Amendment on Consumer Financial Protection Could Block Citizens From Taking Banks to Court

The debate over whether Congress should create a Consumer Financial Protection Agency, as recommended by President Obama, has recently taken a disturbing turn. Apparently, some congressional Democrats have been receptive to complaints from the big national banks that the current bill does not preempt state laws and regulations that are more stringent than the regulations that the new agency will promulgate.

National banks have traditionally been protected from state regulation by virtue of express preemption clauses in the federal statutes under which federal agencies like the Office of the Comptroller of the Currency provide their charters. This has arguably been a disaster for consumers. For example, when New York Attorney General Andrew Cuomo launched an investigation into discriminatory banking practices, the federal agencies literally cut off the investigation in mid-stride by filing a lawsuit in federal court for injunctive relief, and the Supreme Court agreed with the agencies.

This week the House Financial Services Committee may vote on an amendment offered by Rep. Melissa Bean (D-Ill,) that would similarly preempt more stringent state regulation once the new agency is up and running.

Proponents of this amendment argue that once the new consumer protection agency has promulgated a regulation establishing standards for national banks, it doesn’t make a lot of sense to allow 50 separate state agencies to promulgate different standards for the same banks.

Critics of preemption point out that federal agencies are subject to “capture” by regulated industries. As a new agency ages, it generally feels lots of pressure from the regulated industry and little pressure from the beneficiaries of the regulatory program. Before long, the agency can begin to see the world through the eyes of the companies that it regulates. It becomes domesticated by the regulated industry, and it stops doing its job correctly. There is no reason to believe that the new financial protection agency will be immune to pressure from the mega-banks that are emerging from the financial meltdown.

The skeptics have a very good point. Congress should think twice before it assumes that state regulators have no role to play in protecting their citizens.

But the Committee should pay special attention to a threat that such preemption may post to consumers that has not surfaced so far in the debates. There is a very real possibility that any express preemption clause would take away the right of victims of big banks to sue under state law for compensation for fraud and other misconduct when they have suffered financial damage as a result.

Congress has not in the past been sufficiently careful when it enacts legislation preempting state laws and regulations to preserve the right of citizens to sue, and the courts have been all too anxious to interpret such claims to preempt state common law claims.

Unless the House Democrats that want to preempt state regulations really mean to take away the right of citizens to sue, it should add an explicit savings clause making it crystal clear that any preemption clauses they add does not preempt state common law claims.

(For more on Rep. Bean's amendment generally, see Public Citizen and Wonk Room)