On Thursday December 10, 2009, in the dark of night in Washington D.C., the U.S. House of Representatives was overcome with amnesia. They acted as though the financial crisis that has gripped this nation for the past two and half years never happened. The worst financial crisis since the Great Depression, followed by a showering of billions of tax payer dollars to bailout the financial industry, was but a fevered dream. That is the only conclusion that one can draw when viewing the amendments to H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009.
I live in California and, as a lawmaker, believe we should be able to legislate more consumer protection for our residents if the situation demands it. We shouldn't have to depend on what someone from some other state thinks is good enough. But these amendments, sponsored by Representative Melissa Bean (D-Ill), would deny California residents appropriate shelter from the financial industry storm. And in an example of "no good deed goes unpunished," bankers, who asked for the amendments, and spent over $300 million fighting against the bill, are still unhappy.
I don't want the Office of the Comptroller of Currency (OCC) to have the power to gut California consumer protection laws. But that's exactly what the amendments would do. The OCC could do it under the guise of the federal preemption doctrine. Preemption of state laws could occur via a letter or administrative ruling, and could apply, at the OCC's discretion, to multiple laws across multiple states, amounting to a blanket prohibition on consumer protection laws of a specific type.
Furthermore, courts would be required to give deference to these letters when ruling on preemption issues. Additionally, these amendments would diminish the ability of state attorneys general to compel national banks to produce records as part of an investigation. This effectively reverses the recent Cuomo v. Clearing House Assn., L. L. C. (No. 08-453) 510 F. 3d 105 Supreme Court decision in which the Court found that the OCC overreached in its determination that a law enforcement investigation by the New York Attorney General was preempted by federal law because the subject of the investigation was a national bank.
For decades, Federal regulators have turned a blind eye to the perverseness of predatory mortgages, usurious credit card rates, obscure fees and charges plaguing consumer transactions, and the explosion of exotic Wall Street financing schemes.
These amendments not only return us to the status quo, but push us further away from the goal of consumer protection. They have the affect of allowing national banks to pick and choose which state laws they are going to follow and grant an inappropriate amount of power into the hands of the OCC, an agency that has a proven track record of preempting strong consumer protection laws. The OCC's responsibility is not concentrated on consumer protection, but on the safety and soundness of financial institutions.
California has suffered disproportionately in this mortgage crisis, ranking in the top three among states with the highest foreclosure rates. Unfortunately, California provided a ripe market for financial institutions and state regulated mortgage brokers to fleece consumers.
Long before this crisis erupted, the State Legislature attempted to pass strong regulations (as early as 2001) to close the loophole on unmitigated subprime lending. At each step, national banks fought these proposals, and claimed that such actions would substantially interfere with their business. Additionally, their state-regulated colleagues claimed that if laws did not apply equally to both types of institutions this would place them at a competitive disadvantage. Proposed consumer protection laws in California that addressed mortgage lending required such novel approaches as requiring that a borrower actually had the ability to repay their loan, and that lenders and brokers should not be allowed to steer borrowers into higher priced mortgages when they otherwise could qualify for a prime rate loan. We must also be mindful that the largest financial institutions in the country are national banks that rely on, and benefit from, a large state like California. Their assertion that strong state consumer protection laws will put them at a disadvantage is one of the greatest fallacies perpetrated in the financial industry. California is a market they cannot ignore.
Contrary to the accepted logic, national banks contributed to the subprime mortgage crisis through their affiliates and lines of credit offered to mortgage brokers. Their hands are not clean in this economic downturn. However, the amendments to H.R. 4173 read as if this crisis never happened. The status quo failed our state and failed this nation, and now we are faced with legislation that could actually make things worse. Federal preemption of reasonable state laws to protect consumers has cost California families their jobs, neighborhoods and dreams.
Real reform of the financial industry will not happen until we see legislation that acknowledges the role that states have in regulating banking activity. States need to be allowed to establish consumer protection laws that may be stronger than federal law and apply across-the-board to both state and federally regulated entities.