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OCC-CFPB spat takes interagency discord to new level

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Bank regulators, for the most part, avoid the public spats that define other realms of the polarized Washington landscape. They will often disagree on policy, but their differences are hashed out behind closed doors.

That is, except if you are acting Comptroller of the Currency Keith Noreika and Consumer Financial Protection Bureau Director Richard Cordray.

The dispute between the two agency heads related to use of mandatory arbitration clauses — punctuated by competing op-eds about the CFPB's recent arbitration rule — has become a personal and political fight that observers say is highly unusual between bank regulators.

"It's very rare to see this kind of bare-knuckles politics," said Greg Hesse, a partner at Hunton & Williams. "I cannot recall a similar situation in which you had two regulators going back and forth quite like this."

The tug of war pits Noreika, a Trump administration appointee and former private banking attorney seen as more industry-friendly, against an Obama administration holdover — the first head of the post-crisis consumer bureau that is the target of relentless GOP attacks.

Both regulators have become polarizing in their own right. Since President Trump took office, many have speculated about the administration's desire to fire Cordray, a former Democratic attorney general who is rumored to want to resign to run for Ohio governor.

Noreika, meanwhile, has been caught up in controversy as well. On Tuesday, six Democratic senators asked the Treasury Department's watchdog to investigate his appointment to run the Office of the Comptroller of the Currency as a so-called "special government employee," which allowed him to avoid Senate confirmation but limited his service at the OCC to 130 days. (Joseph Otting's nomination as permanent OCC chief is still pending.)

Some lawmakers say Noreika should have ended his tenure at the OCC on Sept. 12 given that his special status allowed him to sidestep the Senate vetting process and avoid ethics requirements.

Noreika's feud with Cordray is not the only time the acting comptroller has taken another agency to task. Earlier this year, he called out the Federal Deposit Insurance Corp., accusing the agency of slowing down the de novo chartering process, and suggested that the FDIC have a more limited role in approving new banks.

But the acting comptroller's battle with the CFPB over the arbitration rule — which congressional Republicans have sought to overturn through the Congressional Review Act — has been more visible and protracted.

The tiff dates back to soon after the CFPB's release of the final arbitration rule, which prohibits clauses in consumer contracts designed to avert class actions. In July, Noreika started a letter chain with Cordray in which he requested data that the bureau used in crafting the rule and asked that its publication be delayed due to safety and soundness concerns. In response, Cordray argued that Noreika's claims were baseless.

More recently, Noreika urged senators last week, in an op-ed in the Hill newspaper, to repeal the arbitration rule. He criticized Cordray for failing to disclose that the rule could spark higher consumer credit costs and that small banks could be impacted by having to defend themselves against more class-action lawsuits.

But Cordray fanned the flames with a rebuttal to Noreika's op-ed in which he belittled a review by economists at the OCC, calling the analysis a "gratuitous attempt to undermine the evidence" supporting the arbitration rule. He wrote that Noreika's claim that the arbitration rule would cause a 3.5% increase in credit card rates was "bogus" and "flunks basic economics."

Joann Needleman, an attorney at Clark Hill, said the “level of back-and-forth” between the two agency heads was “unusual.”

She also noted that the OCC’s criticism of the rule was a new course for the agency that Noreika spearheaded. Before he became acting comptroller in May, the OCC had not objected to the CFPB’s arbitration policy.

"Nobody thought the OCC was going to come into this fray — nobody," Needleman said. "Noreika is coming in at halftime here and he hasn't had his hands wrapped around this issue as long as the CFPB has.”

Yet she also sees the tiff as a natural result of the Trump administration steadily putting its own people in place at agencies.

"It's a slow progression of Trump getting his people in there and doing what he wants to do with these agencies, which is his prerogative," she said.

Some observers said the regulators' open back-and-forth could confuse the public about the true substance and impact of the rule.

"It is an open question about how this all should be hashed out and whether it's healthy to have it hashed out in op-eds in the Hill," said John Campbell, the Morton L. and Carole S. Olshan professor of economics at Harvard University, who is also a member of the CFPB's advisory board. "These technical arguments shouldn't be done in the press because people are not going to be able to understand the issues."

Noreika's latest salvo came Tuesday in a letter to congressional leaders in which he alleged that the CFPB was using "secret data" to justify the arbitration rule. He threatened to publicly release the CFPB's confidential supervisory data to allow others to assess the rule's impact on consumers.

"Ensuring that rules and regulations are not based on secret data available only to the government will ensure that agencies do not behave in arbitrary and capricious ways," Noreika wrote to Sen. Mike Crapo, the chairman of the Senate Banking Committee, and ranking member Sen. Sherrod Brown, D-Ohio.

In the letter, he disputed a CFPB statistic that more than 90% of community banks and credit unions studied by the bureau do not use arbitration clauses for checking account contracts. Noreika charged that "no one outside the CFPB knows how many community banks and credit unions the CFPB studied, or any other information it relied on to draw these conclusions and so these statistics become meaningless."

"In fact, I hear time and again from community banks that the arbitration rule could threaten their very existence," he wrote.

Some see the political brouhaha as just the latest chapter in a decades-long battle waged by banks to reduce litigation costs. Financial firms have successfully reduced consumer litigation by the use of mandatory arbitration clauses.

"Class actions are something that impairs the health of banks and there's an ongoing debate about whether class actions are good or bad for consumers," said Scott Pearson, a lawyer at Ballard Spahr. "The CFPB's own study shows that class actions are good for class-action lawyers and they increase costs for banks."

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