The Economic Impact of Eliminating Preemption of State Consumer Protection Laws

The University of Pennsylvania Journal of Business Law, Forthcoming

34 Pages Posted: 22 Sep 2009 Last revised: 10 Nov 2009

See all articles by Joseph R. Mason

Joseph R. Mason

Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center

Robert B. Kulick

NERA Economic Consulting

Hal J. Singer

Econ One

Date Written: September 1, 2009

Abstract

In July 2009, the Obama Administration proposed legislation that would create a Consumer Financial Protection Agency. Among other items, the proposed legislation would eliminate federal preemption of state consumer protection laws, which would encourage states to reintroduce a scattering of local rules and regulations. The legislation is an outgrowth of a recent - though largely non-economic - literature linking preemption to all that ails the U.S. banking industry, including the subprime mortgage crisis. Since the National Bank Act of 1864, U.S. banks and their customers have benefited enormously from the preemption of state and local rules. Uniform, national regulatory standards have allowed banks to issue a consistent set of terms for mortgages, credit cards, and business loans. Literature focusing on the politics of preemption, rather than on the economic effects, largely misses the efficiency gains from standardizing regulatory policy. By encouraging competition between banks, uniform standards lead to lower costs of credit and greater capital availability. In this paper, we examine from an economic perspective why uniform national standards were originally needed in the U.S. banking industry, and continue to be so. The most significant preemption decisions made by the Office of the Comptroller of the Currency over the last two decades have enhanced competition among banks and thwarted price controls, increasing overall economic efficiency. Preemption has been used to open markets, expand access to banking services such as ATMs, democratize credit, and simplify regulatory compliance. Accordingly, placing barriers to preemption would raise bank operating costs and restrict bank operations, hurt customers, and suppress economic growth.

Keywords: banking, consumer protection, preemption, subprime mortgage crisis, Consumer Financial Protection Agency, CFPA

Suggested Citation

Mason, Joseph R. and Kulick, Robert B. and Singer, Hal J., The Economic Impact of Eliminating Preemption of State Consumer Protection Laws (September 1, 2009). The University of Pennsylvania Journal of Business Law, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1476318

Joseph R. Mason

Louisiana State University - Ourso School of Business

2900 Business Education Complex
Baton Rouge, LA 70803
United States
202-683-8909 (Phone)

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

Robert B. Kulick

NERA Economic Consulting ( email )

1255 23rd Street NW
Suite 600
Washington, DC 20009
United States

Hal J. Singer (Contact Author)

Econ One ( email )

805 15th Street
Suite 501
Washington, DC 20005
United States
202.312.3065 (Phone)

HOME PAGE: http://https://www.econone.com/staff-member/hal-singer/

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