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Warren on Looming Pre-Emption Compromise: “States Ought to Be Able to Enforce Their Own Laws”

At 2:15 today, the Senate will take up two amendments that would weaken the Consumer Protection bureau housed inside the Federal Reserve. Tom Carper (D-DE) has been working for weeks on an amendment that would set a federal standard for consumer protection and let federal regulators pre-empt the ability for Attorneys General to enforce their own state laws. This would basically tilt the playing field toward the big banks, giving them one regulator rather than having to conform to 50 state laws. And it looks like the leadership is moving toward a compromise with Carper that will at least allow him to obtain some of his goals.

Elizabeth Warren, the brainchild behind the consumer protection agency, strongly opposes a pre-emption measure. She said in a joint press event with Sen. Jack Reed (D-RI) today that pre-emption is “designed to weaken consumer protection, in terms of the rules and their enforcement. It’s designed to take cops off the beat and that’s not a good idea.”

Warren actually believes that the Senate’s version of consumer protection, with its agency inside the Fed, will “have the independence and the teeth it needs to fix the consumer credit market.” She does believe that it should exist as a standalone agency, and supports Sen. Reed’s amendment to spin it off (Reed hopes to push for that in conference committee, sort of signaling that it’s unlikely to get a vote at this time). But the point of establishing a Consumer Protection bureau is to create a floor that lenders, banks, auto dealers and the like could not dip below. It was not meant to create a ceiling with regulations that can be eroded over time. “It will not be possible to stabilize this economy if we don’t give families the chance to stabilize their household finances,” Warren said, and by chipping away at the independence, enforcement and rulemaking in the consumer protection sphere, that goal cannot be realized.

However, a late compromise (subs. only) between Carper and Senate Banking Committee chair Chris Dodd could lead to some pre-emption making its way into the bill.

Carper is expected to announce a compromise Tuesday afternoon or evening with Banking Committee Chairman Christopher J. Dodd, D-Conn., that lowers the bar for federal “pre-emption” while still allowing state attorneys general to pursue legal actions in their own jurisdiction. The modification is also expected to bar state attorneys general from class action suits.

A Carper aide cautioned Tuesday morning that a deal had not been finalized.

“Sen. Carper continues to work with Sen. Dodd to find a compromise that addresses his concerns about pre-emption,” the aide said.

The amendment is expected to come up for a vote today, though it is unclear whether it will require 60 votes or a simple majority to win adoption.

Sen. Reed would only say that talks between Carper and Dodd were ongoing. But he did say that Dodd is trying to strike a balance in the bill between a federal standard and a good standard, suggesting that some pre-emption would occur. (There’s actually a little pre-emption already in the bill, though the amendments on offer would go much further.)

We’ve seen modifications like this on several amendments. Sam Brownback changed his auto dealer carve-out language with a provision allowing regulators to ensure fair treatment of military service members and their families (this was the locus of the criticism of the dealer carve-out). Sheldon Whitehouse’s amendment getting states back into the game in credit card regulation got whittled down to only applying to national banks. But the Carper compromise would still allow federal regulators for significant pre-emption, at least at first glance.

As Elizabeth Warren said today, “Wal-Mart doesn’t do this, they don’t say they don’t want to follow the law in the states where they do business… States ought to be able to enforce their own laws.”

UPDATE: This modification has been made, and Dodd has signed off on the amendment, so it’s likely to pass. The restriction on class-action lawsuits against national banks is in there, as expected. This doesn’t look great, but see for yourself.

UPDATE: There’s also a pre-emption deal in the House version of the bill, which is arguably worse. So it’s not like there’s a lifeline out there.

Here’s what it does (on the flip):

The amendment as modified accomplishes two things.

1. Clarification on Barnett Preemption Standard

The amendment preserves the federal pre-emption standard in the Supreme Court’s ruling in the 1996 Barnett Bank case.

While the Wall Street Reform bill refers to the Supreme Court’s ruling in the Barnett Bank case, the addition of the “federal substantive standard” provision went beyond the ruling in that case by adding new statutory hurdles to applying the Barnett preemption standard.

Senator Dodd agreed to remove this new standard and to simply restore the OCC preemption standard to Barnett. The unintended consequence of keeping this additional requirement of a “federal substantive standard” would be that this could lead to uncertainty and litigation and most importantly, could hurt consumers, small business and local economies that depend upon reasonably priced financial products.
The amendment as modified will ensure that preemption determinations are made according to a uniform standard that will provide certainty to everyone – those that offer consumers financial products and to consumer themselves.

2. Clarification on State AG Powers

The amendment codifies the Supreme Court’s ruling in the Cuomo vs. Clearinghouse case by clearly stating the role State AGs may play in enforcing certain laws against national banks.

The amendment preserves the ability of state attorneys general to provide a backstop to the new consumer protection bureau. While the new Consumer Financial Protection Bureau will be the main enforcer of its new rules, the amendment as modified will preserve a role for State AGs to ensure that consumers are never again put at risk because federal regulators are asleep at the switch.

Under this amendment, State AGs will be able to enforce the new rules that are issued by the new Consumer Financial Protection Bureau. However, State AGs may not bring Federal class action-like suits against national banks and will not be able to go into another state to bring charges against a national bank. For example, under our modified amendment, the Attorney General in California will not be able to bring claims under the new bureau’s rules in Nevada.

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David Dayen

David Dayen