Dodd-Frank: Empowering States in Unconventional Ways

Two years ago, Congress passed, and the president signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. A response to the financial meltdown in 2008, Dodd-Frank initiated one of the most significant restructurings of financial regulations since the Great Depression, and a great deal of the reforms hinged on states’ relationships and regulatory authority over financial institutions. Now, with the law in effect and the federal rule-making process well under way, some states are using their new authorities in unpredicted—and unprecedented—ways.

Revamping federal pre-emption of state consumer financial protection laws was centerpiece of Dodd-Frank, and implementing this portion of the law has come with some controversy. Until 2008, federal regulators could largely override state consumer protection oversight over nationally chartered banks. Known as the federal pre-emption doctrine, this policy was enforced by the federal government both through direct action against state regulators and indirect action, such as by joining in a bank’s lawsuit against a state. Many argued, however, that a cause of the subprime mortgage crisis in 2008 was both a lack of federal oversight and interference by the federal government in state consumer protection, so lawmakers attempted to address these issues in Dodd-Frank by largely doing away with the federal pre-emption doctrine.

This sweeping change to the federal pre-emption doctrine was not without pushback from federal regulators. Even with Dodd-Frank’s broad mandate, federal regulators claimed the doctrine was backed by Supreme Court precedent. Meanwhile, states have moved forward with restructuring their financial departments to prepare for what may be a much heavier regulatory workload.

In some states, this restructuring has come with interesting side effects. In New York, Gov. Andrew Cuomo consolidated several regulatory agencies and created the Department of Financial Services in late 2011. The reason for the restructure was to allow one state regulator to “oversee a broader array of financial products and services,” according to the agency’s website. And it certainly has.

Last week, Standard Chartered, a U.K.-based bank, settled with the New York Department of Financial Services for $340 million. The settlement, one of the largest in history for a state regulator, came after New York threatened to revoke Standard Chartered’s license for laundering billions of dollars for Iran and then lying about it. Although Standard Chartered is not a federally chartered bank, it is regulated by the Federal Reserve and the settlement with the New York irked federal regulators and apparently took them by surprise—though the department says it kept the feds fully posted on its intentions.

Before the 2008 financial crisis, a state finance regulator settling with an international bank over money laundering charges tied to a state-sponsor of terrorism would not have been a headline you would expect to see. But in an era where states have far more regulatory power, it’s something that could turn into the norm.

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