We have discussed how the presidential election and pending PHH case might affect Richard Cordray’s role as CFPB Director. Questions also exist regarding the Bureau’s rulemaking agenda which will undoubtedly be affected by the change of administration and potential changes to CFPB leadership.
Earlier this month, the Bureau issued its Fall 2016 rulemaking agenda. Keep in mind, the agenda states that the information is current as of October 19, 2016. That means that while the agenda was released post-election, the Bureau finalized the agenda before the presidential election in November. It stands to reason that the surprise results of that election could alter the Bureau’s timeline. There is, however, also the possibility that the Bureau proceeds as planned (or maybe even acts more aggressively) as it waits for the Trump administration to announce its plans for the CFPB.
In any event, we believe that there are multiple ways that GOP policymakers and the consumer finance industry can challenge, postpone, and ultimately prevent the CFPB arbitration rule from taking effect.
To begin, president-elect Trump could attempt to oust CFPB Director Richard Cordray from his position. The president does not currently have the authority to remove the CFPB director at will, and an attempt to remove Director Cordray for cause would probably prove to be a challenging and time-consuming process. We don’t expect that Cordray would leave his position voluntarily so a highly contested legal battle would likely ensue. While this approach may not be a particularly effective or efficient way to remove Cordray, it could be enough of a distraction to postpone the rule.
On the other hand, Cordray could elect to pursue other political aspirations, such as running for Ohio governor in 2018, and step down from his position without a long, drawn-out battle. In that case, a Trump-appointed CFPB director would could postpone or amend the rulemaking. This option requires president-elect Trump to act quickly, because the best chance to stop the rule would be to appoint a new director before the CFPB arbitration rule is finalized. Amending or rescinding the rule after it has been finalized becomes much more difficult.
Another option is for Congress to intervene by stopping a final rule from taking effect by overruling the new regulation in accordance with the Congressional Review Act. Under the Congressional Review Act, Congress has 60 days to overrule any new federal regulations issued by government agencies. A final CFPB arbitration rule or any other final rules issued by the CFPB after May 2016 would be subject to the CRA, and could be nullified if the House and Senate pass a joint resolution disapproving the new rule and the president signs it.
Another possibility is that the industry launches a lawsuit challenging the rule. The focus on an industry attack would likely be the 728-page arbitration study that the Bureau completed as mandated by Section 1028 of the Dodd-Frank Act. That study forms the basis for the Bureau’s rulemaking. The Bureau’s study concluded that arbitration agreements are overwhelmingly detrimental to consumers, but a closer look at the study reveals that arbitration is actually faster and more economical than class action litigation and provided consumers more meaningful monetary relief on average. The industry’s lawsuit could allege that the CFPB’s study reach the wrong conclusion and that the CFPB’s rule is arbitrary and capricious.
While the Bureau announced that it expects to issue its arbitration rule by February 2017, it is possible that the CFPB releases the rule before Trump is inaugurated on January 20. As we mentioned earlier, by issuing a final rule the CFPB can make it more difficult for Trump and the GOP to overturn the rulemaking, but it could also expose the Bureau to criticism that it rushed through the process in order to put the rule in place before Trump took office.
According to the Bureau’s proposal that it issued in May 2016, the proposed regulations would only apply to arbitration agreements entered into after the end of the 180-day period that begins on the rule’s effective date. The Bureau is proposing an effective date of 30 days following publication of the final rule in the Federal Register. Thus, the proposed regulations would not apply to arbitration agreements entered into before 210 days after a final rule is published in the Federal Register.
That should give the industry sufficient time to initiate a legal challenge and for Congress to adopt a legislative solution.
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