Bankers get partial victory, win some limits on state consumer laws

WASHINGTON (AP) — The Senate voted to roll back efforts to give states more consumer powers Tuesday, in a partial victory for federally chartered banks that don't want state regulators meddling in their business.

Like a House bill passed in December, a sweeping Senate financial regulations bill backed by President Barack Obama would permit states to write and execute tougher consumer financial laws and let state attorneys general enforce federal laws. Essentially, banks would face more regulations and more cops on the beat.

The Senate on Tuesday rejected one amendment to weaken the proposed law, but voted 80-18 for a compromise measure that still curtailed the state powers that had been in the underlying regulatory bill.

Banks and their allies argue that the Obama administration and Senate Banking Committee Chairman Christopher Dodd, D-Conn., would create an overly complex system of regulation. States devising disparate rules would result in increased costs to consumers and an avalanche of lawsuits.

"It is not only going to be confusing for the banks themselves, as they try to comply with this patchwork quilt of 50 different rules and regulations, in addition to the national rules and regulation, it's going to be confusing for consumers too," said Sen. Tom Carper, D-Del., who offered the successful compromise amendment to limit state power.

Under current law, federal regulators have been able to issue a blanket rule overriding state laws concerning licensing, credit terms and loan disclosures. The result has been an inability by state regulators to impose those rules on national banks and a rash of dismissed lawsuits brought by homeowners claiming national banks or their subsidiaries violated state consumer rules.

Carper, in a deal with Dodd, agreed to allow federal regulators to override state law on a case-by-case basis and permit attorneys general to enforce federal regulations passed by a proposed consumer financial protection bureau. Sen. Bob Corker, R-Tenn., had a more bank-friendly amendment that would prohibit attorneys general from enforcing federal rules altogether. It failed 55-43.

The Obama administration encouraged Dodd to compromise with Carper to provide an alternative to Corker's proposal, which had gathered Democratic support.

After the vote, Treasury spokesman Andrew Williams said Carper's amendment "represents a significant improvement over the status quo."

Bankers cheered the vote.

"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," said Edward Yingling, the American Bankers Association's president and CEO.

Consumer advocates were more conflicted.

"The deal compromises a bill further that is already full of concessions to the banks and the bank regulators who failed us, but it does not give in to the bank demands to remove the states entirely from their responsibility to protect their residents," said Lauren K. Saunders, a managing attorney at the National Consumer Law Center.

State attorneys general argue that the growing ability of national banks and their subsidiaries to avoid state consumer laws over the last 15 years contributed to the subprime mortgage fiasco that precipitated the economic meltdown of 2008. They say they can be far more nimble in detecting and responding to emerging problems.

"The states have long been laboratories for democracy," Illinois Attorney General Lisa Madigan said in an interview. "When we identify abuses in the marketplace, we can react, either through enforcement or though passing news laws to address the abuse."

Senate opponents of the Obama-backed plan argue it would upend the dual banking system created during the Civil War, which created nationally chartered banks in addition to the already existing state-chartered banks.

The legislation would return consumer banking regulations to a standard the federal government began employing in 1996, when the Supreme Court ruled that the federal Office of the Comptroller of the Currency, which oversees national banks, could override state regulations on a case-by-case basis. The OCC expanded that standard in 2004 and by 2007 federal regulators had granted national banks and their subsidiaries virtually blanket protection from state laws.

Others argue that the federal government needs a greater ability to override the states and to trust the power of the proposed consumer protection entity to adopt tougher national regulations.

"The one thing we know is we're going to have a powerful federal presence in consumer protection," said Hal S. Scott, a Harvard law School professor and president of the nonprofit Committee on Capital Markets Regulation. "No longer can it be said we fear the government is not being aggressive on consumer protection."

Scott objected to giving state attorneys general the ability to enforce federal laws. Consumer advocates and officials such as Madigan in Illinois insist that is an essential component that would ensure the laws are being obeyed.

"Federal law should be enforced by the federal government," countered Scott, "not the states."