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Senate amendment broadens states' leeway in cases against national banks

By Renae Merle and Brady Dennis
Washington Post Staff Writers
Tuesday, May 18, 2010; 4:38 PM

The Senate overwhelmingly approved Tuesday an amendment to the financial regulation bill awarding states more power to pursue cases against national banks, but preserving the right of a federal bank regulator to stop states from pressing some consumer protection cases.

The amendment sponsored by Sen. Thomas R. Carper (D-Del.) passed 80 to 18.

Under the amendment, state attorneys general gain the ability to pursue consumer protection cases against national banks based on rules set by a new consumer protection bureau, which would be housed in the Federal Reserve. The consumer watchdog will have the authority to enforce its own rules, but the Carper amendment would allow state attorneys general to play a role in enforcing those rules as well.

"The compromise we passed today would preserve our national banking system while also giving state attorneys general the authority to enforce new rules issued by the consumer protection bureau," Carper said in a statement. "This was a hard-fought but fair compromise that will give businesses certainty and provide an extra set of cops on the beat to help make sure that consumers aren't handed a raw deal."

But the amendment also contains a provision, opposed by consumer groups, giving the Office of Comptroller of the Currency the ability to stop states from pursuing some consumer protection cases even if there is no federal law covering the issue. Under the compromise, there is a lower standard for the OCC to preempt state cases than was originally contained in the legislation.

"Without the Carper Amendment, consumers and their banks could have been subject to potentially hundreds of different and confusing state and local laws covering their loans, checking accounts, credit and debit cards, or ATM usage," Edward L. Yingling, president of the American Bankers Association, said in a statement.

The principle of federal preemption currently limits states' pursuit of cases against national banks and their subsidiaries.

"The bill continues to give bank regulators too much authority to immunize banks from state law, and the deal makes it easier for bank regulators to preempt state law even if there is no federal protection in place," Lauren Saunders, managing attorney at the National Consumer Law Center, said in a statement. "But it does curb the preemption excesses of the last ten years, when bank regulators wiped out consumer protection laws governing mortgages, credit cards and other products, without even looking at whether particular laws that address gaps in federal protection impose a significant burden on banking."

Sen. Christopher J. Dodd (D-Conn.), the sponsor of the overall Senate legislation, offered support for the amendment after Carper agreed to some modifications.

Administration officials had not expected an outright win on doing away with federal preemption, even with they outlined the issue in their initial blueprint nearly a year ago.

Thanks in part to a lobbying blitz, financial firms succeeded in opposing the administration's position, warning that a patchwork of rules in dozens of states would overly complicate the business of lending and ultimately raise costs for consumers. They've also gotten traction by arguing that state attorneys general would gain an unchecked ability to set policy if states were permitted to establish their own rules.

The administration has countered that states should have the power to hold firms accountable as well. One official noted that insurance companies have long managed different rules for their business across state lines.

The battle over preemption, while more low-profile than some other issues related to the financial overhaul, has been fierce. It has remained a top priority for national banks such as J.P. Morgan Chase and others.

"We're disappointed," said Ed Mierzwinski, director of consumer programs at U.S. PIRG. But "it's a compromise and is better than it could have been."

Staff writer David Cho contributed to this report.

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