WASHINGTON – Perhaps one of the biggest financial regulatory reform issues is the one getting the least amount of attention: federal preemption of state and local consumer protection laws.
“This is one of our top issues,” CUNA Associate General Counsel Mary Dunn told Credit Union Journal. “We have a list of nine principles regarding the creation of the Consumer Financial Protection Agency (CFPA), and preemption is right near the top of that list.”
As one of the few financial trade groups that didn’t automatically reject the proposed CFPA, CUNA has said it would entertain the concept if its nine concerns regarding the new agency are addressed. “Preemption is not a new issue, but the proposed Consumer Financial Protection Agency is really bringing this issue to a head,” Dunn suggested. “On the one hand, you would have an agency that is really focused on consumer protection issues at a level we have never seen before, but on the other hand, if you have a new federal agency that is setting consumer protection standards but then also invites the states to add on to those standards, any credit union that operates in more than one state is going to have a very difficult time complying with each individual state’s rules.”
Credit unions aren’t the only ones concerned about the preemption issue. Bankers and their representatives argue it would change the nature of U.S. banking to force any institution that operates in multiple states to comply with several standards, limiting product choice and raising costs, according to CU Journal affiliate American Banker. “This provision will fundamentally alter the national bank system as envisioned during the Civil War,” said Howard Cayne, a partner at Arnold & Porter. “It allows the states to act independently and separately and without regard to any type of uniformity. It will totally Balkanize the industry.”
But the administration has shown no sign of backing down, and Treasury Department officials downplay the expected impact of their plan. Indeed, Dunn said financial institutions face an uphill battle on this, as consumer groups strongly support the ability of the states to chime in on consumer protection.
“The consumer groups don’t want to lose the opportunity to have consumer protection issues incubate at the state level and then bubble up to the federal level,” she said. “But in our view, it undermines the object of the agency. If you have one agency, then consumers know exactly what their rights are, and the institutions know what their obligations are.”
Administration officials have downplayed the role of the state regulators, even as they maintain the importance of allowing the states to play a role. “Our judgment is, the federal standards are going to be high and protective of consumers, so I don't think you're going to see a lot of states jumping in with different kinds of laws,” Assistant Treasury Secretary Michael Barr told American Banker. “The experience in this area is that states have tried to step in where there has been significant failing at the federal level.”
But support isn’t entirely across the board. Comptroller of the Currency John Dugan has objected in two hearings to eliminating preemption, but it was unclear from lawmakers' comments whether he has much support.
