Last week, House Financial Services Chairman Barney Frank released a scaled-back proposal for creating a new Consumer Financial Protection Agency (CFPA), which was reportedly meant to address the concerns of some Democrats on the committee. Among other changes, the bill will no longer mandate that financial firms offer consumer “plain vanilla” products before moving on to more complex products.
While the changes may have been necessary to win support on the committee, the financial services industry now sees an opening, and is “turning up the pressure on moderate Democrats on the panel to push for more concessions.” And as The Hill reported today, “lobbyists are tailoring their efforts to rewrite specific provisions in the bill,” particularly that giving states the right to impose regulations that are stricter than the national standard set by the CFPA:
The financial industry believes that will create a patchwork quilt of different state regulations that increases the cost to firms. Those costs might then be passed on to consumers. “What’s going to happen to a customer who moves from one part of the metro area of D.C. to another? Will they have different rules just depending on geography?” said Tracey Mills, spokeswoman for the Consumer Bankers Association.
Roll Call reported that “industry groups are largely relying on the 15 members of the New Democrat Coalition to carry their water to ensure that federal pre-emption remains part of the package.” Rep. Melissa Bean (D-IL) is reportedly working on a preemption amendment that could be offered in committee.
As I’ve pointed out before, preemption is a failed policy choice that contributed to the housing bubble by preventing states from going after national banks engaged in predatory subprime lending. That this lesson has been forgotten so quickly is a testament to the financial services industry’s influence over the regulatory reform debate.
As for the Consumer Bankers Association’s (CBA) specific question regarding whether rules will differ “depending on geography,” the short answer is “yes, they will.” But that’s not the huge worry that CBA makes it out to be. After all, differing state regulations in terms of health insurance requirements have not eviscerated the health insurance industry. And a consumer moving within the Metro DC area (from Virginia to Maryland, maybe?) will presumably not bring his mortgage with him, rendering this concern over different terms overblown.
In the past, Democrats have viewed preemption as a “compromise” to be made with the industry, and the classic example of this is the Employee Retirement Income Security Act of 1974 (ERISA). After a media exposé revealed that many Americans’ pension funds were disasterously mismanaged, Congress enacted ERISA to protect employee health and retirement benefits. But thanks to a preemption provision and a Supreme Court decision gutting the federal remedy that Congress intended to replace state law, ERISA became a boon for corporations looking to avoid state regulations. As the late Justice Byron White put it, ERISA resulted in the “perverse anomaly of leaving those Congress set out to protect with less protection than they enjoyed before ERISA was enacted.”
“Preemption doctrine often serves business interests at the expense of taxpayers…and also should offend lovers of local democracy,” wrote Tim Fernholz. “Why should the feds limit your ability to make rules?” And as long as the CFPA sets a strong minimum level of regulation, there will be no worries about a race to the bottom, in terms of states trying to coax business to their state by eliminating regulations. So hopefully, Frank will stand tall against the push to include preemption in the final regulatory reform package.