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The Latest Loopholes in Financial Regulatory Reform

Today’s loophole alert regarding financial reform comes from The Wall Street Journal, which points out that USAA, an insurer that serves military families, quietly won an exemption from tougher provisions proposed as part of a massive regulatory overhaul bill. And that’s not to mention General Electric Co. and Pitney Bowes, which were also spared.

USAA, one of the country’s 50 largest federally insured financial companies, has one of Washington’s more aggressive lobbying operations. It spent $5 million on lobbying in the first nine months of 2009, according to government filings, more than larger rivals such as Bank of America Corp. and Wells Fargo & Co. Its political-action committee also gives generously to lawmakers.

Adam J. Levitin, an associate professor at Georgetown Law Center, said by exempting some companies, others will demand similar treatment. “There’s a slippery slope,” he said. “Just because a party is a good party today, that doesn’t mean its going to be a good party in the future.”

Lawmakers also struck a deal late Thursday night on a modified form of an amendment pushed by bank-friendly Democrats that would still allow federal laws to override stronger state protections, The Washingon Post reports.

One key change approved Thursday night was the addition of language that would permit federal laws governing consumer protection to continue to preempt those set by individual states. The bill that arrived on the House floor would have allowed states in most cases to impose tougher restrictions, using federal standards merely as a floor rather than a ceiling. The financial industry has lobbied relentlessly against that structure, saying it would saddle national banks with layers of burdensome bureaucracy and cause confusion among consumers. Rep. Melissa Bean (D-Ill.) and other moderate and business-friendly Democrats threatened earlier this week to stall the bill if Bean’s preemption amendment did not get a hearing on the House floor. After a flurry of meetings between top House Democrats and Treasury Department officials, the groups reached a deal: A modified form of Bean’s amendment could proceed. In addition, it would be folded into a broader amendment put forward by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. “It’s clearly a victory for the banks,” said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group.

Those victories seem to be adding up, don’t they? Softening preemption really hurts, as evidence begins to show that stronger state anti-predatory lending laws prevented foreclosures, until they were preempted by the Office of the Comptroller of the Currency. But people who didn’t lose their homes to foreclosures due to strong state protections aren’t likely to have a lobbying group with money to hand out.

In the meantime, the bill doesn’t lay a hand to ratings agencies, and it includes enough loopholes in the draft of reforms for derivatives trading “to drive Goldman Sachs right through it,” said L. Randall Wray at New Deal 2.0.

Loopholes and all, the full House is expected to vote on a final package as early as today. The reforms keep getting referred to as the largest overhaul of the financial regulation system since the Great Depression. With all the apparent loopholes, it may be time to change that description. And there will likely be more to come, once the legislation lands in the Senate.

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