To secure a rare legislative victory this week, Senate Republicans turned to a strategy that has paid off for them in the recent past: killing policy rather than writing it.
This time, Republicans took aim at a regulation giving U.S. consumers more flexibility to sue their banks and other financial institutions. The rule is widely loathed by the business community and conservative lawmakers, many of whom opposed the creation of the agency that wrote it, the Consumer Financial Protection Bureau.
So Sen. Mike Crapo (R-Idaho) turned to an arcane legislative tool — 1996's Congressional Review Act. The law gives legislators a limited period of time to block a new regulation before it goes into effect. Lawmakers have used the measure more than a dozen times already to roll back rules issued at the end of the Obama administration, often at the urging of the Trump administration, which has pushed to eliminate regulations it says are stifling economic growth.
Late Tuesday evening, the Senate used it again, approving Crapo’s measure blocking the CFPB’s rule and sending the matter to President Trump, who is expected to sign it. Trump “applauds” the legislation’s passage, according to a White House statement.
The vote was the biggest victory yet for the banking industry during the Trump administration. After years of suffering under tough regulations imposed after the global financial crisis, bankers had been giddy at the prospect of a regulatory reprieve. But many of those efforts stalled in the Senate, which has not taken up some of the more complex regulatory changes the industry has favored.
Blocking the CFPB rule likely emboldens the agency’s critics, but it is not likely to speed other, more complicated, regulatory rollbacks, industry analysts say. “The country is still too populist and too distrustful of big banks,” Jaret Seiberg, a Cowen Washington Research Group financial services analyst, said in a report Wednesday.
But even this legislative victory proved tricky for Republicans. Sen. Lindsey O. Graham (R-S.C.) emerged as an early “no” vote, leaving the party with little wiggle room. To win passage without Democrat support, the GOP could lose no more than two votes from members of its party.
At issue was the fine print in many of the agreements that consumers sign when they apply for credit cards or bank accounts. These contracts typically require consumers to settle any disputes they have with the company through arbitration, in which a third party rules on the matter, rather than going to court or joining a class-action lawsuit.
The 2010 financial reform law, known as the Dodd-Frank Act, called on the CFPB to study the use of mandatory arbitration clauses. After five years, the agency moved to ban such clauses, potentially allowing millions of Americans to file or join a lawsuit to press their complaints.
The measure was widely disliked by banks and among many Republicans in Congress, who called it a gift to plaintiffs’ attorneys. Critics argued the rule would trigger a flood of frivolous lawsuits and drive up credit card rates. Arbitration, they argued, was a faster, cheaper way to settle disputes.
The House passed legislation to block the rule's implementation in July, but in the Senate the measure appeared to languish. Fearing lawmakers might not meet an early November deadline to block the rule, the U.S. Chamber of Commerce and several other business groups filed suit against the CFPB last month.
Complicating Republican efforts was the growing unpopularity of Wells Fargo and Equifax. Wells Fargo has been under pressure since admitting last year that employees had opened millions of sham accounts customers didn’t ask for, and Equifax is struggling to recover from a massive hack that potentially exposed the data of more than 145 million people.
Democrats and consumer groups, who had been mobilizing to defeat the bill for months, used the corporate missteps as a rallying cry against arbitration clauses. Crapo, the chair of the Senate Banking Committee, acknowledged to reporters that the Equifax breach had become "an issue" in securing enough votes to repeal the rule.
“It didn’t help,” said one financial services lobbyist working the issue, who spoke on the condition of anonymity to discuss behind-the-scenes concerns. “It detracted from the underlying principle of why arbitration is important.”
Amanda Werner, arbitration campaign manager for Public Citizen and Americans for Financial Reform, began showing up at congressional hearings dressed as a Monopoly board game character, with a black top hat and bushy white mustache. The images made their way online — and onto late-night television. “It went completely viral, out of control,” said Werner, who has been working on the issue for two years.
Consumer advocates also launched a “five-figure” digital campaign targeting states where Republican lawmakers remained uncommitted on the issue, including Arizona (Sen. John McCain) and Alaska (Sen. Lisa Murkowski.)
Meanwhile, Republicans and the banking industry were mobilizing too. Credit unions and community banks began to weigh in against the CFPB rule. While repeatedly apologizing for their companies' misdeeds, Wells Fargo and Equifax executives refused to back away from their use of arbitration clauses in their contracts. Pressed to disavow mandatory arbitration during a Senate committee hearing this month, Wells Fargo CEO Tim Sloan said "No, I won't, senator."
The rule also faced unusual resistance from other banking regulators. The Office of the Comptroller of the Currency asked the CFPB to halt the rule, arguing it was not well thought out and would raise costs for consumers. While it is not uncommon for regulators to disagree, those clashes typically don’t spill out into public view.
This week, as both sides began to prepare for a final Senate showdown, the Treasury Department took the unusual step of criticizing the CFPB’s work, issuing an 18-page report that argued the arbitration rule “would upend a century of federal policy favoring freedom of contract to provide for low-cost dispute resolution.”
The criticism from regulators gave Republicans more ammunition to call for the rule’s repeal, industry analysts said.
By Tuesday evening, it appeared Republicans had secured enough support to move forward with a vote. Graham, as expected, sided with Democrats against the measure, as did Republican Sen. John Neely Kennedy of Louisiana, leaving the vote at 50 to 50 at about 10 p.m. Vice President Pence cast the deciding vote.
The battle over the rule has laid bare lingering division between the CFPB and the White House.
Under the Trump administration, many agencies have begun taking steps to roll back or at least slow regulations. But the CFPB, a watchdog agency established after the global financial crisis and still led by an Obama-era appointee, has continued to draw the ire of business groups with its aggressive tactics.
The debate has often taken an unusually personal tone. After the Senate voted to overturn the rule, CFPB Director Richard Cordray said in a statement that “Wall Street won and ordinary people lost.”
Sen. Tom Cotton (R-Ark.), a co-sponsor of the Senate repeal legislation, fired back at Cordray, who many expect to run for governor of Ohio next year. “The unelected Mr. Cordray issued yet another stupid regulation that would have hurt consumers, the people’s democratically elected representatives voted to stop the regulation, and now Mr. Cordray whines that Congress stopped his stupid regulation,” Cotton said in a statement. “It’s well past time for Mr. Cordray to resign and begin his long-expected losing campaign for Governor of Ohio. If he won’t, President Trump should fire him.”