The CFPA does not need Preemption

(The following is excerpted from my recently released preemption white paper with Hal Singer, available at

In July 2009, the House Financial Services Committee introduced the Consumer Financial Protection Agency Act of 2009 (“H.R. 3126”). Among other items, H.R. 3126 would eliminate federal preemption of state consumer protection laws, which would encourage states (and even municipalities) to reintroduce a scattering of local rules and regulations. Federal rules promulgated by the Consumer Financial Protection Agency would override “weaker” state laws, but the states would be free to adopt “stricter” laws. The National Bank Act (NBA) and the Home Owners’ Loan Act (HOLA) would be amended to provide that state consumer protection laws apply to national banks and savings institutions. In addition, the NBA and HOLA would be amended to provide that their respective “visitorial” provisions would not prevent a state Attorney General’s enforcement of federal or state law.

Since the National Bank Act of 1864, U.S. banks and their customers have benefited enormously from the preemption of state and local rules. Uniform, national regulatory standards have allowed banks to issue a consistent set of terms for mortgages, credit cards, and business loans. Literature focusing on the politics of preemption, rather than on the economic effects, largely misses the efficiency gains from standardizing regulatory policy.

The arguments put forward by critics of preemption generally fail to consider the economic benefits of preemption and lack empirical validation. When preemption is considered from an economic efficiency standpoint, its merits become apparent (as they have also been to the Supreme Court). The economic literature has historically supported preempted laws that impose a proportionately greater compliance burden on smaller, multistate companies unable to realize economies of scale. Hence, by encouraging competition between banks, uniform standards lead to lower costs of credit and greater capital availability. The most significant preemption decisions made by the Office of the Comptroller of the Currency over the last two decades have enhanced competition among banks and thwarted price controls, increasing overall economic efficiency. Preemption has been used to open markets, expand access to banking services such as ATMs, democratize credit, and simplify regulatory compliance. Accordingly, placing barriers to preemption would raise bank operating costs and restrict bank operations, hurt customers, and suppress economic growth.

Moreover, none of the top 25 subprime loan originators in the recent crisis were national banks, only one was an FDIC insured bank, and the five lending operations that were associated with bank holding companies were fully subject to state law—further undermining the preemption opponents’ arguments that preemption is to blame for the subprime crisis. Similarly, the U.S. Treasury, itself, recently noted that 94 percent of “high-priced loans” to “lower income borrowers” were originated by lenders not covered by the Community Reinvestment Act.

In summary, from an economic perspective consumer protection and preemption are not contrary policies, but rather are different means of ensuring that financial markets function to maximize the banking services available to consumers. When markets are competitive, increasing the operating cost of firms through a patchwork of state regulation will result in higher prices for consumers. Likewise, protecting high-cost firms in a given state from competition against more efficient (out-of-state) firms will result in higher prices for consumers. Protecting consumers does not require policymakers to eviscerate U.S. national banking regulation that has provided a substantial basis for banking industry stability and economic growth since 1863.

† Hermann Moyse, Jr./Louisiana Bankers Association Professor of Finance, Louisiana State University, Senior Fellow at the Wharton School, and Partner, Empiris LLC. Contact information:; (202) 683-8909 office. Copyright Joseph R. Mason, 2009. All rights reserved. Past commentaries and testimony are blogged on