Banking Regulators Engage in Unusually Public Spat

By Chris Bruce

An unusually public dust-up between two bank regulators may be just the start of a running debate over regulatory policy as the Trump administration puts its stamp on the federal bank regulatory agencies.

Sharp disagreement between Consumer Financial Protection Bureau Director Richard Cordray and acting Comptroller of the Currency Keith Noreika escalated after Cordray July 10 issued a rule barring the use of mandatory arbitration contract clauses to block class actions by consumers.

Noreika wrote Cordray July 10 to voice concern about the “potentially ruinous liability” the CFPB’s rule could have on banks due to increased litigation costs. The OCC acting director also suggested a joint approach to the rule that he said would help avoid safety and soundness concerns. That sparked a July 12 response by Cordray, who said he was surprised to receive Noreika’s letter because the OCC hadn’t voiced any previous concerns about the regulation during more than two years of development. Cordray said there was “no basis” for Norieka’s claims and that CFPB staff could brief the OCC on the rule.

The latest volley came July 17 when Noreika replied with a letter asking Cordray to delay the rule and to turn over the data used by the CFPB in crafting the regulation. “I appreciate you giving me your reassurances that the Final Rule does not have any safety and soundness impact on the federal banking system,” the OCC chief wrote. “As you know, the CFPB is, by design, not a safety and soundness prudential regulator.”

This is far from the first time banking regulators have disagreed, although the spat stands out because it’s so public, according to Karen Shaw Petrou, co-founder and managing partner of Federal Financial Analytics, Inc., a Washington, D.C., company that advises financial services companies, central banks, and others.

“Typically, these kinds of battles are waged behind closed doors or in a manner that’s not directly confrontational, often through proxies or in statements to Congress,” Shaw Petrou told Bloomberg BNA.

The Cordray-Noreika exchange may be a sign of things to come, according to Daniel P. Stipano, a partner with Buckley Sandler in Washington who served the Office of the Comptroller of the Currency as deputy chief counsel for 16 of his 30 years at the agency.

More than anything, he said, the exchange highlights the difference in perspective between a bank regulator appointed by the Obama administration and one appointed by the Trump administration. That same dynamic may continue to play out as other seats are filled, Stipano told Bloomberg BNA July 14.

“As more appointments to the agencies are filled, collectively these new appointees are going to have a different perspective on safety and soundness and consumer protection issues than their predecessors did,” Stipano said. “Once the new team is in place, there will be a real shift in direction among the agencies, and this is the start of it.”

It’s Happened Before

The skirmish between the two regulators, while creating a extra level of buzz over the already controversial arbitration initiative, isn’t the first time agency heads have squared off in public, according to Shaw Petrou.

Among other such disputes, Petrou cited John D. Hawke Jr., who headed the OCC from 1998 to 2004 and who frequently battled other regulators on fees and assessments leveled on national banks.

More recently, Federal Deposit Insurance Corp. Vice Chairman Thomas M. Hoenig has had plenty of high-profile disagreements with other regulators, including the Federal Reserve, on his plan to replace risk-weighted capital requirements and other measures with a leverage ratio of at least 10 percent.

“You often see it in comment letters but also in testimony and speeches,” Oliver Ireland, a partner at Morrison & Foerster, told Bloomberg BNA in an email.

Factors at Play

Benjamin K. Olson, another Buckley Sandler partner, said timing and other factors play a role. Olson, former Deputy Assistant Director for the Office of Regulations at the CFPB, said that although such public disagreements don’t often happen, Noreika’s letter isn’t unusual given his new role, his still-recent tenure at the OCC, and the mission of the agency itself.

“The acting Comptroller came in at the end of this process,” Olson said. “He’s only been in the role for two months, so this is the first time he has had the opportunity to raise these questions. It’s neither shocking nor unprecedented that the head of a prudential banking regulator is raising concerns about safety and soundness in relation to a consumer protection rule.”

Senate Banking Testimony

One month before he wrote Cordray, Noreika told the Senate Banking Committee that banks with more than $10 billion in assets should be supervised by their safety and soundness regulator—rather than the CFPB—for compliance with consumer protection laws.

Noreika issued a sweeping list of recommendations to streamline oversight in a way that shifts some duties to the OCC. Noreika argued in his testimony that the various banking regulators too often overlap, stunting economic growth by making duplicative and contradictory requests to lenders.

Brian Simmonds Marshall, policy counsel for Americans for Financial Reform, said it seems like Noreika’s “really adopting a lot of the industry agenda to take on the consumer bureau and seek to undermine the powers that Congress gave it.”

“You can see it in a few different areas,” he added. “You saw it a lot, I think, in his Senate testimony, where you can go down the line and say where there are various areas where he thinks the CFPB and really, honestly, the FDIC and the Fed should all be doing less and that the OCC should have the opportunity to unilaterally deregulate.”

Marshall said this is not something where the OCC has taken a longstanding position or is related to the institutional interest of the agency. “It seems to be just one head of agency’s views being thrown in at the last minute trying to overturn—or suggest he thinks he might try to overturn—the CFPB decision,” Marshall said.

FSOC Process

In his letter to Cordray on arbitration, Noreika expressed “safety and soundness concerns” given the requirements of Section 1023 of Dodd-Frank.

Section 1023 authorizes the Financial Stability Oversight Council to set aside any final rule issued by the CFPB if the council decides the rule would endanger the stability of the U.S. financial system.

Asked about the viability of a challenge to the CFPB rule, Marshall said there is “no chance” the OCC or the other agencies can make the showing required under the statute, which is that the rule would place the safety and soundness of the U.S. banking system at risk.

“The OCC has never taken the position that a bank must use an arbitration clause in order to make it safe and sound,” Marshall said. “The idea they could defend in court that they in fact believe this rule would create a systemic risk to the financial system is preposterous.”

And the challenge would be subject to judicial review, Marshall said. “They can’t simply vote and that’s the end of it,” he said, adding any affected party would be able to sue under the Administrative Procedures Act.

Isaac Boltansky, an analyst for Compass Point Research & Trading, said it’s possible but not probable the FSOC acts to reverse the arbitration rule.

“The FSOC mechanism is real, but untested,” he told Bloomberg BNA. “The clearest path to reversing the arbitration rule remains a congressional CRA push,” he said, citing the Congressional Review Act.

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To contact the editor responsible for this story: Michael Ferullo at

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