As the Trump era nears inauguration, progressives have found solace in an unlikely quarter: federalism. In The New York Times and Vox, liberal scholars cheer on expected efforts to advance a localized agenda of resistance and reform, from sanctuary cities to mandatory reductions in carbon emissions to a living wage.
But President-elect Donald Trump and his team could nullify state and municipal laws through federal pre-emption. Under certain circumstances, federal agencies can argue that the industries they regulate need not comply with any state measures that go beyond their national standards. This can particularly affect consumer protection, where pre-emption has an ugly recent history. And this has Democrats angry that President Obama’s hand-picked regulators are handing their successors a golden opportunity to wipe out state rules.
Earlier this month, the Office of the Comptroller of the Currency (OCC), the main regulator for national commercial banks, announced that it would move forward on granting special purpose bank charters to so-called “fintech” companies. This moniker applies to a wide range of technology-focused financial services startups, like robo-stock adviser Betterment, online lenders Lending Club and SoFi, or such payment services as Stripe, Square, and even ApplePay. More pop up every day, with $24 billion in global investment over just the last few years. At their best, they are seen as a way to democratize finance and give all income classes the tools to borrow, invest, and bank. But at their worst, they could be teamed with Big Data to target vulnerable people with high-cost loans.
Under the plan, fintech companies could choose a national charter that would make them subject to OCC-supervised standards on corporate governance, risk management, and capital and liquidity requirements. “Preferences and needs of consumers, communities, and business are changing,” said Comptroller of the Currency Thomas Curry at the announcement. “Chartering companies that are finding new and better ways of satisfying those needs is another step toward supporting responsible innovation that is good for consumers, good for the federal banking system, and good for the country.”
There may be excellent reasons to charter fintech companies. Having non-banks engage in lending and other services outside of the regulatory perimeter makes it difficult to properly monitor the entire financial sector. National standards would not only train fresh eyes on the market (and after the Lending Club loan backdating scandal, it’s clear fintech needs some policing), it would cut down on the regulatory arbitrage that happens now. Under that system, fintech firms partner with national banks so they can adhere to one standard instead of a state-based patchwork of rules. This trends toward monopolization of financial services, at a time when the banking industry would actually benefit from more competition.
But there’s a problem. Federal banking law puts limits on what’s known as state visitorial powers—the ability to regulate, examine, and supervise a company’s affairs. A chartered fintech firm could get this kind of relief if OCC declared that the company was no longer subject to certain state rules. “We don’t want a situation where the OCC charter trumps state law,” says Senator Jeff Merkley, an Oregon Democrat who sits on the Banking Committee.
The Dodd-Frank Act excluded certain types of pre-emption, and also affirmed that states may bring lawsuits against national banks for violations of state law, as well as of rules issued by the Consumer Financial Protection Bureau. But OCC could still pre-empt state consumer-finance laws if the agency determines that the law discriminates against national banks, or “interferes with the exercise by the national bank of its powers,” according to Dodd-Frank Section 1044. The Comptroller makes these determinations on a case-by-case basis, subject to judicial review.
For example, an online lender with a federal charter might argue for an exemption from Oregon’s payday lending law, which limits the interest rate to 36 percent. Nothing in the current proposal prevents a current or future Comptroller from deciding to pre-empt that rule. “Creating a charter that doesn’t explicitly protect consumers runs the same risk as what we see in the credit card industry, where the laws of a state trump the laws where the transaction is made,” Merkley says.
This concern is not merely theoretical. In 2002, Georgia passed the strongest anti-predatory mortgage laws in the nation. OCC pre-empted the law for national banks, claiming that there was “no evidence that national banks are engaged in predatory lending practices.” This created a chilling effect; state legislatures simply stopped working on mortgage fraud laws, expecting a federal override. Merkley described his efforts as Oregon House Speaker to pass a law against predatory lending in 2008, five years after the OCC pre-emption. “We passed it, but in the Senate, the leadership said they wouldn’t put it up for a vote,” Merkley says, “because it created inconsistency between federal and state banking charters.”
State banking regulators have been quick to push back against OCC. Maria Vullo, superintendent of the New York Department of Financial Services, issued a blistering statement, vowing “New York will not allow consumer protections to fall into the void.” Vullo told Bloomberg that states have long regulated non-depository financial service providers, which they “should continue to protect without the threat of pre-emption.”
In his announcement, Curry said understandable concerns about pre-emption are “not exacerbated by granting special purpose charters.” He cited numerous areas where state law applies to national banks—including fair lending, debt collection, foreclosures, and even unfair and deceptive practices—and assured that any fintech charter would operate the same way.
However, even Curry would agree that his interpretation is subject to change depending on OCC guidance. And Curry won’t be around much longer. His term as comptroller expires in March, meaning Trump will get to name the individual who would likely complete the fintech charter process. So an Obama-appointed banking regulator just set the table for a Trump designee to easily undermine state consumer protections.
Top tech firms, which are meeting with Trump this week, know well what’s at stake here. In July, a consortium called Financial Innovation Now, which includes Apple, Amazon, and Google, released a white paper lamenting the burdensome regulations associated with fintech, all but begging for the feds to step in and override a state-dominated process. “New technologies may themselves solve regulatory policy goals and obviate the need for some regulations,” according to the paper. Financial Innovation Now signaled that members were “encouraged” by Curry’s attempt to streamline fintech regulations.
This isn’t the only example of Obama’s independent agencies taking actions that will make life easier for Trump’s. The Commodity Futures Trading Commission just stopped work on a rule aimed at preventing speculation on oil and other futures markets. Nearly the entire top staff at the Securities and Exchange Commission has resigned since the election. But Curry’s maneuver could prove even more damaging, because he’s creating a previously nonexistent device for the Trump OCC to employ.
OCC will have to weigh public comments before implementing the charter rules. Merkley, for one, wants definitive language that prevents the overriding of state laws. “It comes down to states being a good backstop for the protection of consumers,” he says. And fintech firms could still be subject to Consumer Financial Protection Bureau oversight. But the deregulation-minded Trump administration is unlikely to appreciate these attempts at preservation. The president-elect and his team already had plenty of means to wreck consumer protection; Thomas Curry didn’t have to deliver them another hammer.