Title

Essay -- Preemption, Agency Cost Theory, and Predatory Lending by Banking Agents: Are Federal Regulators Biting Off More Than They Can Chew?

Abstract

A pitched battle is currently being waged for control of the American banking industry. For over a hundred years, the federal and state governments have maintained a complex, but relatively stable truce in their contest for power. At the beginning of our republic, state governments were the primary charterers and regulators of banks. In the wake of the Civil War, the National Bank Act created parity between federal and state banks, cementing the notion of a “dual banking system” that endured through the twentieth century. But in the past five years, the federal government has increasingly used its powers under the Supremacy Clause of the U.S. Constitution to grab new authority for federal banking regulators and for federally chartered depository institutions. A series of controversial federal regulations have preempted the application of state consumer protection laws directed at prevention of “predatory lending” by national banks and thrifts. The preempted state laws address a recent rash of fraudulent, deceptive, and unconscionable lending that is having a corrosive effect on minority communities, senior citizens, and the entire lower middle class. In a related move, federal banking regulators have also recently preempted the application of state law of independent contractors of national banks and thrifts. This essay explains the potentially far reaching impact of federal preemption of state regulation of independent contractors. If these determinations are upheld, thousands of businesses, including insurance agents, mortgage brokers, and automobile dealers, will be placed beyond state oversight--provided that they have agency relationships with a national bank or thrift. Moreover, this essay uses economic agency cost theory to explore the potential for mischief posed by placing bank and thrift agents beyond the reach of state government. In particular, I argue that bank and thrift agents, by their nature, have lower incentives to forego predatory lending than the depository institutions themselves. Given the limited resources of federal banking regulators and their primary focus on safety and soundness, I conclude that preemption of state regulation of bank and thrift agents is currently inadvisable.

Disciplines

Agency | Banking and Finance Law | Bankruptcy Law | Commercial Law | Consumer Protection Law | Economics | Law and Economics

Date of this Version

September 2006