The compromise reached late Wednesday between pro-reform House Democrats and the banker-friendly wing of the party could significantly weaken consumer protection in states where lawmakers support tougher rules against tactics such as predatory lending and excessive ATM fees than historically submissive federal regulators.
Melissa Bean of Illinois and her fellow members of the New Democrat Coalition -- who have collectively accepted massive amounts of money from the financial services industry since 2008 -- temporarily blocked the landmark financial regulatory reform bill from hitting the House floor on Wednesday.
At issue was whether federal regulations should be a floor or a ceiling for consumer protection in the states, particularly as they affect big national banks like JPMorgan Chase, Citibank, Bank of America and Wells Fargo.
The Obama administration, Financial Services Committee Chairman Barney Frank, state attorneys general and a coalition of consumer advocates and law professors want states to be able to enforce tougher consumer financial protections.
The big banks, obviously, want federal regulations -- which they have found relatively easy to influence -- to preempt any more onerous state rules for banks operating in more than one state.
Working on behalf of the big banks, the New Dems were able to extract a compromise that will allow federal regulations to preempt state laws on a case-by-case basis.
State regulators have extracted billions of dollars from predatory lenders over the past decade through fines and court settlements, and state legislatures adopted strong anti-predatory lending measures years before Congress. Federal regulators were largely absent from the fight to protect consumers or acted too late, consumer advocates argue.
Federal preemption of state laws is not a new concept -- particularly in banking. It accelerated in 2004 when the federal regulator of national banks, the Office of the Comptroller of the Currency (OCC), issued a sweeping interpretation of the law in which the agency determined that national banks did not have to comply with state laws purporting to regulate their practices -- laws like anti-predatory lending measures -- to the delight of big national banks.
"The Comptroller of the Currency, for example, behaved much like a banking lobby embedded in the Treasury Department," USA Today observed in an editorial published Monday.
As part of the new deal, Frank will incorporate preemption-friendly language from Bean into his amendment to financial overhaul legislation. The deal slightly dials back the OCC's broad preemption authority, a House aide said late Wednesday. Per the compromise, the agency would have to preempt laws on a case-by-case basis.
The effects could be wide-ranging. If the OCC preempts a law and determines that it applies to a particular category of laws, that single preemption determination would then apply to all similar measures in the future. Also, the OCC would have the authority to preempt state laws that "materially impair" a national bank's operations. Capping ATM fees, for instance, could fall into this category as it would have a material impact on a bank's profits.
Because of the compromise, national banks may still be able to completely avoid stronger state consumer protection measures. State regulators could be unable to regulate the $1.5 trillion in home mortgages held on the balance sheets of national banks, for example -- a total more than double that held by state banks, according to a Huffington Post analysis of federal banking data. They also could have no say about the nearly $295 billion in credit card loans held by national banks, nearly five times as much held by state banks.
And it's not as if national banks are better at what they do. Eleven percent of home mortgages held by national banks are delinquent, according to HuffPost's analysis. That's more than double the rate at state banks. Also, seven percent of national banks' credit card loans are delinquent, compared to just five percent at state banks. Between home mortgages and credit cards, national banks are holding $188 billion in delinquent loans; state banks have less than a fifth of that.
Part of the argument for preemption is that it sets standard rules for everyone to follow. Rather than allowing for a hodgepodge of 52 sets of rules (50 states, federal law and Washington, D.C.), national banks only would have to abide by a single standard. This is what formed the basis for the creation of a national banking system in the mid-1800s -- uniform banking laws and a uniform currency all subject to federal law. As an added bonus, complying with just one set of rules leads to a decrease in banks' costs which could then be passed onto consumers.
But consumer advocates argue that preemption stifles innovative state lawmaking aimed at protecting consumers. When the OCC, for instance, exempts national banks from laws that still apply to state-chartered banks, that puts the state banks at a disadvantage -- something state legislatures generally try to avoid.
If the OCC could be trusted, argued John Ryan, executive vice president of the Conference of State Bank Supervisors, then perhaps this compromise wouldn't be so alarming. But given the OCC's history of aggressive preemption of state consumer protection measures, he said, the compromise is really no compromise at all -- the big banks could still be given free reign.
"It's the problem of the last decade," he said.