In July, the US House of Representatives voted to repeal the so-called Arbitration Rule, recently implemented by the Consumer Financial Protection Bureau (CFPB) and designed to prevent financial companies from mandating private arbitration for all claims brought forth by customers. Earlier this week, the Senate voted to repeal it as well, which effectively means that consumers will have to arbitrate each claim individually rather than pursuing a class action when a bank’s action harms millions of people. As a part of the all-out assault on regulations generally and the CFPB in particular, a group of business associations led by the US Chamber of Commerce has pursued legal action against the agency, arguing that the very structure of the CFPB is unconstitutional and that the President should have the authority to remove the current Director of the agency, Richard Cordray.
Additionally, the lawsuit claims that the Arbitration Rule violates the Administrative Procedure Act (APA) because, in addition to other procedural concerns, the agency used “a deeply flawed study that improperly limited public participation, applied defective methodologies, misapprehended the relevant data, and failed to address key considerations.”
So-Called Secret Analysis
Several others have jumped on the anti-Arbitration Rule bandwagon, specifically in light of the allegations over defective research methodologies. Keith Noreika, the current head of the US Comptroller of the Currency, sent a missive to leading members of the Senate Committee on Banking, Housing and Urban Affairs, where the resolution is being held, to express concerns over the CFPB’s new regulation.
In the letter, sent on October 17th, Noreika wrote: “Director Cordray may feel confident of the CFPB’s secret analysis, but […] practical results are what matter most to working Americans who are counting on their government officials to look out for their interest and not the special interests benefited by this rule.”
Noreika vs. Cordray
Not long before Noreika sent the letter, he wrote an op-ed piece for The Hill, arguing that the CFPB failed to be fully transparent in its study of the economic effects of the Arbitration Rule. According to an independent review published by the OCC, the agency neglected to communicate the fact that there is an 88 percent chance of credit costs increasing – meaning consumers could see credit rates jump from 12.5 to 16 percent.
Additionally, Noreika claims that the CFPB’s own study shows that arbitration produces higher payouts more often than class action suits, which according to the OCC director, result in highly paid plaintiff lawyers and very small awards for class members. Noreika also suggests that small banks suffer because of the litigation costs associated with class action suits.
On October 16th, Cordray wrote his own op-ed in the same publication, contending that Noreika’s claims make very little sense. Cordray noted that the OCC had been involved in the rule-writing process the whole time. It is thus surprising that these objections are being voiced right now – just before the Senate’s vote. Additionally, he clarified that the rule does not even ban all arbitration clauses; instead, it prevents companies from precluding class-action suits, meaning consumers are permitted to pursue their own claims if they wish.
As for the projection that credit rates will skyrocket, leaving consumers in the dust: Cordray says, “This claim is demonstrably bogus.” First of all, the total costs for the rule have been set at $1 billion, a paltry sum when you consider that banks currently have profits of $171 billion and trillions of dollars in assets. Secondly, according to Cordray, the OCC’s claim that there is an 88 percent chance of costs increasing is “the equivalent of flipping a coin twice, having both come up heads, and declaring that the coin is ‘very likely’ to have heads on both sides.” That’s not to mention that in 2009 many banks were forced to strike their arbitration clauses, leading to no significant increase in interest rates.