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Amicus Brief in Watters v. Wachovia:

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.

Anderson (mail) (www):
A fascinating insight into the psychology of rationalization. Thanks!
11.7.2006 4:30pm
byomtov (mail):
So you are arguing that the OCC should be able to preempt state regulation because you think the policies favored by OCC are wiser than the state laws?
11.7.2006 4:31pm
HLSbertarian (mail):

So you are arguing that the OCC should be able to preempt state regulation because you think the policies favored by OCC are wiser than the state laws?


I don't know much about the legal issue here specifically, but I would guess the nature and breadth of the consequences of state regulation are pertinent to the legal question of preemption. Educating the court about these consquences, especially those that are unintended, would then be quite relevant to the legal inquiry. Can anyone with knowledge of the administrative law question here back this up?
11.7.2006 4:42pm
Zywicki (mail):
HLSbertarian:
Exactly. That's why I linked to the AARP brief as well, which makes a policy argument about the wisdom of the state regs and the consumer harm that would result if consumers were given the choice between the national and state regulatory systems.
11.7.2006 4:48pm
Steve:
States need to be able to protect their consumers. I thought you guys supported federalism!
11.7.2006 4:54pm
byomtov (mail):
It's fine with me if you want to make that argument. OCC policies may well be wiser.

It does, however, tend to reinforce my view that almost everyone works both sides of the street on federalism issues. Think the federal policies are better? Go for preemption. Like the state laws? Then federalism is sacrosanct.
11.7.2006 5:01pm
Houston Lawyer:
Thanks to these regulations, I get credit offers with a 0% teaser rate backed up with a default rate of 36%. The regulatory scheme is so successful that we had to tighten up our bankruptcy laws to take it into account.

I fail to see the benefit of a regulatory scheme where a state bank is prohibited from lending on terms that are legal for the federal bank across the street.
11.7.2006 5:12pm
Hans Bader (mail):
Preemption isn't new at all.

Congress has been preempting state regulation of federal banks and their subsidiaries since the first Bank of the United States two centuries ago.

Supreme Court Case law under the National Bank Act makes clear that Congress intended that national banks be "favorites" of federal law, and that they thus deserve protection against a hodgepodge of disparate state regulations.

The founding fathers liked preemption of regulation of national banks.

Nor were they protective of state regulation of business under a "state's rights" theory.

Indeed, their choice of law doctrines were just the opposite. For nearly a hundred years, from Swift v. Tyson until Erie v. Tompkins, the Supreme Court court refused to even apply individual states' differing common law rules to out of state businesses, insisting instead on applying a uniform law merchant throughout the United States.

The founders believed in "states' rights" primarily as a check on overweening federal power, to protect individual rights, rather than as a justification for the states to restrict commerce.

They didn't believe businesses should be ground between the twin stones of state and federal regulation. They thought that business should be protected, where possible, from protectionist state legislation, and be subject, where possible, to only federal OR state regulation, not both at once.
11.7.2006 5:14pm
Steve:
What sort of credit card rates did the First Bank of the United States offer, anyway? It's possible the nation has changed a bit since those days.
11.7.2006 5:18pm
MnZ (mail):
I cannot say that I have a dog in this fight. However historically, state bank regulations have been more about protecting banks (small banks in particular) from competition rather than protecting consumers. Of course, many of the same regulations existed under the thin-veil of consumer protection.
11.7.2006 5:22pm
NotALegalEagle:

What sort of credit card rates did the First Bank of the United States offer, anyway? It's possible the nation has changed a bit since those days.


Certainly it has. To start with most consumer goods have had a 2% credit card surcharge priced into them.
11.7.2006 5:26pm
Ted Frank (www):
Byomtov, it's an oversimplified and incorrect view of federalism to characterize it as "states always win." There are simply matters of national commerce where federal regulation is superior, and our Constitution recognizes that. An elected Madison County judge shouldn't get to dictate national banking policy.
11.7.2006 5:43pm
Loren Svor (mail):
Todd, you are glossing over the issue here. If it is the national bank directly doing the activity, I totally agree, the OCC says what they can do. But it is not--it is a subsidiary's activities that are at issue. And as state corporations, subsidiaries are a creature of a state; they are not a national bank. If they want the limited liability and other benefits of the state system, they should be subject to state laws, however misguided those laws might be (or not--I have a great deal more doubt than many posters about the omniscience or beneficence of the OCC. But then I work for a state regulator). They want preemption, then do it directly through the bank. And if you really believe in the dual banking system, then the federal government can't be everywhere supreme. In most of the cases I have read, federal law (if that really includes administrative rules, which are not legislative acts) is not accorded just deference, but a presumption of validity. The dual banking system, and the country, needs the OCC to lose this one.
11.7.2006 7:50pm
ReaderY:
Does one really want to be heard, given even the federal government's recent need to enact a usury law to protect the military, to be seen in public using language as quaint as calling usury laws "archaic"? One does want to be taken seriously, doesn't one? Please remember to press your tophat, and launder your wig! And don't forget that abacus.
11.7.2006 8:41pm
J. F. Thomas (mail):
You guys are just not cynical enough. The big banks got the horrible new bankruptcy law passed. They have the congress in the palm of their hand. It is a lot easier to bribe lobby 535 members of Congress to allow usurous rates on credit cards and consumer loans than it is to get such laws passed in 50 state houses.

Because Congress is bought and paid for by the Big banks nowadays, the real consumer protection is occuring at the state level and Citibank don't like that. So Todd, ever the Corporate stooge, or maybe he really is a true believer in the "free market", writes a fantastical brief about how 36% rates really are beneficial for the consumer, well, just because, people need to have debt loads they never have a prayer of paying off.
11.7.2006 8:42pm
David M. Nieporent (www):
I fail to see the benefit of a regulatory scheme where a state bank is prohibited from lending on terms that are legal for the federal bank across the street.
Consumer choice?
11.7.2006 10:02pm
byomtov (mail):
Byomtov, it's an oversimplified and incorrect view of federalism to characterize it as "states always win."

Of course it is, and a good thing too. I'm no big fan of states' rights. It's also obviously oversimplified to say that the line is always clear.

I think I was unclear in my previous comments. I personally have no problem with people taking pro-state or pro-federal views on a question based on their policy preferences. I do it myself. I don't think the division of sovereignty is based on any deep-seated and carefully reasoned principles. It's somewhat arbitrary, and ought to be guided by pragmatic thinking about centralization vs. decentralization of control over various matters.

I was just commenting that this seems to be what's happening here. The original post described the amicus brief as making policy arguments, not legal arguments. That just struck me as interesting, partly because of the federalism issue, and also because we are told constantly that judges are not supposed to base rulings on their policy preferences
11.8.2006 10:23am
MnZ (mail):
The big banks got the horrible new bankruptcy law passed. They have the congress in the palm of their hand. It is a lot easier to bribe lobby 535 members of Congress to allow usurous rates on credit cards and consumer loans than it is to get such laws passed in 50 state houses.


The history of banking regulation has often been dominated by small banks who seek to limit competition by enacting regulations at the state level.

For example, many states had laws banning banks from operating more than one branch. The "consumer protection" argument was that consumers needed to be protected from big, out of town banks, who would open branches, provide poor service at high prices, and force the good-old local bank out of business. (Of course, it was the good-old local bank was often a monopoly.)

I have heard that the storyline for "It's a Wonderful Life" basically represented these branching regulations.
11.8.2006 11:04am