April 27, 2010
Senator Christopher Dodd
United States Senate
Washington, DC 20510
Re: Support Attorney General Enforcement and a Strong Role for States in S.3217, Restoring American Financial Stability Act
Dear Senator Dodd,
As you continue efforts to improve and achieve bipartisan support for S. 3217, the Restoring American Financial Stability Act, we urge you to resist calls from Wall Street lobbyists to weaken the bill by gutting attorney general enforcement of consumer rules or weakening the current minimal protections in the bill against unnecessary and excessive preemption of state consumer protection laws. Please heed the bipartisan call of attorneys general and governors in the attached letters to give states a role in protecting their consumers.
We are facing the worst crisis since the Great Depression because lax enforcement of federal consumer protection laws and preemption of state predatory lending laws combined to leave consumers at the mercy of bank abuses. The bill already contains numerous concessions to the banking industry, including dramatic weakening of the protections in the initial draft against excessive preeemption. Yet the banks are asking for more because they don’t want to be held accountable to federal or state law. They want bank regulators to continue insulating banks from state law without even looking at whether a state law significantly interferes with banking or whether it addresses new abuses that fall in a gap in federal protections. And they don’t want state cops on the beat to make sure they comply with the nationwide federal rules the CFPB will be adopting.
Any wrongdoer who violates federal law should expect to be held accountable. The bill already has serious flaws in its enforcement provisions. It does not give injured consumers any private remedy against wrongdoers, and does not give the Consumer Financial Protection Bureau (CFPB) full enforcement powers against smaller institutions, leaving enforcement to those who failed us in this crisis. These flaws should be fixed, and the bill should certainly not be weakened by taking state cops off the beat. Even a strong federal agency will not have sufficient resources to address all violations. For example, foreclosures will affect 13 million consumers. The resources of AGs are critical to making sure that all consumers are protected against reckless Wall Street practices.
Banks largely are immune from state laws, so full, nationwide enforcement of federal rules is essential. Even with the modest preemption changes in the bill, banks will still have the freedom to ignore many state consumer protection laws. So vigorous enforcement of federal laws is essential. The bill has a variety of mechanisms to vet CFPB rules before they are enacted, but once they are, no one should get a pass on compliance. Consumers are much more likely to complain to, and get a response from, state-based enforcement agencies. And federal regulators are more likely to be responsive if they know they do not have a monopoly on enforcement.
AGs regularly enforce other federal laws, and consistent enforcement everywhere levels the playing field. AGs can already enforce many federal laws against banks, including the Home Owner Equity Protection Act, the Fair Credit Reporting Act and others. Under the bill, AGs must notify both the CFPB and the bank’s prudential regulator before acting. The Bureau can intervene and provide guidance on its rules and bank regulators regularly file amicus briefs. Inconsistent interpretations of federal law have never been a problem. The bigger threat is gaps in enforcement, with violations in some states catching national attention and others going unaddressed. Consumers everywhere need protection, and responsible industry players do better when bad actors do not compete unfairly.
States need to be able to address new problems before they spread nationally and catch the attention of federal regulators. Beginning in the late 1990s and culminating in the 2004 regulation of the Office of the Comptroller of the currency, state laws that applied to national banks were wiped out through preemption, with nothing in their place. Studies show that states that adopted tough anti-predatory lending laws before that preemption had lower foreclosure rates than states without those laws. National banks made riskier loans after preemption was extended. Colorado Attorney General John Suthers ( R), explained in testimony to the FCIC this year that “ [w]ith respect to the few laws we did have back in 2005, we were largely powerless to enforce those laws against national banks and their lending affiliates and subsidiaries due to the aggressive stance federal regulators took to preempt state law, even with respect to discriminatory lending and deceptive advertising.” In 2006, from 32% to 50% of toxic loans, depending on the type, were made by banks and subsidiaries that states could not touch, and that share was growing. The states are still ahead of federal law in enacting protection against mortgage abuses.
The bill gives the OCC too much power to preempt state consumer protection laws, and the modest steps to give states some room to protect consumers from new bank abuses should be strengthened, not weakened. Senator Dodd’s original bill would have required national banks to comply with state laws, but the current bill merely requires the OCC to first assess whether a state law or similar ones interfere with banking and whether there are any federal protections in place. That is the least we can ask if we care at all about bank abuses and consumer protection. A case-by-case assessment is critical if state laws are not to be wiped out thoughtlessly, across the board. And if federal protections are lacking, that is precisely when state laws should not be preempted. The bill does not prescribe any particular degree of protection. In addition, state banks must comply with state laws regardless of preemption, so any law that had serious impacts on banking would be challenged by these state banks and not survive on a variety of grounds. Most important, the protections in the bill against excessive preemption, need to be strengthened, substantively and procedurally, so that the OCC will undertake a serious inquiry and not a pro forma one.
In Summary, respect for the role of states in our constitutional system of federalism and for the importance of consumer protection demand that states be allowed to protect their citizens and that state laws not be preempted cavalierly.
Sincerely,
Americans for Financial Reform