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Should Federal Regulations be a Floor or a Ceiling?

December 11, 2009 - by Donny Shaw

The House today is expected to vote on and pass the Democrats’ comprehensive financial regulations overhaul bill (H.R. 4173). But before they do, they’ll likely approve an amendment from the pro-business New Democrats Coalition to pre-empt tougher state laws. Congressional Democrats and the Obama Administration have been fighting against this for months.

Victoria McGrane at Politico reports:

The coalition of moderate Democrats, with an assist from the fiscally conservative Blue Dog Coalition, held up consideration of a crucial Wall Street reform bill for several hours Wednesday to protest the way Democratic leadership and the Obama administration’s treated some of their proposals.

By 6:30 p.m., the moderates had won significant concessions from top Treasury officials on a contentious consumer protection issue.

“The New Dems had concerns [about] a number of the amendments that we wanted to see either made in order or some of the language included in the manager’s amendment. And we’re satisfied that we came to a good place on this,” Rep. Melissa Bean (D-Ill.), a leading member of the New Democrats group and a member of the House Financial Services Committee, said upon emerging from House Speaker Nancy Pelosi’s office Wednesday night.

Specifically, the moderates hammered out a compromise on the issue of whether national banks should be subject to tougher state consumer protection laws. House Financial Services Chairman Barney Frank (D-Mass.) had promised Bean a vote on her amendment to shield national banks from state rules – a situation known as pre-emption, since the federal rules set by the new consumer watchdog would pre-empt those made by the individual states.

With the help of Republicans, the “moderate and pro-growth” New Dems, which have 68 House members, will almost certainly have the votes to pass their amendment on the floor today, over the objections of most Democrats.

Real quick, here’s what this is all about: The Democrats’ bill spells out a number of regulatory guidelines and consumer protections at the federal level. Individual states also have their own guidelines and protections. The question is whether the federal rules should be used as a floor from which stronger regulations can be built up from, or a ceiling to protect businesses from states whose laws would go above and beyond the federal rules.

Bean’s amendment would have the bill pre-empt states from being allowed to enforce their tougher rules. It would even have the effect of rolling back the states’ existing authority to enforce their own consumer financial protection laws in many cases.

Most Democrats and the Obama Administration want the proposed federal rules in the bill to be treated as a floor with individual states allowed to enforce their own more restrictive regulations and protections. There are several reasons why. States know their economic needs better than the federal government. A centralized regulatory framework is easier for financial companies to lobby against and fight to dismantle. State laws are much easier for consumer activists to fight to strengthen than are federal laws. States with stronger restrictions against things like predatory lending and subprime mortgages have suffered less during the economic crisis. Et cetera.

The New Dem argument against states enforcing their own 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,” Chairwoman Rep. Melissa Bean [D, IL-8] wrote in a letter to the House Financial Services Committee.

UPDATE: The amendment was rolled into the manager’s amendment and adopted to the bill.

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