The Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau are engaging in a high-stakes battle over the latter agency's effort to rein in mandatory arbitration clauses, in a rare public spat between federal regulators.
Acting Comptroller Keith Noreika provoked the fight by publicly criticizing the CFPB's final arbitration rule, requesting that it delay its publication in the Federal Register until after the OCC has the chance to analyze and study its impact on safety and soundness. Yet his demands came late in the process, after a lengthy rule-writing effort by the CFPB in which the OCC never previously indicated any concerns with the plan. The OCC also has not offered any evidence that the CFPB rule, which would largely ban mandatory arbitration clauses, poses a threat to banks.
CFPB Director Richard Cordray appeared frustrated with Noreika's eleventh-hour move, writing Tuesday in the fourth letter in a string of them between the two agency heads that he could not see "any plausible basis" for the claim that the rule "could somehow affect the safety and soundness of the banking system."
"On what conceivable basis can there be any legitimate argument that this rule poses a safety and soundness issue?" Cordray wrote. "The economic analysis of the rule 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. Even if you think that estimate could be off by some amount, the banks alone made over $171 billion in profits last year."
The arbitration rule would prohibit financial firms from requiring that consumers arbitrate disputes, freeing them to band together in class-action lawsuits. The rule is expected to be published on Wednesday in the Federal Register, setting the clock ticking for both regulatory and legislative efforts to rescind it. Congress has 60 legislative days from the rule's publication to kill the arbitration rule with a majority vote using the Congressional Review Act.
The Financial Stability Oversight Council could also veto to the rule. Noreika is one of 10 voting members of the FSOC, and he would have to file a petition within 10 days of the rule's publication to begin the veto process, which requires a two-thirds majority.
Cordray took direct aim at Noreika's likely intention to use the FSOC's veto power, which would be a first.
"I question why it would be appropriate to distort the FSOC process to review a claim that is so plainly frivolous, when congressional and judicial forums are available to pursue such matters," Cordray wrote. "Again, I would be interested to know more about what you view as the basis for your claim here."
Regulators rarely interfere with other agencies' rulemaking, particularly so publicly and late in the process. Even in cases where there is a change of administrations and political parties, such battles are not this heated nor open.
Some argue Noreika is right to take action if he thinks the rule is a safety and soundness threat.
"We have a new administration now that is trying to roll back what has gone on over the last eight years and the acting comptroller is trying to do what is best for the banks that he regulates, because the OCC has a balanced mission, not only to protect consumers but also to protect the banks," said Scott Pearson, a partner at Ballard Spahr.
Yet others doubted both Noreika's motivations and his rationale.
"This is a concerted effort to undermine the CFPB," said one former regulator, who said "the OCC was unable to explain what it means by safety and soundness."
Neither the OCC nor others have pointed to any case in which a bank was threatened or failed as a result of a class-action suit.
"I have never heard of regulators raising safety and soundness as a concern in class action litigation," said Lauren Saunders, associate director of the National Consumer Law Center.
A financial services lawyer who is usually skeptical of the CFPB said, "No one is a strong believer in the safety and soundness argument."
Another former regulator called Noreika's comments on arbitration "unprecedented," given that he is an acting head who been on the job since May, and the public comment period has long passed.
But Matthew Stromquist, a partner at Pilgrim Christakis in Chicago, said the current clash is part of the democratic process in which policymaking and rulemaking can take years, yet regulators' terms do not coincide with presidential terms.
"This is a tug of war between agencies tasked with safety and soundness and protecting consumers," Stromquist said. "Safety and soundness is just the term of art being used for cost impact and profitability, which was the objection to the rule from the beginning. If the numbers that we're seeing are correct in terms of the bottom-line impact, it's certainly not peanuts."
The arbitration rule was proposed in March 2016. Former OCC officials said the agency has made no objections to the arbitration rule.
Regulators also have not raised safety and soundness concerns about the prohibition on mandatory arbitration clauses in the mortgage market or in the many forms of credit extended to service members and their families.
Noreika first raised the issue in a letter to Cordray on July 10, the day the final rule was announced. He followed up Monday with another letter to Cordray asking him to delay the rule and to share data so the OCC could conduct its own independent review. Cordray agreed in his letter Tuesday to share the data with the OCC.
Richard Hunt, the president and CEO of the Consumer Bankers Association, laid the blame for the fight on the Dodd-Frank Act, which stripped consumer protection oversight from the federal banking regulators and gave it to the CFPB. The 2010 law also required the CFPB to study the use of mandatory arbitration clauses and issue regulations that protect consumers, are in the public interest, and are consistent with the bureau's examination of arbitration.
"There are inconsistencies with Dodd-Frank because it took away consumer protection from the OCC and left them with safety and soundness," Hunt said.