U.S., not states, should have lead role in consumer financial protection

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Tuesday, May 18, 2010

ON FINANCIAL regulatory reform, the Senate is finally wrestling with the legislative arcana that don't translate well into sound bites -- but do make a lot of difference to how the law will work. Case in point: the struggle over the extent to which a proposed consumer financial protection bureau can trump state law.

State attorneys general like to have the power to enforce both federal rules and the sometimes stronger ones of their respective states because they believe that this better protects consumers and because there's more political hay to be made that way. National banks, for their part, favor federal enforcement only of federal rules -- known as "preemption" -- because they believe it is more efficient and cheaper for consumers, and because it's easier for them to influence one regulator than 50.

In recent years, the Office of the Comptroller of the Currency has pushed hard to preempt state banking regulation, and the Supreme Court has mostly supported that effort. Consumer advocates argue that this approach enabled a lot of mischief during the boom years and that state regulators, more attentive to the needs of local communities, might have headed off these problems if they had had the power to do so. Thus the draft bill by Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) would undo much of the recent trend toward preemption. Instead of allowing national banks to initiate credit practices or products on the presumption that only federal consumer rules would apply, as under current law, the Dodd bill would require banks to seek preemption first on a case-by-case basis, with input from both the OCC and the new consumer agency.

A bipartisan group of senators, including Thomas R. Carper (D-Del.), Mark Warner (D-Va.) and Bob Corker (R-Tenn.) is pushing back on this point, proposing an amendment that would keep the basic preference for federal enforcement of federal rules. Yes, preemption has paved the way for certain dubious practices, as its opponents argue. But often that was due not to preemption as such, but to the conflicting mandates within federal agencies, such as the OCC, which were supposed to look after consumer protection and bank safety and soundness.

The point of the consumer protection agency is to end that conflict by creating one advocate for consumer interests within the federal government. Other things being equal, preemption reduces the complexity and cost of regulation. Therefore, it makes sense, as Mr. Warner has said, to give the new federal consumer agency a chance to show what it can do on its own.


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