The Senate approved an amendment Tuesday to the regulatory reform bill that would give federal regulators more leeway to preempt state laws, but still allow state attorneys general some enforcement power over national banks.
The measure, approved 80 to 18, was softer on the banking industry than a previous version by Senate Banking Committee Chairman Chris Dodd, but would still be stronger than current law.
"The amendment preserves the ability of state attorneys general to be a backstop for the Consumer Financial Protection Bureau and while the new bureau will be the main enforcer of its new rules, it preserves the role for the state AGs to ensure that consumers are never again put at risk because federal regulators are asleep at the switch," said Sen. Tom Carper, D-Del., who authored the amendment.
Dodd said the amendment was "really striking a balance."
"The Carper amendment preserves the state attorneys generals' role protecting their citizens against abusive practices," he said.
Under Dodd's bill, the Office of the Comptroller of the Currency would be allowed to follow the so-called Barnett standard to preempt state laws on a case-by-case basis.
But banking industry representatives objected to the provision because it would also require the agency to take additional steps, including proving that the issue a state law is addressing is already being handled by a substantial federal standard.
The Carper amendment would remove such language from the reform bill, allowing the OCC more flexibility to preempt state laws.
However, Carper was forced to drop his original plan to curb the state AGs' ability to enforce federal and state laws against national banks.
Under pressure from the White House and state advocates, his amendment would allow state AGs the ability to enforce new rules from a proposed consumer protection bureau against all banks, but prevent them from bringing federal class action suits against national banks or charging them over activities conducted in other states.
State regulatory representatives argued it was a good compromise that allowed for national standards but preserved the rights of states to act.
"It feels like there is at least a recognition of the role the states play," said John Ryan, executive vice president at the Conference of State Bank Supervisors. "It's a compromise and it feels like it's a fair compromise."
Still, it did not sit well with national bank and preemption advocates, who warned that state AGs would have much more power to pursue national banks than under current law.
"There is no way that you can consider national banks winners with this legislation," said Robert Cook, a partner at Hudson Cook LLP. "Some of the ambiguity has been removed from the preemption standard in the bill and that's a good thing… But to say this amendment is a victory for the comptroller or national banks is way too strong."
Ken Clayton, chief legislative counsel for the American Bankers Association, said the amendment was an improvement from the original Dodd bill, but still problematic.
"We continue to be concerned about the broad authority of state AGs to politicize national banking laws through litigation," he said. "At the same time, we do believe the provisions dealing with the way the Barnett standard works, that's a significant improvement that permits national banks to deliver services in a uniform way to consumers across the country."
Although state AGs would be restricted to enforcing rules from the new consumer bureau, observers said that over time, that could prove significant.
"Eventually it will give the attorney generals the ability to enforce almost any consumer protection rule against national banks," Cook said. "It's going to have considerably significant impact later.... Will the national banking system survive as a result of this amendment? Yes. Will it be the most efficient banking system? The answer is no."
Some Republicans continued Tuesday to try and go further. Sen. Bob Corker, R-Tenn., said he preferred the original Carper amendment and offered it to a vote, but it was defeated 55 to 43.
"This is going to create so much uncertainty out there and then to have an organization like this unfettered dealing with these types of issues and then for the first time in years allowing the state AGs to take actions against some of these smaller institutions," Corker said during debate on the floor. "This is one of the most dangerous and problematic attributes of this bill."
This story has been reprinted with permission from American Banker.
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