Senate Democrats Make Misguided Push To Give National Banks Immunity From State Law

When the House of Representatives was debating its financial regulatory reform bill last year, one of the more contentious aspects was to what extent, if any, the bill would preempt state consumer protection laws. Despite a push from the bank-friendly New Democrats, the House bill does not preempt state law, but instead allows states to put in place protections that are stronger than those at the federal level. It forces regulators to examine and preempt state law on a case-by-case basis.

This is an incredibly important distinction. During the buildup of the housing bubble, several states attempted to police predatory subprime lending. However, they were repeatedly preempted by federal bank regulators. In one instance, state regulators in Illinois tried to go after a subprime lending subsidiary of Wells Fargo, but “the company quickly reshuffled its legal paperwork and moved the offending sub-company under its nationally chartered bank,” exempting it from Illinois law.

Sen. Chris Dodd’s (D-CT) financial reform bill, which is currently being debated, adheres to the standard set by the House bill, rolling back preemption and ensuring that states can enforce their own laws. However, a group of “centrist” Democrats — led by Sen. Tom Carper (D-DE) — has offered an amendment giving national banks permanent immunity from state consumer protections.

The history of the economic crisis shows that this would be a big mistake. And in case Carper’s group — which also includes Sens. Mark Warner (D-VA), Tim Johnson (D-SD), Evan Bayh (D-IN), Bob Corker (R-TN), and John Ensign (R-NV) — needs more evidence, it can look at these two studies from the University of North Carolina’s Center for Community Capital

The first found that the presence of an anti-predatory lending laws (APLs) can “reduce the foreclosure rate up to 18 percent.” The second study, meanwhile, looked at states which had laws preempted, finding that “preemption resulted both in deterioration in the quality of and in the increased default risk for mortgages”:

More narrowly, [the results] show that OCC-preempted lenders increased their share of loans originated with risky subprime characteristics. Similarly, they show that loans originated by OCC-preempted lenders were more likely to default in APL states after the OCC preemption. Finally, the results show that in the refinance market the increase in default risk among OCC lenders often outpaced that of independent mortgage companies that remained subject to stronger APLs after 2004.

“Our research confirms that state consumer protection laws work, but that when one group of lenders is handed a regulatory free pass, they are going to take advantage of it,” said Roberto Quercia, the Center for Community Capital’s Director.

Proponents of preemption like to claim that ditching it will do away with 150 years of tradition in U.S. law. But even that claim is wildly inaccurate, as the Conference of State Bank Supervisors (CSBS) has pointed out. “In truth, the Dodd bill’s preemption provisions would instead roll back the abusive preemptive policies first implemented by the OCC in 2003,” the CSBS said. “The actions taken by the OCC since 2003 have enabled our biggest financial institutions to evade accountability at the local level. This is unacceptable and moves our nation closer to a dangerous financial oligopoly. That is clearly not an American tradition.”