Com­pli­ance & Reg­u­la­tion

Is ar­bi­tra­tion win a turn­ing point for banks?

National Mortgage News - - Contents - By kate berry

the se­nate’s ra­zor slim vote to re­peal the Con­sumer Fi­nan­cial Pro­tec­tion Bureau’s ar­bi­tra­tion rule was ar­guably the in­dus­try’s big­gest pol­i­cy­mak­ing vic­tory since pas­sage of the Dodd-Frank Act. But does it mean the reg­u­la­tory tide has turned in banks’ fa­vor? Many are skep­ti­cal.

“It’s a very big win for banks, and a huge vic­tory that [the Se­nate] fi­nally did it, but I don’t think the im­pli­ca­tions of it are all that broad,” said Alan Kaplin­sky, the co-prac­tice leader at Bal­lard Spahr’s con­sumer fi­nan­cial ser­vices group. “This was an un­usual sit­u­a­tion where there was al­most uni­ver­sal sup­port for an over­ride, and look how dif­fi­cult it was; they eked by.”

The 51-to-50 vote, which re­quired Vice Pres­i­dent Mike Pence to break a tie, over­turned a rule ab­horred by banks that would have have pro­hib­ited ar­bi­tra­tion clauses that pre­clude con­sumers from bring­ing class ac­tions. The re­peal was au­tho­rized by the Con­gres­sional Re­view Act, which al­lows law­mak­ers to re­verse agency rules with a sim­ple ma­jor­ity.

De­spite the close mar­gin, the mea­sure was an un­am­bigu­ous win for banks. It not only in­val­i­dated the CFPB reg­u­la­tion, but the bureau can­not bring back the reg­u­la­tion in the fu­ture with­out con­gres­sional ap­proval, which re­quires 60 votes in the Se­nate.

To be sure, banks have notched pol­icy suc­cesses since Dodd-Frank. For ex­am­ple, as part of a 2014 spend­ing bill, law­mak­ers re­pealed a Dodd-Frank pro­vi­sion re­quir­ing bank­ing firms to push out a por­tion of their swaps busi­ness into sub­sidiaries. Yet that mea­sure was seen as ben­e­fit­ing large banks, par­tic­u­larly Cit­i­group, whereas the ar­bi­tra­tion rule re­peal has wider ap­peal.

Some ex­perts think the mo­men­tum will con­tinue as Repub­li­cans sup­port rolling back post-cri­sis reg­u­la­tions. Re­peal­ing the ar­bi­tra­tion rule could em­bolden reg­u­lated en­ti­ties to chal­lenge the CFPB more than in the past.

“This could set off a chain of events that means more over­all vic- tories,” said Jenny Lee, a part­ner at Dorsey & Whit­ney and a for­mer CFPB en­force­ment at­tor­ney.

But she cau­tioned that re­peal­ing the ar­bi­tra­tion rule may also be a spe­cial case since the rule had elicited such uni­ver­sal ob­jec­tions from fi­nan­cial in­sti­tu­tions.

“The ar­bi­tra­tion rule had a larger and more sys­temic op­po­si­tion than any other CFPB rule,” Lee said.

What the ar­bi­tra­tion rule re­peal also had in its fa­vor was clear sup­port from mem­bers of the Trump ad­min­is­tra­tion. Many said se­cur­ing enough Se­nate votes to pass the Con­gres­sional Re­view Act mea­sure was helped by last- ditch ef­forts from act­ing Comp­trol­ler of the Cur­rency Keith Nor­eika, who urged sen­a­tors to vote against the rule, and the Trea­sury Depart­ment, which is­sued a scathing re­port crit­i­ciz­ing the CFPB rule a day be­fore the vote.

Yet ob­servers said any mo­men­tum from the vote will not be enough, for ex­am­ple, to spur a bi­par­ti­san deal on reg­u­la­tory re­lief. For one thing, such a re­form pack­age still needs 60 votes.

Get­ting leg­is­la­tion that re­quires the sup­port of Democrats “is an­other ket­tle of fish,” Kaplin­sky said.

Re­peal­ing the ar­bi­tra­tion rule may also not have much ef­fect on other in­dus­try pri­or­i­ties sim­ply be­cause the in­tense pol­icy and po­lit­i­cal en­vi­ron­ment in Wash­ing­ton is fo­cus­ing ef­forts in other ar­eas be­sides fi­nan­cial ser­vices.

“Larger-scale leg­isla­tive re­form will be more dif­fi­cult be­cause of the abil­ity of a bloc of 40 sen­a­tors to block” leg­is­la­tion, said Ted Frank, a se­nior at­tor­ney and direc­tor of the Cen­ter for Class Ac­tion Fair­ness at the Com­pet­i­tive En­ter­prise In­sti­tute.

Yet he added that the ar­bi­tra­tion vote proved that con­gres­sional lead­ers are work­ing ag­gres­sively to try to eke out any vic­to­ries they can.

“I don’t be­lieve this ad­min­is­tra­tion has the at­ten­tion span or focus or con­stancy to pass any ma­jor leg­isla­tive ini­tia­tive, but [House Speaker Paul] Ryan and [Se­nate Ma­jor­ity Leader Mitch] McCon­nell may be able to work won­ders not­with­stand­ing reg­u­larly be­ing un­der­mined by the pres­i­dent and be­ing put in a bad spot by the last debt limit deal,” said Frank.

While the in­dus­try’s vo­cal sup­port for re­peal­ing the ar­bi­tra­tion rule helped the mea­sure get to the fin­ish line, banks may also have ben­e­fited from the fact that con­sumers pos­si­bly are not that fa­mil­iar with the tech­ni­cal as­pects of the CFPB reg­u­la­tion, soft­en­ing any con­sumer back­lash.

But the fi­nan­cial ser­vices in­dus­try might have a tougher time re­vers­ing other rules that con­sumers may more clearly un­der­stand, such as the CFPB’s re­cent pol­icy crack­ing down on pay­day and other short­term lenders.

“Ar­bi­tra­tion was the tip­ping point, the last straw that broke the camel’s back, it was too much for the in­dus­try to bear,” said Craig Naz­zaro, of coun­sel at Nel­son Mullins Ri­ley & Scar­bor­ough. “When it comes to rules gov­ern­ing Main Street, like a pay­day loan, those are un­der­stood by the gen­eral pop­u­la­tion, while more in­volved reg­u­la­tions will be a lit­tle eas­ier to un­wind, or gain back ground.”

Still, Naz­zaro added, the ar­bi­tra­tion win could usher in an en­vi­ron­ment “where you’re go­ing to see a po­ten­tial roll­back of reg­u­la­tions that the Amer­i­can pub­lic doesn’t un­der­stand, like the Vol­cker Rule, or cap­i­tal re­quire­ments.”

Jaret Seiberg, a fi­nan­cial ser­vices and hous­ing pol­icy an­a­lyst at Cowen Wash­ing­ton Re­search Group, cau­tioned against over­re­act­ing.

“This is not go­ing to un­leash the flood­gates of dereg­u­la­tory leg­is­la­tion for fi­nan­cials from Congress,” Seiberg wrote in a re­search note Oct. 25. “This was a lim­ited ques­tion on whether con­sumers were bet­ter off with manda­tory ar­bi­tra­tion or class ac­tion lit­i­ga­tion. Vot­ers are still pop­ulist and still do not like big fi­nan­cial in­sti­tu­tions. Those same vot­ers, how­ever, also don’t like class-ac­tion lawyers.”

Oth­ers said fur­ther re­form will be tough to ac­com­plish as long as there are still Obama ad­min­is­tra­tion holdovers in key po­si­tions at the pru­den­tial reg­u­la­tors.

“The ap­point­ment of pol­i­cy­mak­ers is the most im­por­tant task,” said Joe Lynyak, a part­ner at Dorsey & Whit­ney. “While not a panacea and not a quick fix, start­ing the reg­u­la­tory mile­stones re­quires the ap­point­ment of new se­nior agency per­son­nel. There is a dif­fer­ence be­tween hav­ing neu­tral par­ties at the agen­cies ver­sus peo­ple who will af­fir­ma­tively im­ple­ment...re­form.”

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