As it moves through Congress, the proposal to create a new agency has come under assault from the financial services industry, Republicans in Congress, and existing bank regulators trying to protect their turf. The proposal has already been scaled back in the House, and will no longer mandate that financial firms offer customers a “plain vanilla” version of a product, before moving on to more complicated and expensive ones.
But a second troubling development is underway — led by the so-called New Democrats — which would continue the practice of allowing nationally chartered banks (like Bank of America or Wells Fargo) to ignore state regulations that are stronger than federal regulations:
Democrats are split over whether the proposal should allow states to trump federal regulations and enforce their own, often tougher consumer rules against national banks, such as Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. This would permit states to bar certain fees and late charges otherwise allowed by federal regulators…Rep. Melissa Bean (D., Ill.) is preparing an amendment that would prevent states from enforcing tougher standards against national banks than the federal entity’s.
This is a monumentally misguided effort on the part of the New Dems. “The system that is being proposed by the New Dems is the system we have now. That’s the system that failed,” said Ed Mierzwinski, consumer program director for U.S. PIRG.
Indeed, we’ve already seen the wreckage that preempting state law can cause. Under the Bush administration, bank regulators repeatedly exempted national banks from state laws aimed at reeling in subprime lending. And according to a new study from the University of North Carolina’s Center for Community Capital, those preempted anti-predatory lending laws (APLs) could have made a huge difference in mitigating the subprime crisis:
[W]e observe a lower default rate for neighborhoods in APL states, in states requiring verification of borrowers’ repayment ability, in states with broader coverage of subprime loans with high points and fees, and in states with more restrictive regulation on prepayment penalties. We believe that these findings are remarkable, since they suggest an important and yet unexplored link between APLs and foreclosures.
The New Dems’ proposition would bake-in an exemption for the national banks, meaning that those banks could focus all of their effort on weakening regulation in Washington, and the states would be powerless to do anything about it. In a briefing with bloggers today, Austan Goolsbee of the Council of Economic Advisers emphasized that the Obama administration “did not call for national preemption,” and said that states with “a particular reason” for providing additional protections for their consumers should be allowed to do so.
Read more about the case for a consumer protection agency in today’s Progress Report.