BUSINESS
05/18/2010 02:08 pm ET Updated May 25, 2011

Wall Street Makes Last-Ditch Effort To Gut Reform

A new amendment to the Wall Street reform bill carried by Sen. Tom Carper, a Democrat from Delaware, that deals with the potent issue of federal preemption, has been backed by Sen. Chris Dodd (D-Conn.), who's shepherding the bill through the Senate. [UPDATE 3:45 p.m.: The amendment passed 80-18.]

Under current law, state attorneys general are largely barred from enforcing laws that are stricter than those on the federal books. The House Wall Street reform package largely keeps the status quo in place, while the underlying Senate bill would empower state AGs.

Carper's amendment strips some of that authority, but doesn't go as far as the House bill, heartening some consumer advocates who are nervous that Wall Street will succeed in gutting the bill by including strict federal preemption. [UPDATE: A statement from the National Consumer Law Center is below.]

Dodd said that he likes Carper's amendment. "It's a good amendment," he said.

Asked by HuffPost if there was a deal to include it in the final package, he said: "Well, I like the Carper amendment."

The measure may come for a vote as early as Tuesday and is cosponsored by Sens. Evan Bayh (D-Ind.), Mark Warner (D-Va.) and Tim Johnson (D-S.D.), all of whom are generally considered friendly to the financial services industry.

Carper's amendment does not appear to go as far in pushing preemption than the House did, because it "preserves the federal preemption standard in the Supreme Court's ruling in the 1996 Barnett Bank case," according to a summary provided by Carper's office. In 2004, a Republican Congress expanded preemption, a standard the current House bill keeps. But the National Consumer Law Center says it prefers the House approach. "The House [bill] is better. It preserves state law when we need it the most -- when there is no federal protection in place, before abuses have spread to become a national problem," said Lauren Saunders, an NCLC spokeswoman.

But the summary also indicates that state attorneys general will only be allowed to enforce rules created by the federal consumer protection agency, rather than state laws though, without specific legislative language available, it's impossible to be certain.

"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," reads the summary.

The full summary:

Carper Bayh Warner Johnson Modified Amendment

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.

UPDATE: The National Consumer Law Center, a strong opponent of pre-emption, has released a statement saying the amendment does not go as far as the group would like, but is an improvement on current policy.

"Senator Dodd and Senator Carper have reached a deal to modify Senator Carper's amendment #3949 on the role of states in protecting consumers under the Wall Street reform bill. The deal compromises a bill further that is already full of concessions to the banks and the bank regulators who failed us, but it does not give in to the bank demands to remove the states entirely from their responsibility to protect their residents.

"State attorneys general will be able to take action to enforce new consumer rules against banks that violate those rules if the new Bureau or bank regulators do not. But the deal makes it harder for states to play their traditional role as first responders if banks engage in unfair or
deceptive actions that are not yet covered by federal protections.

"The deal preserves the standard of the 1996 Barnett case, when the Supreme Court held that national banks must comply with state laws unless those laws substantially interfere with the business of banking. The bill continues to give bank regulators too much authority to immunize banks from state law, and the deal makes it easier for bank regulators to preempt state law even if there is no federal protection in place. But it does curb the preemption excesses of the last ten years, when bank regulators wiped out consumer protection laws governing mortgages, credit cards and other products, without even looking at whether particular laws that address gaps in federal protection impose a significant burden on banking."