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A letter [PDF] has been going around Capitol Hill, written by a number of legal experts who study consumer financial protection. It argues in favor of the creation of a new Consumer Financial Protection Agency. Noam Scheiber has broken down some of the key points, but one interesting thing he didn't touch on was how the agency would interact with state financial regulators, which have often been overruled by federal-level regulators. Unlike other banking regulators, the CFPA is designed to provide a floor, not a ceiling, to state level consumer regulators:
The traditional police power of states to regulate commercial practices in the interest of their citizens has been undermined by federal banking regulators, whose assertion of preemption has worked to the advantage of financial institutions at the expense of effective consumer protection by states and localities. Two developments are illustrative. In 1978, the Comptroller of the Currency helped to deregulate the credit card business by issuing interpretations of preemptive effect which prevented the states from enforcing their own usury laws. Almost twenty years later, in the 1996 decision Smiley v. Citibank, S.D., N.A., the Court unanimously upheld the interpretation of the Comptroller of Currency that late payment fees were deemed "interest" for the purposes of preempting state regulation of late fee amounts ... Subsequent federal decisions have accepted the principle of deference to the Comptroller's interpretation of the scope of nationalized banking regulation. The importance of a more balanced federalism is widely endorsed in the scholarship. In our view, whatever merit arguments in favor of preemption have are outweighed by the value of having states operate as laboratories, trying different approaches to lending problems, particularly in dealing with the relatively young problems of predatory lending. It is important that Congress not take a simplistic approach favoring only federal development of consumer protection laws in financial products and services; and that Congress not limit the role of the states to enforcement of state and federal law. State legislatures and courts need to be able to continue to develop consumer protection law. Many of the types of non-bank financial products that will be within the jurisdiction of the CFPA have been regulated up until now only by the states, and their good work should not be undermined. In addition, problems are much more likely to grow larger if they can be addressed only at the federal level and not also by states where they first appear.You might think that Republicans would be pleased by this Federalist approach to regulation, but they've consistently supported the banks' efforts to limit financial regulation to a single national standard, which is easier to capture and further from on-the-ground problems.
-- Tim Fernholz
