated judgments.  In addition, under CAFA, prudential regulators are afforded notice and the opportunity to comment on the proposed class settlement before the court makes a final approval decision.  These mechanisms allow for consideration of safety and soundness concerns into the class settlement approval process.

This response by the CFPB is superficial and unpersuasive.  While the “majority” of banks may not use arbitration agreements, that is because most banks are small community banks in rural areas that are typically not the target of class action litigation.  However, the CFPB’s own data in its March 2015 empirical study of arbitration showed that 45.6% of the 103 largest banks with accounts representing 58.8% of insured deposits use arbitration clauses.  It is those banks that are more likely to be the targets of class actions.

The CFPB estimates that the rule will cost 53,000 financial services companies who currently utilize arbitration agreements between $2.62 billion and $5.23 billion over the next five years to defend against an additional 6,042 class actions that will be brought by plaintiffs’ counsel.  The CFPB expects those numbers to be repeated every five years thereafter.  Second, with respect to CAFA (the Class Action Fairness Act), neither Federal Rule of Civil Procedure 23 nor 28 U.S.C. 1715 requires regulators to consider “safety and soundness concerns” when reviewing class settlement notices.  Therefore, CAFA provides no assurance that safety and soundness concerns will be addressed.

 

Politico has reported that James Clinger, President Trump’s nominee to be the next FDIC Chairperson, has asked the White House to withdraw his nomination, citing family issues.

Last month, the White House announced that President Trump intended to nominate Mr. Clinger to be a FDIC member for a six-year term and to be Chairperson for a five-year term, effective November 29, 2017 when the current FDIC chairperson’s term ends.

 

 

The Federal Housing Finance Agency has announced that it has extended until July 31, 2017 the comment period on its Request for Input on improving language access in mortgage lending and servicing.

Issued this past May, the RFI asked for input to be provided by no later than July 10, 2017.  The extension is shorter than the extension of at least 45 days that a group of eight trade associations had requested in a letter sent to the FHFA.

The FHFA has stated that it intends to use the information it receives in response to the RFI to inform “additional steps that could potentially be taken to further support [Limited English Proficiency] borrowers and the mortgage industry’s ability to serve them throughout the mortgage life cycle.”

 

 

In a notice published in today’s Federal Register, the CFPB announced that it has extended the comment period on its small business lending RFI until September 14, 2017.

The CFPB issued the RFI, together with a white paper on small business lending, in May 2017 in conjunction with a field hearing on small business lending.  The RFI is intended to inform the CFPB’s rulemaking to implement Dodd-Frank Act section 1071.  At last month’s meeting of the CFPB’s Consumer Advisory Board, Director Cordray indicated that in response to requests for additional time to respond to the RFI, the CFPB had decided to extend the comment period (which would have expired on July 14) by 60 days.  Today’s Federal Register notice specifically referenced a letter the CFPB received on May 23 from thirteen industry trade associations requesting a 60-day comment period extension.

 

 

The CFPB has updated the Home Mortgage Disclosure Act guidance that is available on its resource webpage for HMDA filers.  Updates were made to the Technology Preview, the Filing Instruction Guides for both data collected in 2017 and data collected in 2018 and subsequent years, and the Frequently Asked Questions.

In the FAQs, the CFPB notes that the new internet-based HMDA Platform for the submission of HMDA data is expected to be available in the third quarter, and that once the Platform is available companies will be able to register for login credentials and establish an account.

Two Republican Senators, Mike Crapo (who chairs the Banking Committee) and Tom Cotton (a Banking Committee member), have announced plans to draft a resolution of disapproval to overturn the CFPB’s final arbitration rule under the Congressional Review Act.

According to Politico, Senator Crapo has indicated that he wants to take the lead on drafting a CRA resolution.  Senator Cotton posted a statement on his website yesterday in which he criticized the CFPB for having “gone rogue again, abusing its power in a particularly harmful way” and indicated that he “has started the process of rescinding this [arbitration] rule” under the CRA.

In addition, Representative Jeb Hensarling, who chairs the House Financial Services Committee, posted a statement on the Committee’s website in which he stated that the arbitration rule “will harm American consumers but thrill class action trial attorneys” and stated that the rule “should be thoroughly rejected by Congress under the [CRA].