What we talk about when we talk about Consumer Protection (Part 1)

Consumer protection is like puppies, ice cream, and the laugh of a child — beloved by all decent people. It is invoked by right and left as essential to a functioning market and a justification for regulation. So why are fights over financial regulation so contentious? If we all want consumer protection why don’t we just get along? Because, dear reader, when people talk about consumer protection they often don’t mean the same thing.

Consumer protection never sleeps, though it may yawn

An example from the fight over an OCC fintech bank charter

The fight over the Office of the Comptroller of the Currency’s (OCC) proposed fintech bank charter provides a useful example of this disconnect. The OCC is proposing a special purpose national bank charter that is effectively aimed at innovative “fintech” lenders and money transmitters. These firms do not take customer deposits and have been operating subject to a more onerous regulatory environment than their bank competition. Unlike banks, they must be licensed in every state they operate in and the lenders cannot operate nationwide under their home state’s laws governing interest.

Enter the OCC, which is planning to offer a way for at least some of these fintech firms to become national banks. This will allow these firms to operate in every state and (for the lenders) export their home state’s interest law. State banking regulators are not fans of this proposal. They argue that it will weaken “consumer protections.” Charles Cooper, the commissioner of the Texas Department of Banking and chairman of the Conference of State Bank Supervisors (CSBS), went so far as to say:

What if these newly-chartered entities run into problems? If they violate consumer rights, state protections and enforcement will not apply.

This simply isn’t true. National banks are not exempt from state protections and enforcement. The 2009 Supreme Court case Cuomo v. Clearing House Assoc. L.L.C., held that the National Bank Act did not prevent state law enforcement officials from enforcing state laws against national banks. The only time a state cannot enforce a state law is when it is explicitly preempted by federal law or regulation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) clarified when the state laws are preempted as applied to national banks. Dodd-Frank requires a state law to discriminate against national banks, prevent or significantly interfere with a national bank’s exercise of its powers, or be preempted by another federal law. Dodd-Frank also requires the OCC or courts to make a case-by-case determination.

State and local law enforcement can enforce quite a few state consumer protection laws against national banks. In fact, the infamous Wells Fargo fake account fraud started as a suit by the Los Angeles District Attorney.

What’s more, under Dodd-Frank state regulators can bring enforcement actions against national banks to enforce rules promulgated by the CFPB. The states retain a significant amount of power over issues like fraud, unfair and deceptive trade practices, and discrimination, all core “consumer protection” concerns. If you were to ask an existing national bank if it felt immune from the power of the states, I suspect the person you were talking to would look at you like you grew a second head.

Dr. Who is still regulated by the States is more like it

So why are state regulators concerned? A cynic would say it has to do with turf and licensing fees, and that may play a role, but there is something else as well. There is also legitimate concern for consumers, though it may include a belief that the state regulator hammer is best for every nail.

Some state regulators express concern about the loss of visitation power over the institution. This doesn’t mean that there is no regulator who will have comparable powers however. The OCC and (in some cases) the CFPB will have supervisory authority. It is questionable consumers would be at any more risk with the OCC and CFPB supervising compared to the state, and it certainly doesn’t negate state consumer protection law.

Of course, when a lot of people say “consumer protection” they really mean interest rate limits. These would be affected by a national charter because banks (including state chartered banks) are able, under federal law, to make loans under the terms allowed by their home state. This permits a bank to offer a consistent product nationwide, which allows for economies of scale. Whatever the merits of interest rate caps (wait for part 2), they are not the end-all-be-all of consumer protection. Reasonable people can (and do) disagree on their value, but either way caps don’t address fraud, or discrimination, or any number of other important consumer protection issues that must be addressed.

Conclusion

To determine how to best protect consumers we need to be on the same page. The OCC fintech charter debate shows how definitions can slip and lead to confusion. If people are concerned with interest rate caps, they should say so, and we can have that discussion. But we should not conflate one controversial provision with all of consumer protection at the expense of innovation and competition. Doing so may be good short-term politics, but in the long run it is counterproductive to the very thing we all love (no, not puppies, consumer protection).

A little more consumer protection for the road