Dems debate shielding banks from state laws

[September 30, 2009]  WASHINGTON (AP) -- Moderate House Democrats are drafting a proposal that would continue to shield big banks from potentially tougher state regulations when it comes to selling products such as credit cards, mortgages and savings accounts.

The lawmakers say it's a practical approach to regulating large financial institutions that have customers in multiple states and to keeping costs low. But the proposal, spearheaded by Illinois Democratic Rep. Melissa Bean and subject of a hearing Wednesday, isn't sitting well with consumer advocates who say banks shouldn't be allowed to skirt state regulations if the restrictions don't suit them.

"That's the system we have now. That's the system that failed," said Ed Mierzwinski, consumer program director for U.S. Public Interest Research Groups.

The current regulatory regime allows banks to follow either state or federal regulations. Whereas community banks often follow state rules, large banks typically opt for federal oversight so they can operate in various states under one set of regulations.

Under a plan by President Barack Obama and Massachusetts Democratic Rep. Barney Frank, lenders would have to answer to both state and federal regulators. A new Consumer Financial Protection Agency, or CFPA, would set the federal standard but states would be free to impose tougher rules.

The financial industry says the agency would be too burdensome on local businesses, a complaint to be considered at Wednesday's hearing of the House Financial Services Committee, which Frank chairs.

While Bean supports creation of a CFPA, she said in an interview this week that subjecting federally chartered banks to state laws would be too cumbersome to implement and would pass on added costs to consumers.

"If you have 50 different regulatory regimes that an institution has to comply with every new offering they make, every new service they want to provide, there (would be) 50 different sets of forms with 50 different sets of training," she said.

Bean said she is drafting an amendment with input from other Democrats that would allow federally chartered banks to follow federal regulations under the CFPA and ignore state laws. She says her plan would still allow for multiple watchdogs because states could cooperate with federal regulators to sue banks in civil court for violation of federal law.

Ellen Harnick, senior policy counsel with the Center for Responsible Lending, said the amendment would not afford enough protections for local communities to go after foreclosure scams and other consumer issues.

"If you push the states out and leave just the federal regulator, you eviscerate the system," Harnick said.

Bean's proposal is the latest effort by lawmakers to pare back -- or at least put a finer point on -- Obama's sweeping proposal to rewrite the rules governing financial institutions.

Last week, Frank said he wanted to exempt certain businesses from CFPA oversight, including merchants, real estate agents, auto dealers, telecom companies and lawyers. At the same time, he dropped Obama's proposed requirement that every bank offer customers "plain vanilla" -- low-risk, standardized -- products such as 30-year fixed-rate mortgages approved by the government.

The administration has embraced Frank's rewrite because it brightens the bill's prospects considerably in a Congress worried about protecting the consumer at the expense of community banks. But the White House suggested Monday that lawmakers must be careful not to create loopholes that could contribute to another financial crisis.

"The president would not sign any bill that he thought was too weak," White House spokesman Robert Gibbs said.

[Associated Press; By ANNE FLAHERTY]

Associated Press writer Jim Kuhnhenn contributed to this report.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.