Education Moulds

Adam Levitin (Georgetown University – Law Center) has posted Hydraulic Regulation: Regulating Credit Markets Upstream (Yale Journal on Regulation, Vol. 26, 2009) on SSRN.  Here is the abstract:

Consumer
protection in financial services has failed. A crisis is now playing
itself out in the mortgage, credit card, auto loan, title loan, refund
anticipation loan, and payday loan markets. Consumer protection was a
traditional element states’ regulatory power until federal preemption
ousted states from almost all direct regulation federally-chartered
banks without substituting equivalent protections and enforcement.

This
Article argues that one avenue may remain to permit states to engage in
consumer protection regulation of federally-chartered banks. Recent
changes in financial markets have placed the majority of consumer debt
in the hands of secondary market entities, such as securitization
trusts and debt collectors, which are not protected by federal
preemption. States’ ability to directly regulate the secondary consumer
debt market also gives them the ability to indirectly regulate the
primary market, even when direct regulation would be preempted.

States
can impose targeted regulatory costs on the secondary market tied to
the presence or absence of particular terms in consumer debts,
regardless of what type of institution initiated the debt. By tying
regulation to the terms of the debt, states can channel the hydraulic
force of the market, which will pass these costs on to the originators
of the debts – including federally-chartered banks. This would create
an incentive for originating lenders to adjust the terms under which
they originate consumer debts so as to avoid state regulatory costs.
This Article contends that such regulation would not run afoul of
preemption doctrine because it does not directly regulate
federally-chartered banks; it affects them only indirectly, through the
market.

Source: Lawrence Solum

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