Banking Law

According to Stacy Kaper, reporting in today's American Banker (paid subscription required), Barney Frank worked out a compromise late yesterday with moderate Democrats that appears to roll back the attempt by more liberal Democrats to restrict the OCC's power to preempt state law. Under Frank's original bill, "the OCC would have only been able to preempt state consumer laws on a case by case basis when it interfered with the business of banking. The standard was meant to repeal the agency's sweeping 2004 preemption rules, returning it to the so-called 'Barnett standard' established by the 1996 Supreme Court case of Barnett V. Nelson." According to Ms. Kaper, Frank agreed to amend his bill to effectively preserve the OCC's current power to preempt state law.

Under the deal reached between House Financial Services Committee Chairman Barney Frank and [Illinois Rep. Melissa] Bean, the OCC could preempt a state consumer protection law by simply writing a letter or issuing a ruling. It would reaffirm the deference given to the OCC?s rulings by the courts.

It would also allow the agency to preempt all equivalent state standards at once. For example, if the OCC were to preempt an Indiana credit card disclosure law, it could apply the same standard to other credit card disclosure laws with similar language.

The bill would also lower the threshold required for the OCC to preempt state standards by saying that it can override any law that "prevents, significantly interferes with, or materially interferes" the business of banking.

That's certainly a set-back for consumer advocates and state regulators, who had high hopes that the juggernaut of OCC world domination would be somehow forced to grind to a halt. In the messy world of legislation-making, the sausage that results sometimes is not very appealing to those with refined tastes.

Frank also agreed to a legislative maneuver that makes the preemption power provision almost bullet proof.

Bean succeeded in convincing Frank to adopt the bulk of her proposal to broaden preemption and roll it into the Massachusetts Democrat?s manager?s amendment. By incorporating it as part of the base text without requiring a separate vote solely on that provision, the move virtually guarantees that her preemption language will stick.

Ms. Kaper also reported that there were further signs of compromise by Frank and the managers of this legislation with moderates, which may mean that a piece of legislation might be worked out with which banks could actually live.

During the negotiations, moderate Democrats also succeeded in convincing House leaders to consider other amendments during debate, including a measure by Rep. Walt Minnick, D-Idaho, that would substitute the creation of a new consumer agency with a proposal that would let a council of existing federal regulators jointly write new safety and soundness standards and consumer protections.

We'll have to see what amendments are actually adopted (as opposed to merely debated) and what eventually passes both houses of Congress, but if that change is as good as it sounds and makes its way into the final bill, it might address the concerns of commercial bankers who were "fixin' to open up a can of All-American whoop-ass" on Frank's bill over the single issue of the new "Consumer Financial Protection Czar." I think bankers might be able to live with a council of existing regulators who write protections. At least, you wouldn't have a newly created federal potentate with an axe to grind, and each type of bank's primary federal regulator would be able to have input as to its "constituents'" concerns. It would be nice if the new council also includes representatives of state regulators, so all interested parties have a seat at the table. Again, we'll need to see the final language before we get too excited.

The House will also consider an amendment by a group of moderates that would alter the definition of a major swap participant in derivatives legislation to better protect end-users.

The new manager?s amendment from Frank will also take steps to address another big concern of bankers and modify a provision from Reps. Brad Miller, D-N.C. andDennis Moore, D-Kans., that would have required secured creditors to take a 20% haircut in resolutions of firms that pose a risk to the economy.

Under revised language to be included in Frank's manager's amendment, the haircut would be reduced to 10% and apply only to short-term lending of 30 days or less. It would also explicitly exempt any debt secured by government entities including the Federal Home Loan banks, the government-sponsored enterprises, the Federal Housing Administration and Treasury securities.

The 20% haircut is an idea that was launched by Sheila Bair and roundly criticized by experienced expert observers. Bair recently claimed that the 20% haircut "would rarely be used" and that it was designed to target "short-term secured funding." Critics, including long-time bank consultant Bert Ely, publicly warned that the original legislative language would also apply to long-term secured lending and would, in effect, make it nearly impossible for even small financial firms to get long-term secured funding. It sounds like the latest compromises will address the critics' concerns.

If this spirit of constructive compromise keeps up, there's no telling what might happen. Something might actually get passed that will satisfy no one but harm few. That's about the best you can hope for when Congress is in full action mode.