In a highly unusual move, the Trump administration on Monday attacked a rule proposed by one of its own agencies.
It is not unusual for such regulators to disagree, but rarely do those squabbles spill out into public view. The Trump administration has made unwinding many of the regulations put in place following the Great Recession a top priority, arguing that eliminating cumbersome rules would spark economic growth. But Cordray has repeatedly been a stumbling block in some key areas.
The regulation at the center of the fight addresses the fine print in many of the agreements that consumers sign when they apply for credit cards or bank accounts. These agreements typically require them 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 rule approved by the Consumer Financial Protection Bureau, a watchdog agency, would block mandatory arbitration clauses, allowing more people to file or join a lawsuit to press their complaints.
The new measure is widely loathed on Wall Street, which has estimated it would cost them billions of dollars, and among Republicans in Congress, who call it a gift to plaintiffs' attorneys.
The rule “fails to account for significant costs of class action litigation and benefits of arbitration in a meaningful way,” the Treasury Department said in an 18-page report. And it “would upend a century of federal policy favoring freedom of contract to provide for low-cost dispute resolution.”
The CFPB dismissed the Treasury Department's report, saying it rehashes old industry arguments. “Our rigorous analysis of the costs and benefits of the rule found that mandatory arbitration clauses allow companies to avoid accountability for breaking the law and cost consumers billions of dollars by blocking group lawsuits,” Sam Gilford, CFPB spokesman, said in a statement.
The report drew praise from Republicans and rebuke from Democrats. “Treasury’s report shows that the CFPB is more interested in helping trial lawyers than consumers,” Rep. Jeb Hensarling (R-Tx.), chair of the House Financial Services Committee, said in a statement. Meanwhile, Sen. Chuck Schumer (D-NY) said the “Trump administration has twisted itself into a pretzel to try to undermine” the arbitration rule. … . For far too long, big businesses have bullied consumers into mandatory arbitration in order to protect their bottom line.”
Wall Street had hoped Congress would squash the rule before it went into effect later this year. Republicans in the House passed legislation to do just that this summer, but the Senate has struggled to take up a similar bill. With tax reform now taking up much of lawmakers’ attention, opportunities to push through the measure in time are dwindling, industry officials have said.
Also slowing their efforts has been backlash against two big financial firms, 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 affected more than 145 million people. Consumers groups have used both cases as a rallying cry against arbitration clauses, which Wells Fargo and Equifax both use.
“Working people pay the price when large financial institutions like Wells Fargo and Equifax use forced arbitration to cover up egregious cheating,” Sen. Sherrod Brown (D-OH) said in a statement.
But the Treasury Department's report could provide a boost to efforts to derail the rule.
“It provides some needed political cover for the few Senate Republicans who have been reluctant to vote in favor of the banks,” Jaret Seiberg, an analyst with Cowen and Co.’s Washington Research Group, said in a recent report. “This is a way to argue they were voting for consumers over lawyers. And with all the love in the world to our lawyer friends, lawyers have an even worse perception problem than bankers.”
Still, another big stumbling block remains: Cordray, the head of the CFPB. Nominated by former president Barack Obama, Cordray has become a frequent target of Republican ire and aggressively defended the rule.
Cordray has been embroiled in a war of words with another banking regulator, Office of the Comptroller of the Currency. Noreika, the head of the agency, was appointed by Trump and is a former banking industry attorney.
Noreika has belittled the analysis CFPB conducted to justify the rule and called on the Senate to block its implementation. The rule could cause a 3.4 percent increase in credit card rates, Noreika has argued. “Consumers deserve better,” he said in an editorial published in the Hill earlier this month.
Cordray shot back in unusually personal terms. Noreika's column was a “gratuitous attempt” to undermine the rule, and it relied on “so-called analysis that is simply embarrassing,” he said. The claim that eliminating mandatory arbitration clauses would cause an increase in credit card rates “flunks basic economics,” Cordray said in his own Hill column a few days after Noreika's.