Controversial rule would increase interest rates to create lawsuits, OCC head tells CFPB

By John O'Brien | Oct 19, 2017

WASHINGTON (Legal Newsline) – A battle of opinions has broken out between the heads of two regulatory bodies, with the Comptroller of the Currency criticizing a controversial rule that he says will increase costs in the financial services industry for the sake of creating lawsuits.

On Oct. 13, Keith Noreika’s opinion piece was published on The Hill, alleging that the Consumer Financial Protection Bureau ignored his office’s concerns when it finalized a rule that would open the door for more class action lawsuits over certain consumer contracts. The rule has been called a gift for trial lawyers, and the U.S. House of Representatives has voted to repeal it.

“Consumers deserve better, and so do small and regional banks,” wrote Noreika, who urged senators to continue the House’s effort to kill the rule.

Three days later, CFPB Director Richard Cordray’s response was published. He called it a second “gratuitous attempt to undermine the evidence that supports our rule."

“Both times he has relied on so-called analysis that is simply embarrassing,” Cordray wrote.

The CFPB’s rule prohibits certain financial service companies from avoiding class action lawsuits by including waivers that send disputes with their customers to arbitration.

But the costs of defending lawsuits will be passed on to consumers, Noreika said. A frequent criticism of the rule is that the CFPB’s own data show consumers recover more in arbitration than they do in class actions, anyway.

“Class action lawsuits often involve more claimants and may generate big headline settlement figures, but the people making millions are the lawyers when the average individual payout of such suits is just $32,” Noreika wrote in The Hill.

“But the likely increase in cost to consumers and the failure to improve are only two concerns.”

Smaller banks could cease operating because of the costs of defending lawsuits, Noreika wrote, and only large banks with the means to fight in court might survive.

OCC economists have determined there is an 88 percent chance of the cost of credit increasing, and their expected increase in interest rates is 3.5 percent.

“That means a consumer, living week to week, could see credit card rates jump from an average of 12.5 percent to nearly 16 percent,” Noreika wrote.

“The CFPB failed to disclose that observed effect that was apparent in its data. For an agency that demands transparency from the companies it supervises, the omission is an appalling abdication of the bureau’s responsibility to consumers.”

This is occurring during a lawsuit that challenges the structure of the CFPB, which has been deemed unconstitutional by the federal appeals court in Washington, D.C.

The CFPB was created in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act. It has since been headed by Cordray, a Democrat and former Ohio attorney general.

The lawsuit questions the agency’s structure in that the director can’t be removed without cause. A three-judge panel of the D.C. Circuit found this unconstitutional, and the case will now be heard by the entire roster of D.C. judges.

President Donald Trump’s administration has indicated a preference to remove the CFPB director at-will, meaning Cordray’s days would likely be numbered if the D.C. Circuit’s ruling is affirmed.

Cordray, in his piece in The Hill, says Noreika misrepresents the nature of the rule – arbitration isn’t banned, only clauses that prohibit class actions would be.

“The total costs of the arbitration rule are pegged at under $1 billion per year, compared to bank profits of $171 billion last year and an asset base of many trillions of dollars,” Cordray wrote.

“The acting comptroller ultimately stood down and decided not to challenge the rule before the Financial Stability Oversight Council.”

He also calls Noreika’s claim that interest rates would rise by more than 3 percent “demonstrably bogus.”

“His claim… flunks basic economics,” Cordray wrote. “As part of a 2009 settlement, some large firms covering a significant part of the market stopped using arbitration clauses.

“The data did not show this led to any jump in the rates they charge to consumers or that they have been charging much higher rates than their competitors ever since.”

The onus to fight the rule at the legislative level will be on a small group of Republican senators. They are Alaska’s Lisa Murkowski, Louisiana’s John Kennedy and Maine’s Susan Collins.

Their support will be needed if the other 49 Republicans want to use the Congressional Review Act to give Congress 60 days to reverse the rule.

From Legal Newsline: Reach editor John O’Brien at jobrienwv@gmail.com.

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