States Push Back Against Preemption

A hotly debated part of reforming consumer protection laws is the issue of federal preemption of state protections. As the Barney Frank version of the CFPA is being marked up, Republicans and Blue Dog Democrats are pushing for a preemption clause that would protect businesses from being subjected to 50 different sets of consumer laws by each state. As it stands right now, the “proposal still contains the Treasury’s not-so-bright idea to require all banks to comply with national rules, plus a different set of regulations in each state where they operate,” according to the WSJ.

But now governors are pushing back against the move towards preemption, arguing for the status quo in the CFPA legislation. In a letter yesterday to Financial Services Committee Chairman Frank, and ranking Republican Spencer Bachus, the National Governors Association wrote:

Federal actions to reform financial services should refrain from taking any action that impinges on or impairs the ability of states to enforce laws regarding consumer and investor protections, community reinvestment, and fair credit.

Specifically, the letter was from Economic Development and Commerce Committee of the NGA. And ironically the committee is chaired by California Gov. Arnold Schwarznegger and New Jersey Gog. Jon Corzine—not exactly leaders of the most prosperous states in America. California’s bankruptcy issues make M.C. Hammer look fiscally responsible, and New Jersey’s tax laws have only caused a couple hundred million in lost revenues the past few years. Should we really be listening to them for economic advice?

That aside, the governor’s desire to maintain authority to enforce consumer protection is understandable. It could be argued that preemption would destroy a way for states to compete with each other over consumer protection, with states working to relax regulations separately in order to draw businesses to their borders. But the laws are about more than just where businesses set up headquarters, the current consumer financial protection legislation would give New York authority to prosecute a Connecticut or New Jersey based firm for violating its laws if a New Yorker used their services, or even heard about a product via television advertisement.

And in areas like the Northeast, there is a lot of cross-state traffic, both of people and information. If I work and bank in DC, live in Virginia, but get a mortgage from a Maryland company, which state is responsible for my protection? Having a set of federal laws to act as the core standard, preempting complications with state rules wouldn’t keep states from having consumer protection laws, it would simply ensure the system avoids conflicts and gaps.