Treasury Warns of 'Disastrous' Effects In Federalism Bill States'

Legislation quietly whizzing through Congress would severely limit the ability of the federal government -- including banking regulators - to preempt state laws.

Government and industry sources said the bill, though well-intentioned, would add cost and time to rulemaking.

As written, H.R. 2245 will bring the government to a halt, Treasury Assistant Secretary Linda L. Robertson wrote in an Aug. 4 letter to House Government Reform Committee Chairman Dan Burton, R-Ind.

It's one of those things that sounds good, but if you apply it rigidly, as this bill would, you would have disastrous consequences, Steve Bartlett, president of the Financial Services Roundtable, said in an interview last week. This is a 19th-century idea that doesn't work with 20th-century interstate commerce.

The Federalism Act of 1999 is designed to clarify when Congress or the executive branch may preempt state and local authorities. Among other things, the bill would require federal agencies to issue a federalism impact assessment with each proposed, interim, and final rule.

The assessment report must identify any provision that is a preemption of state or local government authority and the express statutory provision authorizing such preemption, Rep. David M. McIntosh, R-Ind., said when he introduced the bill June 16. The bill, like its counterpart in the Senate, would apply only to future federal actions.

One such future law could be the financial services bill that Congress is on the verge of enacting, Ms. Robertson said. Rather than removing obsolete restrictions and regulatory burdens, the federalism bill will foster a patchwork of statutory and regulatory requirements under the laws of the 50 states and countless local governments, she said.

The resulting increase in compliance costs will impede the ability of the institutions to compete in the global market internationally and increase costs to consumers.''

Beyond affecting financial reform's compromise on bank insurance sales, the legislation could affect anything from check hold standards to bank fees. For instance, a number of states have considered capping automated teller fees, which under current law the Office of the Comptroller of the Currency could override relatively easily.

The legislation would cover new rules based on existing laws. If the OCC relied on the National Bank Act to issue a rule affecting bank powers, the agency would have to prepare the impact assessment and prove that the act expressly permitted the preemption.

Any ambiguity shall be construed in favor of preserving the authority of state and local governments, according to Rep. McIntosh.

Opposition goes beyond banks. Another letter to Rep. Burton from 24 trade groups representing interests ranging from convenience stores to engineers contends the bill would make it virtually impossible to craft and enact meaningful legislation that addresses the significant national problems faced by the business community.

Sen. Fred Thompson, R-Tenn., chairman of the Senate Governmental Affairs Committee, introduced similar legislation in the Senate on June 10. That panel approved S.1214, the Federalism Accountability Act of 1999, on a bipartisan 12-2 vote Aug. 3.

House Government Reform's regulatory affairs subcommittee approved the House version, H.R. 2245, on July 29. The full Government Reform Committee was supposed to vote on Aug. 5, but consideration was delayed until September after a flood of critical letters arrived Aug. 4.

Possibly seeking to deflect the legislation, the White House on Aug. 5 issued an executive order in which President Clinton reminded federal agencies to tread lightly on states' rights.

Lawmakers will get at least one more letter. The federal banking agencies are united against the bill and are currently working to spell out their common concerns, according to a spokesman at the Office of the Comptroller of the Currency.

Karen Shaw Petrou, president of ISD/Shaw Inc., predicted such broad opposition will have an impact. I doubt very much it will be enacted in its current form, she said Friday.

The national banking system, for both banks and thrifts, is built on the cornerstone of preemption, Ms. Petrou said. If enacted, it would make it far more difficult for regulators to create a uniform structure of interest rates, consumer standards, and payment systems rules.

A House Government Reform Committee staff member downplayed the opposition and said the bill would be amended next month to address the concerns of bank regulators and others. We really would like to get it right, she said.

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