'New Democrats' Seek to Invalidate Stronger State Consumer ProtectionsOctober 14, 2009 - by Donny Shaw
The House is beginning to take up the White House’s proposal for a new consumer financial protection agency (H.R. 3126), but some of the strongest components of it have already been taken off the table. For instance, a White House plan to require banks to offer a “plain vanilla” version of any exotic, adjustable rate loans was scrapped before the legislation even began its first official stage in the legislative process — mark-up in the House Financial Services Committee.
As the mark-up gets under way (it started on Wednesday), the business-friendly New Democrats Coalition is looking to remove another White House-supported provision and weaken the bill even further.
The way it’s currently written, the bill would undo a series of Bush-era rules that bar individual states from enforcing their own consumer protection laws against national banks if they are tougher than the federal rules. The bill specifically states that the rules and regulations promulgated by the Consumer Financial Protection Agency would not pre-empt state laws to the extent that the state laws are tougher (as determined by the Agency). This proposal came directly from Treasury Secretary Timothy Geithner’s plan for regulatory reform, and President Obama expressed his strong support for it last week.
The New Democrats, lead by Rep. Melissa Bean [D, IL-8] (pictured), are pushing a banking industry-supported amendment to change the bill so that the federal rules would pre-empt state rules. “Allowing states to add additional standards will force national banks to comply with potentially 50 different sets of licensing requirements and 50 different sets of disclosure standards,” Bean and her New Dem colleagues wrote in a letter to the other members of the Committee. “Not only will this increase costs to the consumer and affect the portability of financial products across state lines, it will also undermine the call for creating the CFPA in the first place by questioning its ability to effectively establish robust universal consumer protections as its top priority.”
Not everyone shares that idealistic view of federal banking regulations. The amendment would essentially centralize the consumer protections that are enforced against banks, which, as Ryan Grim at the Huffington Post notes, would make the banks’ efforts to weaken the regulations against them a lot simpler. “All banks would need to do, then, is water down regulation at the top, rather than in each state legislature.”
Lisa Madigan, Illinois’ Attorney General, wrote a letter to Rep. Bean on Wednesday arguing against the amendment and urging her and the rest of the Illinois Congressional delegation to “put the interests of our consumers before those of the banks”:
Federal regulators have maintained that national banks did not play a significant role in precipitating the crisis. That claim does not comport with the facts. The Center for Public Integrity found that 21 of the 25 largest subprime lenders during the lead-up to the crisis were financed by large banks….In contrast, in the run-up to the current crisis, many state attorneys general (including my Office) aggressively prosecuted the bad actors in the industry within our reach….
Federal laws have frequently stymied state reform efforts. These laws preempted states from regulating certain risky loan terms and features, such as prepayment penalties and negative amortization, regardless of whether a state-chartered or federally licensed entity makes the loan. It was precisely these types of features that led to widespread abuses….State attorneys general saw abuses of the prepayment penalties, which often locked borrowers into unaffordable subprime mortgages. Yet federal preemption barred states from enacting tougher laws to address these abuses, even as applied to those entities that we regulate.
National banks and thrifts claim that allowing states to enact tougher laws when necessary – as the CFPA Act would – will result in too great a burden on the system. That argument is disingenuous. Many of these lenders are multi-national companies that currently have to comply with a vast array of varying rules both inside and outside our nation’s borders. In fact, as demonstrated by the swollen docket of our nation’s foreclosure courts, national banks seem to have no problem complying with the varying state and local laws governing the foreclosure process.
Bean’s amendment could come up for a vote in the committee as early as today.
For more general information about the proposal for a Consumer Financial Protection Agency, see this post at this link.