Dem Infighting Over Wall Street Regulation

Illinois Attorney General Lisa Madigan pushed back against her fellow Democrat, Rep. Melissa Bean (D-Ill.), on Wednesday, sending a letter (PDF) opposing her effort to block states from having the ability to write bank regulations that are tougher than those imposed by a federal Consumer Financial Protection Agency.

The letter followed a meeting between the two politicians; Madigan also wrote to Democratic Illinois Reps. Bill Foster, Luis Gutierrez and Bobby Rush, but Bean is the most prominent Illinois figure on the House Financial Services Committee and the lawmaker has publicly opposed Madigan's position.

On Wednesday, the committee took up a proposal to create a Consumer Financial Protection Agency. As currently structured, it would set baseline requirements, but states would be able to toughen their own regulations. An amendment by Bean would prevent states from doing so and a vote could come as early as Thursday.

Bean is the co-chair of the pro-business New Democrat Coalition's financial services task forced and vies for the title of Wall Street's favorite Democrat. Bean and other New Dems are tussling with committee progressives over federal preemption. If Bean's measure carries, states would not be allowed to enforce consumer protection laws on national banks that are stronger than those at the federal level. All banks would need to do, then, is water down regulation at the top, rather than in each state legislature.

Bean met recently with Madigan and the attorney general impressed upon her the importance of not undermining state authority. In the follow-up letter, obtained by the Huffington Post, Madigan argues that states are often the first entities to observe on-the-ground malfeasance by major banks and that the states don't pass redundant laws if the federal law is adequate.

"The states did a much better job in the last decade in protecting consumers than federal regulators or Congress did. The industry controlled every federal regulator, and when the industry said 'bark,' Congress barked. Consumers would be better off with no bill than with a bill that hobbles the states' power to protect consumers," Rep. Brad Miller (D-N.C.), a lead advocate of the CFPA, told HuffPost.

The big banks argue that a patchwork system is too complicated. But Madigan points out that those same banks conveniently have no problem with individual state laws when it serves their interests. "In fact, as demonstrated by the swollen dockets of our state's foreclosure courts, national banks seem to have no problem complying with the varying state and local laws governing the foreclosure process," she writes.

Bean and fellow New Dem Reps. Jim Himes (D-Conn.), Ed Perlmutter (D-Colo.), Jon Adler (D-N.J.) and Rep. Suzanne Kosmas (D-Fla.) sent a letter to colleagues on Wednesday pushing the preemption issue. (The full letter is below.)

"Allowing states to add additional standards will force national banks to comply with potentially 50 different sets of licensing requirements and 50 different sets of disclosure standards," the lawmakers write.

They begin their letter by quoting Harvard Professor Elizabeth Warren , who heads the panel overseeing the financial bailout.

"In an era of interstate banking, uniform regulation of consumer credit products at the federal level may well be more efficient than a litany of consumer protection rules that vary from state to state. The problem is not in the federal preemption; it is in the failure of federal law to offer a suitable alternative to the preempted state law," the letter quotes Warren writing in 2008.

Warren was unavailable for comment, but she opposes Bean's effort and supports the administration position, which would allow states to pass tougher laws if they so chose.

Only in her third congressional term, Bean has already taken more than two million dollars from the finance, insurance and real estate industries, according to the Center for Responsive Politics.

Read the letter from Bean & Co.:

"In an era of interstate banking, uniform regulation of consumer credit products at the federal level may well be more efficient than a litany of consumer protection rules that vary from state to state. The problem is not in the federal preemption; it is in the failure of federal law to offer a suitable alternative to the preempted state law."

-Elizabeth Warren, Making Credit Safer, 157 U. Penn. L. Rev. 83 (2008)

Dear Democratic Colleague:

This week, we will pass legislation to create The Consumer Financial Protection Agency (CFPA), which we support, tasked with writing and updating our federal consumer protection laws, which the Federal Reserve has failed to do. Over the last several years, their inaction has required us to respond by passing mortgage lending reform and credit card legislation. Such legislation would have been unnecessary if the Federal Reserve had used the authority Congress granted them decades ago to update the current federal consumer protections.

We have the utmost confidence in President Obama to appoint a CFPA Director who will put consumers' interests first and ensure our federal consumer protections are current and robust. That is why we support maintaining the nearly 140 years of precedent for national banks and federal thrifts to operate under a uniform, national set of rules. Those financial institutions that choose to operate under a national charter should be able to operate under a uniform set of rules. Allowing states to add additional standards will force national banks to comply with potentially 50 different sets of licensing requirements and 50 different sets of disclosure standards. Not only will this increase costs to the consumer and affect the portability of financial products across state lines, it will also undermine the call for creating the CFPA in the first place by questioning its ability to effectively establish robust universal consumer protections as its top priority.

We ask you to join us in supporting CFPA and maintaining the current law that allows national banks and federal thrifts to operate nationally under a uniform set of rules by supporting Rep. Bean's amendment and supporting final passage of CFPA.

Below you will find additional testimony of fellow Democratic economic thought leaders who are pro-CFPA and pro-uniform standards.

Sincerely,

Rep. Melissa Bean, Rep. Jim Himes, Rep. Ed Perlmutter, Rep. Jon Adler, Rep. Suzanne Kosmas and Rep. Gary Peters

Eugene Ludwig, Comptroller of the Currency in the Clinton Administration, who supports creating of a separate consumer agency:

"We need to establish uniform national standards for nationally chartered financial organizations. We are one nation. One of our key competitive advantages as a nation is our large market. We take a big step toward ruining that market for retail finance when we allow every state to set its own standards with its own enforcement mechanism or entities that have been nationally chartered and are nationally supervised. Do we really want to be a step behind the European Union and its common market? Do we really want to cut up our country so that we are less competitive visvis other large national marketplaces like China, Canada and Australia? I hope not. I do not think many of the detractors of the current independent consumer agency proposal would continue to oppose the legislation--irrespective of how high the standards are--if the standards are uniform nationally and uniformly examined and enforced."

Robert Litan, Clinton Administration official and currently vice president for Research and Policy at the Ewing Marion Kauffman Foundation and senior fellow in Economic Studies at the Brookings Institution, who supports creating a separate consumer agency:

"While I am all for the new financial consumer protection agency, I worry about the potential dangers of failing to seek federal preemption for the agency's rules and enforcement activities. In the future, this could greatly increase the cost of introducing new financial products nationwide if states start adding their own bells and whistles and enforcement initiatives to the federal baseline protections."

Martin Baily, chairman of the Council of Economic Advisors in the Clinton Administration and currently a senior fellow at the Brookings Institution and co-chair of the Pew Working Group on Financial Sector Reform, who supports creating a separate consumer agency:

"One final issue with the CFPA is pre-emption. The Treasury proposal indicates that state regulators would have the power to enact consumer protection legislation that was stronger than that in the federal statute. I understand the case for states' rights in this arena, but the prospect of a myriad of different state rules is daunting and has the potential to reduce the efficiency of the massive US marketplace. There has been enormous progress towards a single market in financial products, leveling the playing field for businesses and consumers, so that the terms of loans or other financial activities are the same in all states. Whether or not federal consumer protection rules pre-empt state rules is not a major issue for safety and soundness, but having single set of consumer rule uniform in all states would improve economic efficiency. As a result, I support the view that federal rules should pre-empt state rules in this area."