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Financial Reform Stalls In Congress Over Preemption

Industry-friendly House members want to weaken state laws

By Martin H. Bosworth
ConsumerAffairs.com

December 9, 2009

Illinois Democrat Melissa Bean is supporting the addition of an amendment to the proposed legislation in the House that would block state laws against regulating everything from credit card abuses to deceptive auto loans.

Instead, the amendment would grant expansive new powers to two federal agencies, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), to police abuses on the federal level and oversee many federal financial regulations.

Bean and several other conservative Democrats are refusing to vote for the CFPA legislation unless the amendment is added, leaving it short of the necessary votes to pass, according to the Huffington Post.

Preemption is a common tactic advocated by multiple industries, from the telecom to the financial, that seek uniform regulatory standards rather than a patchwork of state laws they have to comply with.

Critics claim the preemption tactic is designed to replace strong state regulations with weak federal laws, on the principle that it is easier to deal with a few Congressmen in Washington than multiple state attorneys general.

Illinois' own Attorney General, Lisa Madigan, wrote a letter to Bean arguing that the inability to prosecute and pursue banks at the state level for financial abuses was one of the chief triggers of the financial crisis.

"State attorneys general saw the abuses of prepayment penalties, which often locked borrowers into unaffordable subprime mortgages," she said. "Yet federal preemption barred the states from enacting tougher laws to address these abuses, even as applied to those entities we regulate."

Madigan and a number of other state attorneys general previously voiced public support for the CFPA, saying it was desperately needed to help protect consumers from the worst practices of the financial industry, and publicly opposed the addition of any preemption amendments.

Consumer groups have also backed the CFPA, and have announced their opposition to any "preemption" statutes or amendments. The Consumer Federation of America said the CFPA should "[e]nsure that [the] rules generally provide a floor of consumer protection, allowing states to enact and enforce tougher laws to protect their citizens. CFA opposes amendments to further preempt states from enacting and enforcing their own laws."

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