We are entering the final stretch in what has been a nearly two-year process to reform the nation's financial system. With powerful interests fighting against reform, it is has been only with the dedication of activists and the public resolve that strong consumer protection has remained on the agenda.
The big risk now is that policymakers will loose their nerve at the last minute and compromise on core values. In particular, the power of states to pass laws to protect consumers beyond a federal standard could be bargained away as a concession to Wall Street.
As the current Senate debate unfolds, it is important for our representatives to remember that the housing crisis, which continues to displace families and led to a bank bailout, did not have to be so virulent. States like New York, North Carolina and others passed laws to protect borrowers well ahead of the subprime explosion, but those laws were preempted -- struck down -- by overly aggressive federal regulators who appeared to be looking out for banks instead of people.
The myths that are being perpetuated against states' ability to protect consumers have reached a pinnacle in these final weeks. The following three tired arguments are being recycled and must be exposed for what they are: negotiating tactics, not facts. Myths, not truths.
Myth #1: Allowing states to set consumer protection standards beyond a federal floor would create a patchwork of laws that would be too burdensome for banks that operate nationwide.
Fact: National banks routinely deal with different state laws in all aspects of their business; for example, in contract enforcement, zoning, and foreclosure processes. Only when it comes to protecting consumers, suddenly these banks claim that they are incapable of complying with more than one law. Further, states have demonstrated that they have no incentive to go beyond a federal floor when that level is appropriately set. For instance, only a handful of states have gone beyond the well set privacy requirements of Gramm Leach Bliley even though the states have the power to do so.
Myth #2: The Senate bill's provision to repeal aggressive federal preemption would undo a hundred and fifty years of established history.
Fact: The federal regulators' sweeping preemption actions since 2004 contradict history. The current reform proposals would end their novel attempt to use unfettered discretion in exempting national banks from state consumer protection laws. State laws would have to be reviewed on their merits, as had been the case before 2004, to determine if there is a genuine inconsistency with federal law that would significantly interfere with a national bank's ability to do business. A state law must no longer be preempted just because it is more protective.
Myth #3: With a new national financial consumer protection bureau as part of reform, states should be prevented from going beyond a federally set level of protection.
Fact: The need for state laws is even more important if there is a national government body to protect consumers. We will not always have today's pro-consumer administration in the White House, so states must be empowered to keep the pressure on federal policymakers to set an appropriate consumer protection level. If they fail to, the states will provide consumers with a secondary defense against predatory financial practices. But as importantly, the mere threat of state action will push federal regulators to maintain consumer protections, so the states would not have to exercise their power unless necessary. Therefore, with a new national government body, the stakes are higher and the states must be more vigilant than ever.
There is one fact, however, that the megabanks cannot argue against, and it is that financial reform is urgently needed. Reform must include the ability of the states to protect people, through laws and enforcement efforts. This provision has been watered down by opponents of reform at every step since the President proposed it last year. The House successfully resisted much of what the national banks sought when it passed its bill last year. Now it is time for the Senate to demonstrate the courage to do the same.
The only preemption we need is the kind that preempts an appointed federal bank regulator from forcing legislatures across the country to sit on their hands while their citizens are harmed.