Dems debate shielding banks from state laws

WASHINGTON — Moderate House Democrats are drafting a proposal that would continue to shield big banks from potentially tougher state regulations of credit cards, mortgages and savings accounts.

The plan would differ from President Barack Obama’s proposal to give states a role in regulating large financial institutions that operate nationwide. The lawmakers say it would be more practical and less expensive not to force the banks to comply with 50 different regulatory regimes.

But their proposal, spearheaded by Illinois Democratic Rep. Melissa Bean and discussed at 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.

Bean’s proposal is the latest effort by some lawmakers and business groups to pare back — or at least put a finer point on — Obama’s sweeping proposal to rewrite the rules governing financial institutions. Obama has called for a new Consumer Financial Protection Agency, or CFPA, to protect the average American using credit cards or buying a home.

Rep. Barney Frank, D-Mass., who is leading the legislative effort in the House, has agreed to exempt certain businesses from CFPA oversight, including merchants, real estate agents, auto dealers, telecom companies and lawyers.

The U.S. Chamber of Commerce, which opposes Obama’s plan, said Wednesday that Frank’s bill is written so broadly that it would still cover many of those businesses. For example, auto dealers still would have to answer to the CFPA if they offered leases or loans.

The financial industry also opposes a provision in Frank’s bill that would subject federally chartered banks to state laws.

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.

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.

The House Financial Services Committee, chaired by Frank, planned to take up the bill the week of Oct. 12.

Democratic Rep. Jim Himes, a former investment banker and first-time congressman from Connecticut, has suggested he’s on board with the more business-friendly approach.

“Financial institutions that choose to compete nationally should be subject to one strong and effective regulatory regime,” he told The Associated Press in a statement. “Consumers choosing national institutions should expect consistent quality regardless of where they are in the country.”

But 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.

Associated Press writer Jim Kuhnhenn in Washington contributed to this report.