State Law Makes a Difference in Protecting Consumers

Good data does not always carry the day in policy debates. It should have an impact but often it does not. Still, it is more than convenient when credible research findings are released that help clarify how to approach a particular policy issue.

This is why I was pleased to get an email this morning from my friends at the Center for Community Capital at the University of North Carolina at Chapel Hill. These guys produce high-quality evaluation on a range of topics related to housing finance, financial services, and economic development. Today, Roberto Querica, the Center’s Director, weighed in the financial reform discussion by sharing results from two recent studies that indicate the potential impact of allowing states to enact and enforce strong consumer protection laws and preventing federal regulators from overriding or pre-empting them.

The first study found that:

“States with strong anti-predatory lending laws exhibit lower foreclosure risk than other states, even when taking other explanations into account. A typical state law reduces risks by as much as 18 percent. The strength of the state law also matters. States with laws that go beyond the federal coverage or restrict more mortgage terms have lower default risks.”

The second study looked at pre-emption. When the federal Office of the Comptroller of the Currency used its powers to exempt national banks and their affiliates from provisions of state lending laws, the impact was dramatic. Here, the research found that there was a deterioration in the quality of mortgages originated and an increase in default risks, by as much as 41 percent in some cases, among exempt lenders.

Together these findings indicate that when states enact better laws, fewer homeowners suffered and there is significant merit in making sure that the new regulatory regime at the federal level creates a floor and not a ceiling for consumer protection.

Querica writes “Based on evidence from the recent past, stronger state regulatory controls are our best means of preventing future financial system collapse by ensuring that if one regulatory institution fails, the entire system will not fall with it.”

If we are to achieve meaningful and effective reform, Senator Dodd and now all of his colleagues in the US Senate should keep these data points in mind as they work out the final parameters of a financial reform bill.

Of course, these findings would not be a surprise to Maryland Banking Commissioner Sarah Bloom Raskin. She made similar points at our February event on consumer financial protections. In recent weeks, her name has been floated as a potential nominee to the Fed, which absolutely could use someone with her experience and background.