Monday, February 02, 2009

Super-Bad

Blogger bobn has complained that Federal banking regulators are partly to blame for the sub-prime crisis for, among other things, acting to preempt state consumer protection suits and regulation. This critique is misguided--preemption has nothing to do with the substance of the policy; rather, it is a consequence of the Constitution's "supremacy clause" (Art. VI, cl. 2), making powers properly within the Federal sphere superior, "any Thing in the Constitution or Laws of any state to the Contrary notwithstanding." See Watters v. Wachovia, No. 05-1342, Section III (U.S. Apr. 17, 2007).

But Congress could change the banking laws to alter that balance of power. And last week, the Congressional Oversight Panel (COP) recommended just that, at pages 33-34:
the authority of the states to deal with consumer protection for credit products has been sharply limited by interpretations in federal law. First, the Supreme Court has ruled that the usury laws of a national bank's state of incorporation controlled its activities nationwide. The decision naturally produced the pressures for repeal of state usury protections noted above. Second, the Office of the Comptroller of the Currency and federal courts have interpreted the National Banking Act to pre-empt action by state regulators to apply state consumer protection laws to national banks or to operating subsidiaries of national banks; virtually all of the nation‘s large banks—and most of those receiving federal assistance under the TARP—are national banks. The OCC's action was prompted by the attempt of Georgia to apply its Fair Lending Act to all banks within its jurisdiction. Yet, despite promises to Congress and the states, federal regulators have made the problem worse by failing to provide any significant supervision or regulation of their own.

Action item: Eliminate federal pre-emption of application of state consumer protection laws to national banks.

Preemption affects states' consumer protection initiatives in three main respects:
  1. Standards: The ability of states to set consumer protection laws and the scope of coverage for those laws.


  2. Visitation: The ability of states to examine financial institutions for compliance with consumer protection laws.


  3. Enforcement: The ability of states to impose penalties for violations of consumer protection laws.

Visitation and enforcement are closely connected but distinct. Given the critical role of state consumer protection, Congress should amend the National Banking Act to provide clearly that state consumer protection laws can apply to national banks and to reverse the holding that the usury laws of a national bank's state of incorporation govern that bank‘s operation through the nation.
As I said, such a change in policy would be lawful. However, it would be criminally stupid: if the goal is liquidity (i.e., to get the banks lending again), how is subjecting them to state regulation and lawsuits going to help? Should you think I'm over concerned, look back at a post written three and a half years ago about a threatened suit by then-NY Attorney General Eliot Spitzer. An appeal in that litigation, by the way, will be heard by the Supreme Court this spring.

Plainly, financial services regulatory reform is a hot topic, and some changes are essential--such as eliminating both "thrifts" (savings and loans) and the present separate Federal thrift regulator. But National banks and Federally chartered banks already are overseen by Federal regulators with comprehensive powers. Adding a layer of state regulation would further squelch lending. This is true for state attempts to block sub-prime lending, obviously, but also regarding efforts like Spitzer's thrust, which--though nominally seeking to force more mortgage lending to minorities--actually would make banks more cautious about mortgage loans of any sort.

Dual oversight would guarantee new regulatory conflicts and confusion--the opposite of what's needed now. MaxedOutMama calls the COP proposal "a superfund for banks." Meaning, I think, super funding for litigation-minded lawyers.

4 comments:

bobn said...

Carl,

Your initial link in the article, which I think was intended to point at my blog in general, is linking to nothing. I assume it's an error, though I suppose it could be an editorial comment. ;-)

Anyhow, my complaint about pre-emption has been refined in various bloggings- if the Feds pre-empt something that state regulators are doing, they would be stating that it is their job to do that thing. But the Feds were utterly absent in regulation of the runup of subprime/Alt-A/Option ARM lending and other abusive practices.

My various responses to your original piece here and here.

Carl said...

Link fixed. Your critique is misguided. Was supbrime/Alt-A/Option ARM ultimately destructive of banks?--yes. But, as I have explained, the financial models of both lenders and regulators wrongly said otherwise. In any event, that's not even your argument. Why it is "abusive" for a willing lender to loan money to a willing buyer?

bobn said...

But, as I have explained, the financial models of both lenders and regulators wrongly said otherwise.

Utterly irrelevant. I can create a new model that says I can transmute lead into gold. There's no reason anybody - especially a government regulator - should give that model any weight over business practices that have been well-established over decades or even centuries. So you can stop pointing to the models - they were an excuse, nothing more. To keep referring to the models as some sort of absolution for criminally negligent regulators accomplishes nothing IMO.

Why it is "abusive" for a willing lender to loan money to a willing buyer?

When the only chance that the buyer has to pay off the loan is the continuation of a non-sustainable trend ("house prices always go up many percent per year") then abuse is the only word for it. Note that non-sustainable things strongly tend to not be sustained.

Honestly, I think I've reached the end of trying to argue with de-regulationists. I can argue with ideas and philosophy. I cannot argue with delusions and religion - and that is what you are running on, near as I can tell.

Also, near as I can tell:

I agree with you on Gaza and Israel.

I respect and share you extreme skepticism about global warming and appreciate your links (along with M_O_M).

I agree with you on the amazing antisemitism tolerated world wide, while Islamic bomb-throwers have become some sort of protected class.

We agree on the stupidity of gun control.


But it looks like we will never agree on de-regulationism. Though Obama may yet push me in your direction ;-)

Happy blogging.

Carl said...

bobn:

I was hoping we could agree on Federal preemption regardless of our differences on banking deregulation. Whether or not we should tighten regulation (interesting article here), changing to a regime of multiple and overlapping administrative banking oversight in a national lending market would be disastrous. As I recall, when Georgia tried it, lending by National banks in the state dried up to almost nothing.

At present, banks have either a state or Federal charter. That's the choice of sovereigns. Dual oversight by two sovereigns is a recipe for confusion, precisely what we don't want in the current crisis.