Economic Development & Commerce Committee Home

October 14, 2009

Dear Chairman Frank and Ranking Member Bachus:

As Congress pursues comprehensive financial services regulatory reform, Governors urge you to preserve state authority to protect consumers and investors.  Specifically, we support the provisions in the House Financial Services Committee draft Consumer Financial Protection Agency Act of 2009 (the “CFPA”) that would uphold the authority of states to enforce consumer protection laws and regulations against all financial institutions regardless of charter.

Federal actions to reform financial services should refrain from taking any action that impinges on or impairs the ability of states to enforce laws regarding consumer and investor protections, community reinvestment, and fair credit.  We offer the following common-sense reasons in support of preserving state authority to enforce laws and regulations covering financial services.

First, states are often the “first responders” to emerging financial services threats.  To preempt our ability to protect consumers and investors is shortsighted and would increase risk because the diversity of consumers, financial services products and institutions, investors, and local market conditions are too great for any single regulator.  Preemption would undermine states’ regulatory role and enshrine the federal government as the “first-and-only responder” of all local financial services threats. 

States are the vanguard of prudential regulation and consumer protection efforts, often developing innovative approaches and alerting the nation to emerging financial services threats.  For instance, many states heeded early signals of the housing crisis and enacted predatory lending laws and new state regulations for lenders and mortgage brokers before the current crisis.  While no level of government foresaw the scope and scale in time to avert the crisis fully, the states have been leaders in filling regulatory gaps and pursuing enforcement actions.  In 2007 alone, state regulators took nearly 6,000 enforcement actions against mortgage brokers and dealers. 

Second, there is no compelling evidence that federal preemption of state regulation of financial institutions improved consumer or investor protection during the current economic crisis.  With exemptions from certain state laws for federally chartered thrifts, banks, and their operating subsidiaries starting in 1996 and into 2004, federal preemption predates the acute period of the current financial services crisis.  The U.S. financial system melted down in a regulatory environment that permitted federal preemption. 

To justify a policy of preemption Congress must first assume federal regulators will act more quickly and efficiently to identify and respond to challenges rather than a combination of state and federal enforcers.  Recent history suggests otherwise.  For example, while Congress has yet to enact comprehensive predatory lending reforms, more than 30 states have already put such reforms in place.  Moreover, according to a recent University of North Carolina report, the share of risky, high-cost loans originated by national banks exempt from state predatory lending laws increased significantly after 2004.  Many of those loans contributed directly to the financial crisis at the heart of the current recession.  In contrast, the report found a lower default rate for neighborhoods in states with tough laws and regulations governing predatory lending, prepayment penalties, borrower ability-to-repay, and subprime and exotic mortgage instruments.

Third, the argument that state regulation of financial services chills competition and creates a drag on both this sector and the overall economy rings hollow.  Throughout the past decade in a dual regulatory environment, financial institutions remained profitable and competitive, foreign firms continued to enter the U.S. market, and we saw the expansion of innovative financial products and services.  A uniform regulatory climate, moreover, does not guarantee operating efficiencies for multi-state financial institutions and may actually help foster regulatory and political capture.

Finally, preemption discourages federal-state collaborations to protect consumers and investors.  If the federal government fails to act, or takes too long to react, preemption would keep the states on the sidelines unable to step in to help protect people locally from harm.  The federal government – and its federal financial regulators – should restore and preserve the ability of states to enforce laws regarding consumer protection, investor protection, community reinvestment, and fair credit.  The CFPA bill’s current language would set federal rules as a floor, not a ceiling, allowing the states to adopt and enforce stricter consumer protection laws.  Governors urge Congress to affirm a presumption against federal preemption of state authority.

The Supreme Court affirmed this position last term when it overturned an onerous federal preemption of states to enforce otherwise-valid state laws against national banks.  Cuomo v. Clearing Housing Association, 557 U.S. ___ (2009).  The Cuomo Court held that the National Bank Act (NBA) generally preempts “visitorial” supervisory powers by states over national banks, but that law enforcement powers are separate and not preempted by the NBA.  The decision permits states to pursue in court national banks alleged to violate valid state laws.  Governors support improved federal-state collaboration and coordination in enforcement efforts including enhanced information-sharing, shared access to criminal databases, and design of common enforcement protocols. 

We look forward to collaborating with Congress on a balanced national strategy for regulatory reform that strengthens the U.S. economy, upholds market safety and stability, protects consumers and investors, and preserves state authority as financial services regulators.

Sincerely,

Cc:       The Honorable Nancy Pelosi, Speaker of the House
The Honorable Steny Hoyer, House Majority Leader
The Honorable John Boehner, House Minority Leader
House Financial Services Committee members
Senate Banking Chairman Dodd and Ranking Member Shelby