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.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.
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:
- Standards: The ability of states to set consumer protection laws and the scope of coverage for those laws.
- Visitation: The ability of states to examine financial institutions for compliance with consumer protection laws.
- 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.
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.