As Congress gets more and more angry about excessive bonuses for bankers, the nation's biggest banks could lose one of their favorite defenses against stronger consumer protections -- the preemption doctrine. The House Financial Services Committee will likely vote Tuesday to allow state governments to protect their citizens by permitting them to impose restrictions on national financial institutions that go beyond existing federal laws.
This move will roll back the banks' gains from a hard-won battle for exemption from state laws that dates back as far as the 1980s. That's when national banks were allowed to expand beyond state lines. Those banks did not want to answer to 50 different states' laws, so they gradually fought for and won the right not to comply with state laws.
Some rulings over the years killing consumer protections in individual states include:
• A 1999 decision that national banks did not need to comply with a California banking law which limited the fees banks could charge to use ATMs.
• A 2000 decision that permitted national banks in Rhode Island to ignore state law limiting interest rates for credit cards.
• A 2002 decision that permitted banks in Texas to ignore a state law which barred banks from charging check-cashing fees.
Finally in 2004, the Office of the Comptroller of the Currency, which has been the least supportive of consumer protections, issued a blanket ruling that national banks were exempt from following state laws, and said it was the only regulator that could police the national banks. We all know how that worked out -- more and more abuses with less and less protection of consumers' rights.
Now the banks are fighting to keep that hard-won preemption doctrine on the books, arguing that it will be difficult for them to operate with 50 different sets of rules to protect consumers. Maybe a national agency that focuses on consumer financial protection is starting to look like a better option to these national banks.
House Financial Services Committee Chairman Barney Frank (D-Mass.) told The Washington Post that big banks don't have much political power. Why does he say that? Members of Congress hear daily from constituents with complaints about credit card abuses, such as ever-rising credit card interest rates and other actions by the credit card companies to increase their profits before the new credit card bill goes into effect in February. Also, decisions by the big banks to continue to pay huge bonuses, no matter what Congress and the public think, anger everyone in Congress.
The big financial companies have clearly shown that the only thing that will cause them to change the way they operate is being compelled to do so by new regulations. If some states want to protect their customers more energetically than the federal government, they should have the right to do so. They'll probably get that right in the new financial reform legislation.
The big banks will likely lose their battle on the House side, but that doesn't mean they won't try again in the Senate, which tends to be more conservative. But many senators are just as angry as their House counterparts about the behavior of the big banks: the blatant disregard for regulations; the race to raise interest rates on credit cards; the lack of access to consumer and business credit even after the banks received huge sums in bailout money intended to loosen the tight credit market; and the continuing practice of paying excessive bonuses to their top executives and traders. The big banks overarching disregard for public opinion will likely make their fight in the Senate to preserve the preemption doctrine as difficult as it has been in the House.
The only losers in this change will be the big banks, which will now have to answer to regulators in all 50 states, not just one big regulator in Washington. That single federal regulator has shown time and again it will side with the financial industry over the needs of consumers. It's about time for the pendulum to swing back to the consumer side. I'm sure it will initially be an overreaction, but that regulations on the big banks will gradually swing back to the middle.
Lita Epstein has written more than 25 books, including The Complete idiot's Guide to the Federal Reserve.
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