State attorneys general vie for stronger consumer protection role

By Brady Dennis
Washington Post Staff Writer
Monday, March 15, 2010; A13

In the fight over how to overhaul the nation's financial regulatory system, one of the key power struggles has pitted the states -- in particular a core group of state attorneys general -- against federal regulators, financial lobbyists and some members of Congress.

The dispute boils down to a central question: Should national banks continue to be exempt from state consumer protection laws, or should state officials be allowed to exceed federal standards?

The Obama administration has pushed for the latter, arguing in a blueprint last year that federal rules should "serve as a floor, not a ceiling" and that "states should have the ability to adopt and enforce stricter laws for institutions of all types." Rep. Barney Frank (D-Mass.) pursued that same policy but had to scale back his efforts to successfully shepherd a bill through the House. The House bill passed in December would create a consumer financial protection agency and establish oversight of derivatives, among other measures.

In recent weeks, Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate banking committee, appeared willing to leave in place federal regulators' ability to preempt nearly all state consumer protection laws for national banks.

"Federal preemption would stay in place just like it is right now," Sen. Bob Corker (R-Tenn.), who negotiated details of the bill with Dodd for weeks, said Thursday in describing their agreement.

While it remains unclear exactly where Dodd will come down on the issue when he releases an updated version of his bill Monday, the topic looms as a major sticking point, both for consumer advocates and financial industry representatives.

Meanwhile, state officials and federal regulators have continued to battle over turf. For instance, the Office of the Comptroller of the Currency has asserted that it alone has authority to police banks with national charters. While the banking industry pushes for an efficient set of national rules, consumer advocates have savaged federal regulators for their failure to protect consumers, arguing that preemption contributed to the financial crisis by hampering state regulators.

Few people have been more outspoken in their criticism than a handful of attorneys general, including Tom Miller of Iowa, Lisa Madigan of Illinois and Roy Cooper of North Carolina.

"Let's just debunk the myth that federal regulators did anything, because they didn't," Madigan said in an interview. "They've got a dismal track record."

The attorneys general have logged thousands of miles over the past year to lobby lawmakers on the issue, testify before both houses of Congress and appear as "special guests" of President Obama at a White House speech aimed at bolstering consumer protections. They have made their case in letters, speeches and national conference calls, and they have become reliable allies of the administration's controversial proposal to create a powerful, independent Consumer Financial Protection Agency.

Their argument is simple: Freeing states to enact tougher laws would yield better protections against many of the predatory practices that contributed to the crisis, such as payday lending and subprime mortgages.

Madigan argues that state regulators were "the only ones ever sounding the alarm" as abuses grew in recent years, only to be overruled in many cases by regulators in Washington. "We need to be able to enforce the law against all lenders," she said. "We don't want to be in a situation where history repeats itself."

Cooper said state officials have recognized abuses sprouting on the local level much more quickly than federal regulators and shouldn't be hamstrung by federal laws that might prove inadequate. "We're on the ground. We see the complaints directly from the consumers," he said. "It's not smart to take 50 cops off the beat when you need stronger enforcement to protect consumers."

Much of the banking industry and some key lawmakers, however, argue that too many cops would cause more harm than good. Too many regulators would confuse consumers and produce a bureaucratic morass for any firm that does business in multiple states. National regulation proponents instead have advocated for a single set of standards.

"The simple economic fact is you can't operate a modern financial system if it's subject to 50 different state laws and potentially thousands of local laws," said Edward Yingling, president of the American Bankers Association.

Yingling and others have argued that if states are allowed to exceed federal rules, it could curb financial innovation and prompt banks to pass along costs of additional regulation to customers.

"Having one set of strong rules is preferable to having a patchwork of 50 different state regimes," said Scott Talbott, chief lobbyist with the Financial Services Roundtable, which represents some of the country's largest financial firms. "The benefit of strong national standards are they provide consistency, avoid confusion and keep costs down."

Having gone head to head in the House, both sides are gearing up to wrangle over the issue in the Senate. It will mean a lot more lobbying dollars spent, more speeches and conference calls and letters, and likely more trips to Washington for a fervent group of state attorneys general.

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