By Silla Brush - 05/06/10 10:00 AM EDT
Rifts are emerging among Senate Democrats over how much power the federal government should have under the Wall Street overhaul bill to pre-empt state consumer regulations.
Centrist Democrats argue Senate Banking Committee Chairman Chris Dodd’s (D-Conn.) financial bill should do a better job of reaching a middle ground between state and federal powers. Democratic Sens. Tom Carper (Del.) and Tim Johnson (S.D.) are among those raising concerns, according to several industry and congressional sources.
The balance of federal and state power is at the heart of the debate over a new federal regulator on consumer financial products. As part of its effort to overhaul Wall Street, the White House has pushed hard for more than a year to give state attorneys general and other state officials the power to pursue tougher regulations than imposed by the federal government.
The White House, most Democrats and consumer advocates say the federal government has too often overridden state regulations.
The financial industry and Republicans want to preserve the federal government’s ability to pre-empt state regulations.
The industry argues that without pre-emption, banks would be subject to conflicting or overlapping regulations. Complying with those myriad rules would drive up costs on banks, the industry argues. Those costs could, in turn, be passed on to consumers.
“We cannot have a patchwork set of rules for federally chartered banks,” said Richard Hunt, president of the Consumer Bankers Association. “Why would you add an additional layer of confusion?”
Pre-emption is a top priority in the financial industry’s lobbying efforts on the Wall Street bill.
Senate Republicans circulated legislation this week that would set up a new division for consumer financial protection. But in the legislation, Republicans favor retaining current law on pre-emption, giving the federal government strong power to set standards.
Their concerns are shared by the Office of the Comptroller of the Currency, a division of the Treasury Department that oversees national banks. In a recently circulated memo, the office calls the Dodd bill’s pre-emption standard “a radical departure from recognized pre-emption principles.”
State attorneys general from Iowa, Illinois and elsewhere have joined consumer advocates in opposing the industry and Republican charges.
Johnson raised concern about the balance of powers this week.
“I hope that bipartisan language on investor protection can be retained, that we can find common ground on national pre-emption and state AG enforcement,” Johnson said.
Carper has also raised concerns, according to multiple industry sources. Carper’s office declined to comment on Wednesday.
Some liberal Democrats are pushing amendments that would set stronger prohibitions on the federal government overriding states.
Sens. Sheldon Whitehouse (D-R.I.), Jeff Merkley (D-Ore.) and Dick Durbin (D-Ill.), among others, support an amendment that would prevent consumer credit transactions from having higher rates than the maximum allowed in a given state.
The pre-emption issue was a major concern in the House as well. Centrist Democrats, particularly New Democrats, have long supported federal pre-emption.
The issue was a major concern in December during the House debate on financial legislation.
Rep. Melissa Bean (D-Ill.), House Democratic leaders and Obama administration officials huddled for hours in the Capitol to negotiate a compromise on the issue that allowed debate on the bill to go forward.