WASHINGTON — House and Senate conferees were set Tuesday to deal national banks a setback, agreeing on final language that would make it harder for federal regulators to preempt state consumer protection laws.
In the final scheduled week of negotiations, the panel also tackled a host of other issues and was expected to reach an accord on provisions that would create a consumer protection regulator, establish mortgage underwriting standards, and force lenders to retain some risk of mortgages they sell into the secondary market.
Although preemption was not debated on Tuesday, Senate conferees gave ground to a House proposal on the issue, agreeing to language that says the Office of the Comptroller of the Currency can only preempt state laws that "significantly" interfere with the business of banking. Preemption experts mostly agreed that the added language would make it harder for the OCC to preempt a state law and strengthen state regulators' case in court.
"The 'prevents or significantly interferes with' language means that any state consumer financial protection laws that do not significantly interfere with national bank powers will continue to stand," said Patricia McCoy, director of the Insurance Law Center at the University of Connecticut's School of Law. "In other words, it's not enough for a state law to interfere — it must interfere 'significantly.' "
The new language effectively overrules the 2004 preemption rules, which said that state law was automatically preempted if it "obstructs" or "impairs" a bank's operations, a standard many critics considered too broad.
"It's a win for the states," said Arthur Wilmarth, a professor at Washington Law School at George Washington University. "It makes it even clearer the OCC's 2004 preemption rules cannot apply … This is a much more demanding standard for finding preemption."
Although industry representatives continue to vigorously oppose the new language, the OCC apparently agreed to it. Some observers said it was the best deal the agency was going to get. The House had been seeking additional language that would have forced the OCC to prove a substantive federal standard existed before preempting a state law on a particular consumer issue — an even tougher standard that would have been harder to meet.
"At times in the legislative process one realizes that the language you are confronted with is the best you are going to get, so you might as well embrace it," said L. Richard Fischer, a lawyer at Morrison & Foerster LLP."The Federal Reserve has been doing this for nearly 12 months, and now it appears that the OCC has finally learned this lesson."
Other observers suggested that banks had already lost once it was clear Congress was going to craft a new preemption standard.
"The national banks — at least the handful to whom consumer finance actually matters — are likely to see this as a defeat," said Raj Date, chairman and executive director of the Cambridge Winter Center for Financial Institutions Policy. "But, realistically, preemption is a complicated and high-stakes field, so the banks were likely to continue to litigate borderline cases irrespective of the outcome here."
Conferees also were poised by Wednesday to finalize language on other consumer protection provisions.
As expected, the House agreed to the Senate's structure for a new consumer regulator, which would be an autonomous unit inside the Federal Reserve Board.
House and Senate conferees were also expected to finalize a deal struck Monday between Sen. Richard Durbin, D-Ill., and House lawmakers to allow the central bank to ensure interchange rates on debit cards are "reasonable and proportional." Although the wording is opposed by the banking and credit union industries, it now appears the final regulatory reform bill will include the provision.
Under conference committee rules, the House makes an offer to change the bill, which the Senate conferees can accept, reject, or counter. Once the two sides agree, the bills must still be approved by the full House and Senate.
House Financial Services Committee Chairman Barney Frank said Tuesday he wanted to ensure the conference is finished by Thursday so that President Obama can bring a final blueprint for overhauling the financial system to the Group of 20 meeting this Saturday. Lawmakers are hoping to have a final bill passed before the Fourth of July recess.
Much of the debate Tuesday concerned proposed risk-retention requirements. House conferees sought to strike a provision added to the Senate bill that would let banking regulators define and exempt a class of qualified mortgages from the bill's requirement that lenders retain 5% of a loan's risk when packaging it into a security.
While Frank noted the House version would also allow regulators to reduce or waive the risk-retention standard, he objected to exempting a specific class of loans. "We do want to give the regulators the power to go to zero," he said. "If you can prove to the regulators that you have designed a product that is a very safe and sound one, the regulators could say your risk retention is zero."
But Frank said the Senate measure went too far. "I don't want to have that too rigid," he said. "I don't want to make it too easy for anyone to get around. That's why I don't want to remove risk retention from a class of loans."
Conferees did agree to exempt federally insured loans from the risk-retention requirement such as those backed by the Federal Housing Administration and the Veterans Administration.
The Senate also agreed to accept much of the House's language to establish underwriting standards for all mortgages. The language is largely based on legislation that passed the House multiple times that would force regulators to set standards and ensure borrowers have the ability to repay their loans.
The House conferees also adopted a proposal from Rep. Scott Garrett, R-N.J, that would establish a comprehensive framework for a covered bond market in the U.S. to provide liquidity for home mortgages, commercial real estate and public sector financing. It would specifically create a covered bond regulator within the Treasury Department. It would also define the eligible asset classes to be included in the "cover pool"; establish criteria for issuers interested in offering covered bonds; detail the process of transferring the covered assets to a separate estate in the event of an issuer insolvency; and appoint an administrator to oversee and manage the separate estate.
While the Senate did not vote on the issue late Tuesday, Senate Banking Committee Chairman Chris Dodd and Sen. Bob Corker, R-Tenn., expressed support for the measure.
The conference is expected to address prudential regulation on Wednesday, including provisions dealing with charter approvals, conversions and industrial loan companies. The Senate is also expected to offer language to beef up provisions to implement the Volcker Rule, which would ban proprietary trading.
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