Why Are Conservatives Abandoning States' Rights for Big Banks?

05/08/2015 12:58 pm ET | Updated May 08, 2016

Talk about cognitive dissonance.

On the home page of the Republican Attorneys General Association (RAGA)'s home page is a video talking about the importance of "states' rights." The Attorney General of Georgia even opines in the same piece that expansion of the federal government is "not American."

Then, on the same page, the RAGA attacks the Dodd-Frank Act, setting a goal of getting the act thrown out. It leads one to wonder: Is the RAGA at war with itself?

One of the most important provisions of Dodd-Frank is that it protects state consumer protection laws against being wiped away ("preempted") by federal law. When it passed Dodd-Frank in 2010, Congress noted that it was difficult for consumers to go after lenders who were engaged in deceptive practices because federal laws didn't do anything to protect those consumers, and state consumer protection laws (which were actually very strong) were overridden and erased by federal law. As a result, Dodd-Frank includes numerous provisions designed to make it much harder for federal regulators to wipe away state laws.

So why are the Republican Attorneys General, who go on and on about loving states' rights, trying to roll back the clock to an era when state consumer protection laws were widely stomped out in favor of federal regulatory agencies?

One reason is that the federal regulatory agencies that existed prior to Dodd-Frank didn't do much regulating. Not surprisingly, the industry loved them. The reality for consumers, however, was a dysfunctional and disastrous dynamic in federal banking regulation. Essentially, under the old rules, the banks got to pick who was going to regulate them. If they called themselves "federal thrifts," they could be regulated by the notoriously inept Office of Thrift Supervision. If they decided to call themselves state chartered banks, they could be regulated by state banking agencies. Or, if they preferred to call themselves "national banks," they would be regulated by the industry-friendly regulator at the Office of Comptroller of Currency. (It's a common view among consumer lawyers that the catastrophic subprime hell that led to millions of foreclosures between 2008 and today involved many of the people who ran the OCC during the George W. Bush administration.)

"Who cares who they picked?" you might say. Well, the regulators cared who the banks picked because the regulators' budgets came from user fees paid by the banks. As a result, one large bank could have immense power over its chosen regulator.

As the financial crisis of 2008 approached, user fees from Bank of America, for example, constituted 12 percent of the OCC's budget. So if Bank of America had decided to pick another regulator, the OCC's bottom line would be impacted so significantly that it would have had to fire one out of every eight people in the building! So, not surprisingly, OCC had a huge incentive to side with the banks rather than be a fierce lion for consumers.

Here's where it got us: The OCC weighed in on 60 courts cases between 1994 and 2006 where consumers were challenging illegal practices by banks. It sided with the banks in 58 out of the 60 cases. But we're not done yet. Federal regulators needed to find even more gifts for big banks. So they promised the banks they could issue regulations erasing state consumer protection laws, and replace them with... nothing. And the gift of 'nothing' made the banks pretty happy indeed. That's because, under federal law, there is really nothing that prohibits banks from deceiving or misleading consumers. State laws, however, are great at it. So when the federal regulators engaged in this energetic race to the bottom, that made it much easier for banks to confuse and mislead consumers.

By the time Dodd-Frank was passed, the majority of Americans were confused about the terms of many of the loans they entered into. People got credit cards expecting 6% interest (based on ads making a big deal out of teaser rates), and ended up paying 18% or, sometimes, over 30% interest. People got sucked into mortgages promising low rates in the early years, and then wound up quickly paying far more. The principal enabler of that misleading advertising by banks -- a practice that played a huge role in leading to millions of Americans losing their homes, when the bubble burst -- was crappy regulators wiping away protective state laws.

So now, in 2015, enter RAGA -- a bunch of state attorneys general who preach "states' rights" as the way to be a real American. Read the fine print, though, and you quickly learn they also want to repeal Dodd-Frank and reinstate widespread federal preemption of any state consumer protection laws that might actually protect consumers. Does this "the big print giveth, and the fine print taketh away," (apologies to Tom Waits) approach sound familiar?

What might explain this sudden loss of love for state law? One obvious theory is Citizens United-style campaign contributions. In West Virginia, for example, the state had long been served by one of the most aggressive, hell-raising, consumer protecting state attorneys general in the country. But then, after millions of dollars of undisclosed campaign contributions started flowing into elections there, the state suddenly elected a new cop on the beat: an ex-big Pharma lobbyist who says the attorney general needs to move away from "enforcement" and towards "working with" corporations to help guide them to be better citizens.

A lot of us working with actual consumers would rather have state consumer protection laws left alone (as Dodd-Frank tries to do). Instead, big banks and their friends in high places are stepping up efforts to morph corporate lobbyists into Attorneys General who might preach cooperation and states' rights, but actually work to block their constituents -- consumers -- from actually standing up to banks that deceive their customers.