A new federal rule allowing Americans to file class-action suits against banks instead of being forced into private arbitration has become entangled in a dispute over consumer protection between appointees by Presidents Trump and Obama.
The disagreement poses another potential obstacle to the rule, unveiled last week by the Consumer Financial Protection Bureau over the strong objections of the banking industry. Some congressional Republicans already have vowed to pass legislation repealing the regulation before it takes effect early next year.
Now, Keith Noreika, the acting comptroller of the currency, has asked the bureau to delay implementing the arbitration rule until his staff can determine whether it would threaten the health of the banking system.
The rule, which the bureau has been working on for more than two years, would not ban clauses in checking account, credit card and other banking agreements that say disputes between companies and customers must be dealt with privately rather than in court.
The determinations of an arbitrator are binding and consumer advocates say most decisions favor the company. The private proceedings also allow banks to deal with problems quietly rather than address widespread issues.
The new rule would ban agreements that block consumers from banding together to bring class-action cases. The CFPB argued that such cases would help hold banks accountable.
Noreika, a financial services lawyer appointed by Trump in May, wrote to CFPB Director Richard Cordray on Monday asking him to delay publishing the rule in the Federal Register — a move that starts the implementation clock ticking.
Noreika said he wanted the halt “until my staff has had a full and fair opportunity to analyze the CFPB data so that I am able to fulfill my safety and soundness obligations.”
Cordray, a former Ohio attorney general nominated by President Obama and confirmed to a five-year term in 2013, responded Tuesday that he would be happy to share the data. But he said that the final rule was sent to the Federal Register last week.
And Cordray dismissed the concerns that allowing class-action suits threatened the banking system as “plainly frivolous.”
“I continue to fail to see any plausible basis for your claim that the arbitration rule could somehow affect the safety and soundness of the banking system,” Cordray wrote to Noreika.
The CFPB’s analysis determined that the impact on the entire financial system would be less than $1 billion a year, Cordray said. U.S. banks, he noted, earned a record $171 billion in profits in 2016.
Noreika issued a statement saying he appreciated Cordray’s decision to share the rule’s data and that his agency’s staff would conduct a timely review.
Noreika’s use of the phrase “safety and soundness” is important. The CFPB is the only financial regulatory agency whose rules can be overturned by other regulators.
The CFPB was created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which was opposed by nearly all Republicans in Congress.
President Obama and Democrats argued that a new agency was needed specifically to look out for consumers because other regulators had struggled to balance protecting consumers while also ensuring banks had enough profits to ensure their safety and soundness.
To ease concerns about the effect of CFPB rules, Dodd-Frank stipulated that they “may be set aside” if they would risk the safety and soundness of the U.S. banking system or the stability of the nation’s broader financial system.
The determination would be made by the members of the Financial Stability Oversight Council, a 10-member panel of regulators created by Dodd-Frank. Headed by the Treasury secretary, the council includes the comptroller of the currency, the CFPB director, the chair of the Federal Reserve and the heads of other financial regulatory agencies.
Any member of the council can petition for a CFPB rule to be reviewed. A two-thirds vote is required to overturn it.
Trump already has appointed several members of the council. They include Treasury Secretary Steven T. Mnuchin and Noreika, who is the acting comptroller until nominee Joseph Otting is confirmed by the Senate.
Otting, the former chief executive of Pasadena’s OneWest Bank, has yet to have his confirmation hearing scheduled.
Dodd-Frank says a request to overturn or delay a CFPB rule must come only after a “good faith” attempt to work with the bureau to resolve concerns. A petition for council review must be filed within 10 days after the rule’s publication in the Federal Register.
Noreika had no comment Tuesday on whether he is considering a petition, said Bryan Hubbard, Office of the Comptroller of the Currency spokesman.
In a letter to Noreika last week, Cordray said that his staff consulted with the Office of the Comptroller of the Currency, or OCC, and other regulators throughout the rule-making effort.
“At no time during the 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,” Cordray said. During most of that time, the OCC was headed by Thomas Curry, who was appointed by Obama.
Cordray said Noreika didn’t express any concerns to him since taking office in early May.
Noreika responded that he became aware of the final arbitration rule “several weeks” after taking office and requested his staff analyze it. Noreika said he planned to ask the CFPB for data before the final rule was issued “but the timing of the release… was not shared with me in advance.”
Congressional Republicans want to sharply reduce the CFPB’s authority. The arbitration rule further inflamed the bureau’s opponents.
“The CFPB has gone rogue again, abusing its power in a particularly harmful way,” Sen. Tom Cotton (R-Ark.) said last week, saying the agency ignored the “consumer benefits of arbitration.”
Cotton started the process of using the Congressional Review Act to overturn the rules. The act allows a majority of the House and Senate to scrap a federal rule within 60 legislative days of being submitted to Congress or published in the Federal Register.