This information is courtesy of the Center for Responsible Lending.

Issue: The Senate financial reform bill, S. 3217 – section 1044, gives the Office of the Comptroller of the Currency far too much power to override (“preempt”) state consumer protection laws.  To avoid another financial crisis, the provision should absolutely not be weakened any further and, in fact, needs to be strengthened.

Overriding state laws against bad lending helped cause the financial crisis.

• In 2004, the OCC issued a broad regulation excusing national banks from complying with all state laws that governed the terms of mortgages and other forms of credit.
• After the OCC’s preemption, national banks made riskier loans, increasing reckless lending and foreclosures. In 2006, from 32% to 50% of toxic loans, depending on the type, were made by banks and subsidiaries that states could not touch.
• A recent study by UNC shows that strong anti-predatory lending laws are associated with less risky loans and reduced foreclosure rates.[1]
• The big banks pushed to weaken the states’ ability to protect consumers, and taxpayers ended up picking up the bill for the resulting financial crisis.

Research shows that predatory lending laws had a positive effect in lowering foreclosure rates.  Moreover, after being excused from state laws in 2004, national banks increased their share of home loans with risky subprime features.

A vote for more preemption is a vote for bigger, riskier banks.

• Excessive preemption favors big banks and produces more financial concentration.
• Proponents of more preemption cite the telecommunications/cell phone experience, but there are only 3 or 4 big cell phone companies now.  Do we want only 3 or 4 big banks in the country?

It’s common sense that states should address issues in their own back yards.

• It is critical that states be empowered to protect their residents from financial abuses before they became national problems.
• For example, foreclosure rescue scams that have become a nationwide problem in recent years were a significant problem in California in the 1970s.  The state needed to take strong action at a time when this wasn’t an issue for most of the nation.
• The state representatives of Georgia and Iowa should not have to wait for Washington to act on every local problem.
• States are more nimble: As the rapid decline in underwriting standards began causing damage beyond the subprime market, the first state laws to require common-sense underwriting were implemented in 2007.  The Federal Reserve’s 2008 limited rules were outdated before they become effective, and Washington still has not caught up with common lending problems that helped trigger the financial crisis.

The current bill simply restores the preemption standard to where it was ten years ago.  The partnership between the states and feds worked then, and will work now.

• The bill reaffirms the Supreme Court standard set out in the 1996 Barnett case, which recognized the longstanding balance of federal and state regulation of national banks. Banks operated fine under this standard.
• The Barnett standard provides that any state law that “prevents or substantially interferes” with a national bank is preempted.  The bill does not allow states to set interest rates for national banks, and in fact specifically prohibits that.
• The current bill dramatically scales back the preemption reductions proposed in the original house bill.[2]

Excessive preemption undercuts the rights and important role of the states.

• Ours is a federal system; states are partners in ensuring fair and sensible lending.
• Federal laws generally operate as a floor rather than a ceiling for protections, and national companies handle this fine; examples include state employment and contract law.
• States act as important “laboratories of democracy,” providing an opportunity to see which approaches work best.

Our nation has already suffered enough from lax oversight and the weakening of state predatory lending laws.  We urge you to hold the banks accountable, and to refuse to hobble the states further in their role as the first line of defense against lending problems that can ultimately affect the entire economy.

About the Center for Responsible Lending

The Center for Responsible Lending is dedicated to protecting home ownership and family wealth by working to eliminate abusive financial practices.  CRL is a national nonprofit, nonpartisan research and policy organization that promotes responsible lending practices and access to fair terms of credit for low-wealth families.  For additional information, please visit our website at www.responsiblelending.org.

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[1] Reports issued by the University of North Carolina, Center for Community Capital (March 23, 2010), available at http://www.ccc.unc.edu/abstracts/preemptionEffect.php.

[2] The bill also provides common-sense rules about how preemption is applied:

– Banking agencies can’t wipe out state laws and put no protections in its place.

– Only banks, not affiliates and subsidiaries, get preemption; this ties the preemption to the closer supervision that banks themselves receive.

– Preemption decisions should be made for one type of law at a time, not whole areas of laws.

– Courts should be able to review agency preemption decisions to make sure they are reasonable.