The Economic Impact of Eliminating Preemption of State Consumer Protection Laws

In July 2009, the Obama Administration proposed legislation that would create a Consumer Financial Protection Agency (“CFPA”). Among other items, the proposed legislation would eliminate federal preemption of state consumer protection laws, which would encourage states to reintroduce a scattering of local rules and regulations. Federal rules promulgated by the newly created 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 apply state consumer protection laws to national banks and federally chartered 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. The legislation is an outgrowth of a recent—though largely noneconomic—literature linking preemption to much of what ails the U.S. banking industry, including the subprime mortgage crisis. In Part I of this report, we briefly review the preemption debate, beginning with the passage of the National Bank Act of 1864. A review of the Supreme Court’s decisions in preemption cases reveals that the Court has, based on statute and legal precedent, both implicitly and explicitly promoted economic efficiency through preemption. Through such rulings, the Court