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CFPB fires back at OCC's criticism of arbitration rule

The Office of the Comptroller of the Currency used "flawed statistics" and misstated the effects of the Consumer Financial Protection Bureau's arbitration rule on community banks, CFPB Director Richard Cordray said Friday.

In a letter to Sen. Sherrod Brown, the lead Democrat on the Senate Banking Committee, Cordray called the OCC's analysis of the arbitration rule "mistaken and unfounded."

"The OCC review simply misunderstood a basic fact of how probability works," Cordray wrote. "By committing this error in statistical analysis, the OCC review reached a conclusion that is not supported by the available empirical evidence."

It was the latest exchange in what has become an increasingly hostile relationship between the two agencies and their leaders. Acting Comptroller Keith Noreika reiterated claims Friday that the CFPB's rule, which would ban mandatory arbitration clauses from financial contracts, would cause credit card costs to rise by 3.5 percentage points when the regulation goes into effect next year.

Consumers "could see credit card rates jump from an average 12.5% to nearly 16%," as a result of the arbitration rule, Noreika wrote.

Noreika went so far as to call on Congress to overturn the rule of a fellow regulator - a move that has not been done in recent memory by one agency to another. While interagency rivalry is common, it usually takes place well outside the public view and is seldom so openly contentious.

Noreika's claims rest on the OCC's analysis of the CFPB's rule, which found an 88% chance that the total cost of credit would rise as a result of the arbitration rule.

But Cordray claimed the OCC committed "a basic statistical error" by conflating the so-called probability value with the probability of a hypothetical effect actually occurring.

The letter said the Consumer Bureau's Office of Research "analyzed the OCC review and found that it is based on flawed statistics and is contradicted by publicly-available historical data that the OCC did not consider."

A majority of banks have been operating without arbitration agreements for decades, Cordray said, without any indication that class-action lawsuits pose a risk to their safety and soundness.

"We know, for example, that roughly half of the credit card market does not have arbitration clauses in their agreements," Cordray said. "If the OCC review were correct, it would mean that these banks are operating at a substantial competitive disadvantage, incurring costs that require them to charge 3.43 percentage points more than their competitors."

Cordray continued: "Not only is there no evidence that this is actually happening, but it also would mean that they have chosen to remain at a substantial competitive disadvantage for the years … during which time none of the companies has reinstated an arbitration clause."

Cordray also took aim at Noreika's claim that the arbitration rule would raise costs for community banks.

The CFPB conducted a random sampling of deposit agreements from 141 small and mid-sized banks, which showed that just 7% of checking account agreements mandated that consumers resolve disputes through arbitration.

"Almost none of the community banks told us that they use arbitration agreements," Cordray wrote.

Community banks with less than $550 million in assets would face a 1-in-1,500 chance of a new class action due to the rule, he wrote.

"For those few small banks that do face such an action, the large majority of the cases are resolved quickly on an individual basis without significant expense," he wrote.

In the letter to Brown, the CFPB's analysis suggested that if the OCC's claims were true, banks would pay at least $12 billion more each year to defend and settle class action lawsuits once the arbitration rule was in effect. In actuality, the CFPB estimated that at most banks would pay $150 million more per year.

"A change in the cost of credit on the order of 3.43 percentage points is implausible, both as a matter of statistics and as a matter of economics," the CFPB said.

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