Later this month, the Supreme Court will hear arguments in Watters v. Wachovia Bank, which deals with the question of the propriety of the preemption by the Office of the Comptroller of the Currency of so-called "anti-predatory lending laws" enacted in various states, and in this situation, Michigan.
I was pleased to be invited to join with several distinguished economists and law professors in an amicus brief filed last week endorsing the policy benefits of the dual banking system and the robust competition it brings about for the benefit of consumers. For those who are interested, the press release describing the argument of the brief is available here and the brief in pdf format is available here.
The brief focuses on the policy aspects of the case, and especially the unintended consequences that generally accompany consumer lending regulation, rather than precise questions of administrative law. Among other sources, the brief relies on an article I published a few years ago, "The Economics of Credit Cards" (which is available here). In part, the brief responds to an amicus brief submitted in the case by AARP, other interest groups, and several law professors.
As the brief notes, from a policy perspective it is important that the Supreme Court uphold the OCC's authority here and preserve the integrity of the dual banking system. Overbroad or misguided consumer lending regulations can have extremely negative effects on consumer choice and consumer protection. The most notable example of the benefits of the dual banking system and the preemption of state consumer lending laws is the Supreme Court's opinion in Marquette National Bank v. First Omaha Serv. Corp. in 1978. That case permitted "exportation" of interest rates on credit cards, thereby essentially negating archaic usury regulations on credit cards. The effect was to unleash an era of extraordinary competition and pro-consumer financial innovation. Marquette spurred competition and innovation, leading to vast improvements in payment card services for consumers along with the elimination of annual fees on cards, lower interest rates, and the beneficial uncoupling of retail and credit transactions, thereby permitting the rise of the Internet and small businesses. Misguided regulation of mortgage lending can be especially expensive and burdensome to consumers, and especially lower-income and younger borrowers, because of the inability to meaningfully shop for better terms among jurisdictions because of the nature of the loan itself. I discuss the Marquette effect extensively in my article.
The brief was filed by the Competitive Enterprise Institute on behalf of G. Marcus Cole of Stanford Law School, Christopher DeMuth and Peter J. Wallison of the American Enterprise Institute, Richard Epstein of the University of Chicago, Robert E. Litan of the Brookings Institution, Michael E. Staten of George Washington University, and Todd Zywicki of George Mason University.