The OCC all over again

Law scholar Christopher Peterson (best known for his pioneering work on MERS) was among the first to point out the pattern of federal pre-emption of state-level consumer protection. In a 2005 paper, Peterson examined the behavior of the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision, the regulators of national banks and thrifts, in pre-empting states’ attempts to rein in bad lending practices. He described the result of this behavior has been a deregulatory creep to the bottom in a second paper:

Because federal banks, state banks, thrifts, credit unions, and non-depository lenders all act  in the same zero-sum competitive environment, political shelter for one type of institution is a direct threat to every other type of institution. When the regulatory patrons of one type of institution act to relax the regulatory constraints of their members, rival patrons must respond or risk losing their regulatory turf as the institutions they represent lose market share or shift their assets into better protected (read: less regulated) charters. This dynamic guarantees that even narrow federal efforts to preempt state law will merely creep. In the nearly thirty years since the Supreme Court’s decision in Marquette National Bank v. First of Omaha Corporation, preemptive actions have almost without exception crept out to cover more and more commercial activity. The result has been a steady, silent, deregulatory trend.

We’re living with the fall-out of that creep today, as banks have centralized even further, and continue to enjoy the protection of a highly sympathetic federal government even as individuals remain exposed to widespread foreclosure fraud.

Not to be outdone, the Senate appears today to be engaging in a similar pattern of pre-emption, only this time the targets are regulatory agencies responsible for investor protection. From Dealbook (via Dayen):

Under the bill, current and future White Houses would receive explicit authority to influence the rule-making process at independent agencies, a collection of several dozen government bodies as varied as the Federal Communications Commission and the F.D.I.C., S.E.C. and C.F.T.C. The Federal Reserve is exempt.

The president, through an executive order, would be allowed to mandate at the minimum a 13-point test for rule-making. That includes finding “available alternatives to direct regulation,” evaluating the “costs and the benefits,” drafting “each rule to be simple and easy to understand” and periodically reviewing existing rules to make agencies “more effective or less burdensome.”

For more “significant” rules — those that have an annual effect of at least $100 million on the economy — independent agencies would have to submit their proposals to the Office of Information and Regulatory Affairs, an arm of the White House that acts as a sort of regulatory referee. A negative review from the office would delay a rule for up to three months and force an agency to explain its approach.

Dayen rightly notes the real impact of this bill if passed: by centralizing influence over the agencies in the executive branch, the bill would make lobbying that much easier, and would pull the supposedly independent agencies that much further into the ebb and flow of the electoral cycle.  The results would likely be disastrous for any hopes for meaningful reform, regardless of who occupies the president’s chair.

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