Increasing-Democracy

BY PROGRESSIVE STATES ACTION

Protecting State Consumer Protection from Federal Preemption

The context of this call is that, in the wake of the financial meltdown that engulfed the country last year largely caused by fraud and predatory lending, Congress is now debating the Consumer Financial Protection Agency Act (CFPA Act, H 3126).  The act would create a consumer product protection agency for financial products analogous to the Consumer Product Safety Board. 

Crucially, in the current proposed version of the legislation, the ability of states to also enforce their own tougher lending laws against national banks will be explicitly protected.  Keeping this provision in the bill is shaping up to be the big fight as the legislation moves through Congress.  As the CFPA Act goes to markup this month in the House Financial Services Committee, the major goal of banks and their legislative allies is stripping states of the power to enforce not only federal law, but also their own state lending laws.  Now the banks and their allies, which includes a large block of moderate Democrats on the House Financial Services Committee, want to block the robust state regulation that could have helped prevent the financial crisis from exploding in the first place. 

The crucial non-preemption provisions in the current version of the CFPA Act include:

• Federal law would preempt only inconsistent state laws and regulations, and only to the extent of the inconsistency.  State laws and regulations that provide greater protection are not inconsistent.
• Concurrent state attorney general enforcement authorized. State AGs can bring any action in court to require bank to produce records relating to investigation of state or federal consumer laws or to enforce applicable state or federal law as authorized by such law.
• Bush-era rules preempting state regulation of national banks would be overturned.  State consumer laws of general applicability, including UDAP laws, consumer fraud law, repossession, foreclosure, and collection law, would apply to national banks.
• It would assure that states could, for example, limit negative amortization and protect the right of states to regulate terms such as prepayment penalties on all mortgages, including ARMs.

In order to preserve the anti-preemption language in the CFPA Act, state lawmakers and advocates will need to make clear to House Financial Services Committee Members that retaining the power of the states to enforce their own consumer protection laws against nationally chartered banks is imperative.  Efforts to strip states of this power will be central to the committee markup process soon to begin.  Without strong progressive support for states' rights in this area, we can expect any new national protections to come at the expense of what the states are already doing.

Progressive state legislators have a critical role to play in convincing their counterparts at the national level how important state enforcement of state laws is to your constituents.  House members must be educated about the regulatory failings that led to the current crisis, how states were hamstrung and couldn't step in to protect consumers, and how this scenario will repeat itself if the financial services industry gets its way.  Because state legislators are closer to the ground and are likely more aware of predatory lending practices and products in their districts, they have an important perspective to impart.

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Why State Action is Crucial for Consumer Protection in the Financial Industry

As we've written about before, aggressive federal preemption of state laws, especially those designed to protect consumers, is one of the legacies of our conservative governance that we must reverse if we are to make real strides in protecting Americans from a variety of corporate abuses. 

For years before the recent mortgage meltdown, states were canaries in the coal mine, sounding warnings of fundamental problems in the mortgage market.  But during the Bush administration the Office of the Comptroller of the Currency (OCC, which supervises national banks) began asserting that the National Bank Act preempted state enforcement of state lending laws against national banks.  This created a regulatory vacuum in which sub-prime and other predatory lending practices grew largely unchecked.  The Supreme Court overturned part of that ill-conceived theory in a case last term, Cuomo v the Clearing House Association and the Office of the Comptroller of the Currency, where, in a landmark ruling the court found that while the law prevents states from regulating the internal operations of nationally chartered banks, they remain free to enforce criminal statutes against subprime abuses and other predatory lending practices.  The CPFA Act would build on that court decision to strengthen state oversight roles.

Why does state oversight matter?

• States can catch problems early, before they become nationwide:  States are closer to the ground, and have been better able to see emerging issues and problems.  For years before the recent mortgage meltdown, states were canaries in the coal mine, sounding warnings of fundamental problems in the mortgage market. 
• State laws provide useful data-points for federal policymakers:  Congress has often looked to the states for workable solutions to take nationwide in consumer protection, as in other arenas.  Iowa, for example, pioneered a legal framework for electronic funds transfers that was used as a model for the federal Electronic Funds Transfer Act in the 70s. Congress has looked to those state laws in crafting some of the current proposals.  This is more than just saving Congress work.  Without the creative input and local action of states protecting consumers we can expect financial institutions to remain several steps ahead of regulators, just where they have been for the years leading up to the current financial crisis.
• States must be able to address local problems:  Not all problems that arise locally are destined to metastasize to national problems.  But that does not mean that states' hands should be tied by preemption.   While a higher federal "floor" for regulation is needed, that federal floor should also assure that states have the right — and the responsibility and accountability — to address local problems. State enforcement of financial protections are necessary therefore because even when a predatory practice is identified by the feds, action is only taken when the problem becomes regional or national in scope, so the majority of predatory practices will not be curbed by the feds until many local families have already suffered.

Federal Enforcement is not Enough: Opponents use false arguments that "patchwork regulation" will add costs to banks which will then pass these costs to consumers, yet these are the same opponents who justify abusive fees imposed on consumers by those same banks.  The egregious overdraft practices that strip an estimated $17 billion (and rising) from deposit accounts (hitting the elderly especially hard) have become industry standard.  The reality is that the federal banking regulatory agencies issued “guidances” and “best practices” for these unfair, deceptive and wealth-stripping “conveniences," but did nothing to enforce them.

If we have learned anything from the recent financial meltdown, it is that trusting any single institution to safeguard the financial system is misguided.  More eyes, both at the state as well as federal level, are the best guarantee that malfeasance and illegal activity will be stopped before the damage gets out of control. Even with a renewed federal effort to prevent abuses by national banks, there are almost 20 times as many enforcement personnel in the offices of state attorney general than there are at OCC.  As a comprehensive report produced on behalf of the nation's state attorneys general details in analyzing the need to allow greater state enforcement in new legislation:

Like the existing federal regulators, no new agency created to protect consumers will ever have enough resources to comprehensively reform the financial marketplace across the entire nation. State authorities can maximize resources and bring a more localized focus to ensure widespread compliance with the new rules.

States therefore have a critical role to play in adding cops on the financial protection beat.  It is clearly impossible for federal regulators to monitor the local practices of every national bank, so strengthening the role of the states is a key step to cracking down on consumer abuses across the nation. 

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State Strategies for Protecting Borrowers in 2010

In addition to helping make sure that states' prerogative to enforce their own laws is protected in the CFPA Act, lawmakers should also consider improving their own states mortgage finance and predatory lending laws.  The effects of the Great Recession will continue to be felt for years to come, but there are many steps that states can take, regardless of the outcome of CFPA Act negotiations, that will both help to ameliorate the current foreclosure and debt crisis, and prevent new damage from financial predators.  Here are some of the most promising reforms.

• Mandatory Mortgage Mediation:  Requiring that banks or servicers go through a mediation process to attempt a workout of delinquent mortgages is a no-cost reform that should greatly increase the number of loan workouts lenders make.  Most borrowers never have any direct contact with their lender before foreclosure is begun, in these situations there is little opportunity for a resolution short of losing one's home.  Miami recently began such a program, and Philadelphia has kept thousands in their homes with mandatory mediation.
• Anti-Blight Measures:  Requiring lenders to maintain foreclosed property, and fining them if they don't, is a strong way to decrease the blight that the foreclosure crisis has brought to many communities.  These laws also help cash-strapped municipalities that have taken on the burden of maintaining these homes themselves in order to preserve their neighborhoods and property values.
• Own to Rent Statutes:  Requiring lenders to allow borrowers whose homes have been foreclosed on to remain in their homes as renters for a specified number of years is another no-cost solution to the collateral consequences of the crisis - displaced families, broken communities, joblessness, and homelessness.  Under this law owners would become tenants if they could afford market rent as determined by an independent appraisal.
• Whistle blower Protection for Financial Services Workers:  Protecting the employees of financial institutions from retaliation when they reveal criminal or unethical conduct by their employers can help bring predatory practices to light. Many tellers, loan officers and other retail banking employees report a culture of corruption with managers firing workers who don't engage in predatory practices. Many of these employees want to do the right thing and put a stop to these practices which undermine the financial well-being of their clients, but fear for their jobs keeps them from doing so. Statutory protection against retaliation for workers who file administrative or legal complaints, or testify in an administrative or legal proceeding regarding prohibited practices by the employer, are essential to bringing these practices to light.
• Protections Against Engaging in Predatory Practices: States can go even farther in empowering workers to resist pressure to engage in illegal or unethical conduct by giving workers specific protection when they refuse to participate in, any activity, policy, practice, or assigned task that the employee reasonably believed to be in violation of any law, rule, or regulation, or to be unfair, deceptive, or abusive and likely to cause specific and substantial injury to one or more consumers.” This would empower the employee to stop the bad practice right away by refusing to cooperate, instead of having to wait until they made an official complaint to receive whistle blower protection.

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Conclusion

One of the greatest problems contributing to the current crisis in the credit markets has been federal obstruction of state authority to protect consumers.  New federal legislation should ensure that the states serve as a backstop against weak federal rules or lax enforcement in the future. States are more connected to conditions on the ground than a centralized federal agency.  When one state passes a more protective law, that should be a red flag to the federal government that they need to evaluate whether there is a problem that requires a federal rule.

Ultimately, collaboration between states and the federal government leads to more effective oversight.   Leaders in the states need to deliver that message to Congress.

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