The Senate voted to roll back efforts to give states more consumer powers Tuesday — a partial victory for federally chartered banks that don't want state regulators meddling in their business.
At the same time, Senate Banking Committee Chairman Christopher Dodd offered a potential compromise that could, at least temporarily, resolve a standoff over how to regulate the complex securities known as derivatives. Dodd's proposal would require a two-year delay in the implementation of a contentious provision that would force banks to spin off their lucrative derivatives business.
Tuesday's maneuvers came a day before the Senate was set to vote to end debate on sweeping changes to federal financial regulations, the biggest overhaul of Wall Street rules since the Great Depression. Still, several issues remained unresolved and tempers were running short on the Senate floor among Democrats who were unable to get votes on their amendments.
Even if Wednesday's vote succeeds, final action on the bill might not come until Friday.
On the consumer front, the Senate voted 80-18 to rein in the underlying bill's provisions permitting states to write and execute tougher consumer financial laws and to let state attorneys general enforce federal laws.
Under current law, federal regulators have been able to issue a blanket rule overriding state laws concerning licensing, credit terms and loan disclosures. The result has been an inability by state regulators to impose those rules on national banks and a rash of dismissed lawsuits brought by homeowners claiming national banks or their subsidiaries violated state consumer rules.
John Thibault, a 60-year-old Vietnam veteran living in Manteca, Calif., is among those facing such a legal thicket. According to his lawsuit, when he sought to refinance his two-story house in 2006, a subsidiary of now-defunct Countrywide Financial offered him an adjustable rate mortgage with a 1.5 percent initial interest rate.
The following month, his interest rate ballooned to 7.5 percent. While his payment remained the same, the additional $2,200 he owed a month got tacked on to the balance of his loan, ultimately increasing the size of his mortgage to twice the value of his house.
"Just to try to keep the payments going I've had to sell my stock, use up all my savings and am maxing out on my credit cards trying to maintain the bills, including utility bills and even putting food on the table for my family," Thibault said in an interview.
Thibault sued Countrywide Bank, a federally chartered institution, and its affiliates claiming they failed to disclose all the terms of the loan in violation of California consumer laws. If recent history is any guide, his case against the bank will be dismissed on the ground that federal law preempts state law when it comes to federally chartered banks.
"We've lost almost every single case on pre-emption," Thibault's lawyer, Jeffrey Berns, said. "What's sad is you have some really good federal district court judges who are saying, 'We feel we don't have any choice.'"
Banks and their allies argue that the bill Dodd had drafted would create an overly complex system of regulation. They argued states devising disparate rules would result in increased costs to consumers and an avalanche of lawsuits.
"It is not only going to be confusing for the banks themselves, as they try to comply with this patchwork quilt of 50 different rules and regulations, in addition to the national rules and regulation, it's going to be confusing for consumers too," said Sen. Tom Carper, D-Del., who offered the successful compromise amendment to limit state power.
Carper, in a deal with Dodd, agreed to allow federal regulators to override state law on a case-by-case basis and permit attorneys general to enforce federal regulations passed by a proposed consumer financial protection bureau.
Bankers cheered the vote.
"Without the Carper amendment, consumers and their banks could have been subject to potentially hundreds of different and confusing state and local laws covering their loans, checking accounts, credit and debit cards, or ATM usage," said Edward Yingling, the American Bankers Association's president and CEO.
Consumer advocates were more conflicted.
"The deal compromises a bill further that is already full of concessions to the banks and the bank regulators who failed us, but it does not give in to the bank demands to remove the states entirely from their responsibility to protect their residents," said Lauren K. Saunders, a managing attorney at the National Consumer Law Center.
On the Senate's effort to control derivatives, even Dodd's compromise offer might not settle the issue.
The initial requirement for banks to spin off their derivatives business was offered by Sen. Blanche Lincoln, D-Ark. Dodd offered the amendment Tuesday while Lincoln was in her home state struggling through a difficult primary election.
"I remain fully committed to my provision and will fight efforts to weaken it," Lincoln said in a statement late Tuesday. "I'm proud of the support my provision has received both inside and outside the Senate and will defend it should there be a debate on the Senate floor."
The financial industry also was not ready to embrace Dodd's changes.
Because many derivatives contracts have a duration period of two to five years, the two-year delay period in Dodd's amendment could create huge uncertainty now and have a chilling effect on banks, said John Dearie, executive vice president of the Financial Services Forum, an industry group. He said that would likely have the same effect that regulators have warned about Lincoln's proposal — that it would drive derivatives into unregulated markets.
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