Opponents of the Consumer Financial Protection Bureau's arbitration rule are eyeing a trio of options for blocking the regulation before it takes effect, but all three are beset with their own challenges.
The strategy with the most attention is for lawmakers on Capitol Hill to repeal the rule through the Congressional Review Act. But industry representatives are also considering the prospect of the Financial Stability Oversight Council overruling the regulation, or a group such as the Chamber of Commerce suing to throw the rule out.
Yet all three appear to face an uphill climb.
Congressional Review Act
In the case of the CRA, only a majority of lawmakers in both the House and Senate are needed to nullify a regulation. This may be a more feasible option than an attempt to pass regulatory-relief legislation to overturn the arbitration rule — legislation that would likely require some Democratic votes.
A previous CRA effort to block the CFPB prepaid card rule failed, but such a challenge to the arbitration rule appears to be picking up more steam. The CFPB rule effectively prohibits banks and other companies from crafting arbitration contracts that bar consumers from bringing class actions.
Several senators have expressed interest in taking up the CRA effort, including Sens. Tom Cotton, R-Ark., and Pat Toomey, R-Pa., and Senate Banking Committee Chairman Mike Crapo, R-Idaho. Cotton has said he has begun drafting legislation to repeal the arbitration rule.
"The Congressional Review Act is the best bet to set aside arbitration," said Greg Hesse, a partner at Hunton & Williams.
But, as was the case in previous CRA pushes, observers say the 60-legislative-day window — from when a rule is published in the Federal Register — to pass a resolution might still be too narrow with all the other items on the congressional agenda taking up lawmakers' time.
Isaac Boltansky, an analyst at Compass Point Research & Trading, put the odds of the rule being reversed by the CRA at "slightly less than 50%," given the congressional calendar and underlying political dynamics. The GOP faces CRA "fatigue" after using the provision to roll back more than a dozen Obama-era regulations, he said.
"The clock is ticking and there just might not be enough tailwind to get this done," said Gregory Lisa, a partner at Hogan Lovells and a former CFPB enforcement attorney. "It doesn't seem like arbitration is the No. 1 priority when you line it up against health care, the debt ceiling, infrastructure and Russian sanctions."
Given the short time frame, and other legislative priorities, CFPB opponents appear to be laying the groundwork for other options, including a possible petition before the FSOC to overrule the bureau out of safety and soundness concerns.
But the path to the council's blocking a CFPB regulation entails several steps. First, an FSOC member agency must file a petition no later than 10 days after the publication of a rule if that agency determines the rule would endanger safety and soundness, and has already attempted to work "in good faith" with the bureau to address concerns.
The response to the arbitration rule by one agency, the Office of the Comptroller of the Currency, has been seen by some as a step toward mounting such a challenge. After the final rule was announced, acting Comptroller Keith Noreika sent a letter to CFPB Director Richard Cordray requesting data the CFPB used to develop the arbitration policy.
“The increased cost associated with litigation and the loss of arbitration as a viable alternative dispute resolution mechanism could adversely affect reserves, capital, liquidity, and reputations of banks and thrifts, particularly community and midsize institutions,” Noreika wrote.
Alan Kaplinsky and Mark Levin, attorneys at Ballard Spahr, on Thursday wrote that Noreika's letter "would appear to position the OCC as the most likely FSOC member agency to file a petition to set aside the CFPB’s final arbitration rule."
Yet Noreika's reaction has also been criticized, with consumer advocates and Cordray himself suggesting that the concerns raised by the acting comptroller, who has been in the job for just over two months, are not consistent with what the OCC's position was for most of the period leading up to the rule being written.
"Suggesting now that the rule would put the safety and soundness of the American banking system at risk is preposterous," said Brian Marshall, policy counsel at Americans for Financial Reform. “Many banks do not use forced-arbitration clauses at all, and the OCC has never suggested those institutions are not safe and sound as a result."
In a letter to Noreika on Wednesday, Cordray said that the interim OCC chief had essentially come late to the table, and that Noreika's request did not meet the statutory requirement of "working in good faith" with the CFPB to resolve any outstanding concerns.
"At no time during this 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 wrote. "Nor did you express any concerns to me when we have met or spoken. There is no basis for claiming that the arbitration rule puts the federal banking system at risk."
But even if an FSOC member files a petition, several other pieces would need to fall into place for the council to set aside the rule. The chair of the FSOC, in this case Treasury Secretary Steven Mnuchin, could then honor a request to stay the rule from taking effect for up to 90 days. It requires two-thirds of the council to vote in favor of blocking the rule, but the council faces a deadline of either 45 days from the petition or the expiration of the stay.
Kaplinsky and Levin calculated that at least two current Democratic appointees on the FSOC would need to be replaced with Republican appointees to garner the necessary votes.
A third option is for an industry trade group to try to get the courts to throw out the rule. The group said to be most likely considering such a move is the Chamber of Commerce.
“As we review the rule, we will consider every approach to address our concerns, and we encourage Congress to do the same — including exploring the Congressional Review Act," Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, and David Hirschmann, president and CEO of the U.S. Chamber Center for Capital Markets Competitiveness, said in a press release after the CFPB announced the final rule.
But observers said a lawsuit may pose its own problems since it is not clear a judge would stay the rule, meaning companies would still have to comply while a legal battle played out.
"A challenge of the rule by litigation is not a short-term fix," said Hesse, because the litigation could drag on while businesses would have to comply with the rule.