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, and while the credit union movement was often split on the issue, the national trade associations praised lawmakers for doing what they believe is best for credit unions.
“We’re grateful that the Senate and the House recognized that the CFPB's arbitration rule did not benefit credit unions members,” Credit Union National Association President/CEO Jim Nussle said in a statement. “This rule ignored the different size and member-ownership structure of credit unions and instead treated them as akin to abusive Wall Street banks. The CFPB's rule encourages credit union members to act against their own best-interest by engaging in costly class action litigation which depletes the resources of the membership as a whole and instead benefits trial lawyers most. This rule was just the latest example of the one-size-fits-all rulemaking coming from the CFPB and thankfully Congress acted to remedy the situation.”
The National Association of Federally-Insured Credit Unions was also quick to praise the move.
"NAFCU appreciates the Senate taking up this vote in a timely manner," said NAFCU President and CEO Dan Berger. "While NAFCU strongly supports consumer protections, credit unions should not have been included in this rulemaking as they are not the bad actors the rule is meant to target. Credit unions should also have access to various forms of dispute resolution, and this rule, as written, could have led to a rise in frivolous lawsuits."
But does it mean the regulatory tide has turned in financial institutions' favor? Ryan Donovan, chief advocacy officer at CUNA, didn't go quite that far, but he called the Senate’s decision “an important point in the history of the CFPB.”
“The lesson to be learned here is that if the rules aren’t tailored toward the abusers of consumers, there’s a chance that Congress is not going to allow them to go into effect,” he said. “Congress gave the CFPB very clear authority to exempt any class of entities from its rules, and we saw the CFPB do this pretty artfully in the payday lending proposal, which we’re very pleased with, but on arbitration they didn’t and that definitely didn’t fly with Congress.”
Others were more 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 and credit unions 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 and credit unions. 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.
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 victories," 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 Tuesday's 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.
More reforms to come?
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.
From the credit union standpoint, however, CUNA's Donovan noted that while high-profile legislative priorities such as health care and taxes haven't gone as the GOP has hoped, CUs have had a fairly strong year thus far, including not just victories with the CFPB's payday lending and arbitration rules, but passage of the CHOICE Act in the House, maintaining CDFI funding and more. The ongoing challenge, however, is convincing Congress "to bring about the type of structural changes to the CFB that will produce common sense regulations. Changing the structure from a director to a commission is absolutely critical. You need more voices at the decision-making table within the bureau; you need a structure that more thoroughly takes into account the impact of regulations on credit unions and consumer-friendly providers. That's something we've got to continue to encourage."
But Donovan was quick to note that it won't be a quick process.
"I don't expect Congress to change the stucture of the CFPB by the end of this year or probably even in this Congress," he said. "It's going to take time to work through. But...you've had Democrats and Republicans over the years support [changing the bureau's structure] and it's generally recognized as the place we're going to end up. It may just take some time to get there. There are a bunch of moving parts, and the president and Director Cordray do play a role, but questions about the structure really go beyond the individuals involved -- it's more a question of what's the best way for the CFPB to be structured in order to delver common sense regulation, and that rises above the level of any individual."
Don't get too excited yet
Jaret Seiberg, a financial services and housing policy analyst at Cowen Washington Research Group, cautioned against overreacting in the wake of the Senate's arbitration vote.
"This is not going to unleash the floodgates of deregulatory legislation for financials from Congress," Seiberg wrote in a research note Wednesday. "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."
Aaron Passman contributed to this report.