Senate Republicans have put forward their own proposal for a new consumer protection agency, a plan that significantly kneecaps the consumer division Democrats are pushing for and does little to actually help consumers. Republicans’ plan would establish a consumer protection division within the Federal Deposit Insurance Corporation, but it wouldn’t be independent or autonomous, a condition seen as a dealbreaker for consumer advocates. (The Democrats would put an independent agency in the Federal Reserve.) In the GOP’s plan, the division’s ability to write new rules would be seriously constrained by the FDIC, which have to agree to those new rules before they became law.
The GOP’s consumer proposal would also allow federal consumer laws to continue to override, or preempt, state laws. (The Democratic plan, on the other hand, would let states’ attorneys general and other regulators, who are nimbler and respond to on-the-ground events faster, to craft laws at the state level.)
Here’s why the GOP’s plan to continue federal preemption in consumer protection is a nightmare. As financial blogger Mike Konczal has described, the case of Georgia’s efforts in the early 2000s to crack down on predatory lending is a telling—and painful—illustration of why preemption is bad for consumers and American families. In 2003, as the subprime lending bubble was growing, Georgia state regulators were flooded with overwhelming evidence of predatory lending. Those regulators soon tried to intervene and stop those practices, in part with a bill called the Georgia Fair Lending Act.
Then came the Office of the Comptroller of the Currency, a federal regulator that charters and oversees national banks. The OCC’s chief, John Hawke, delivered a speech (pdf) in July 2003 in which he argued against letting Georgia write its own rules to protect its citizens against predatory practices. He said such state-based rules would interfere with the rating agencies’ models, and that they would stifle the creation of certain high-risk mortgage products. A week later, the OCC officially announced it would preempt Georgia’s predatory lending laws for national banks and their subsidiaries, i.e., the big players in the subprime mortgage market. As Konczal put it:
The OCC sprung into action to make sure that a specific state couldn’t put into place simple “rules-of-the-road” type legislation: no negative amortization, no prepayment penalties, no balloon payments, and simple rules over second liens like home equity lines of credit.
Negative amoritization, prepayment penalties, balloon payments—all predatory practices that played a role in the financial crisis. Yet the OCC stepped in to make sure banks could keep peddling these explosive products.
So how’d Georgia fare under federal oversight? In 2008, it had the eighth highest foreclosure rate in the country; a year later it had the seventh highest rate. Since the crisis in 2008, Georgia has led the country in bank failures, according to the FDIC, in large part fueled by a residential lending boom turned sour in the early and mid 2000s. In other states as well, like New York and Massachusetts, the OCC blocked state attorneys generals’ efforts to crack down on predatory lending and other abuses.
Leaving this kind of preemption in place, as the GOP wants to do, undercuts the toughest cops on the beat for consumers. Which is to say the GOP’s vision for consumer protection would do anything but protect consumers.