Banking and Financial Services
State Sovereignty in Financial Services
The National Conference of State Legislatures (NCSL) is concerned that Congress, the federal financial services regulators, and the federal courts have sought to nationalize control of financial services in Washington, D.C. NCSL has consistently and strongly advocated for state sovereignty in financial services regulation. NCSL has opposed any federal preemption of state legislative or regulatory authority in financial services. A high threshold that federal action is necessary, such as a national financial crisis, should be met before any preemption of state financial services laws and regulations is warranted.
Preservation of Dual Banking System
NCSL is committed to the preservation of the dual banking system. The dual banking system enables state governments to apply laws and regulations to state-chartered banks, thrifts, and non-bank financial services, including financial technology entities that serve the needs of local economies and that respond to the values and concerns of local citizens. In recognition of the advantages of the dual banking system to the public and to the health of the financial services industry, NCSL opposes any efforts by the federal government to restrict state authority to charter, supervise, or regulate the powers of state-chartered banks, thrifts, and non-bank financial services, including financial technology entities. NCSL opposes any federal attempts to tax state banks for federal oversight services already performed by the appropriate state banking agencies and departments. NCSL recognizes that the states have a duty to use their powers responsibly and in a way that does not endanger the deposit insurance system and the nation’s financial stability.
NCSL urges Congress to continue close scrutiny of federal banking regulators to limit preemption of state consumer protections.
Federal Regulatory Consolidation
NCSL recognizes the need for the federal government to reduce the federal regulatory burden that can impede the economic vitality of our nation's financial services industries. In consolidating the federal banking regulators, Congress must ensure that any consolidation does not invalidate the regulatory independence of the dual banking system.
NCSL opposes any federal regulatory consolidation plan that would:
- Preempt, limit, or interfere with the rights of states to regulate state-chartered banks, thrifts, and non-bank financial services, including financial technology entities;
- Require federal reporting requirements and examinations that duplicate state efforts;
- Place state-chartered banks, thrifts, and non-bank financial services, including financial technology entities at a competitive disadvantage with national banks or federal thrifts; and
- Grant oversight authority for state-chartered banks, thrifts, and non-bank financial services, including financial technology entities to federal banking regulators.
NCSL strongly believes that a high burden of proof must be established before federal preemption of state banking authority is justified and that only Congress—and not federal regulatory agencies—can preempt the actions of elected state leaders. NCSL strongly opposes any effort by federal banking regulators to assert regulatory authority to weaken the standard of preemption or shield national banks and bank operating subsidiaries from state consumer protection laws and enforcement.
Dual Chartering of Credit Unions
NCSL believes that state credit union supervisors have the primary responsibility for assuring the safety and soundness of credit unions chartered by and operating under state law and regulation. NCSL supports the authority of state governments to determine how state-chartered financial entities must be insured and opposes any efforts by the federal government to preempt state authority to govern state deposit insurance requirements.
NCSL additionally acknowledges that federal deposit insurance agencies, like the National Credit Union Administration (NCUA), have a legitimate role to play if state authorized powers lead to unreasonable risks for NCUSIF. However, NCUA regulations and policies should be crafted in a way that minimizes the preemption of state authority. NCSL opposes any effort by the Administration and Congress to erode the dual chartering system for credit unions by preempting state credit union laws and regulations that do not adversely impact the financial well-being of state-chartered credit unions and thus the NCUSIF. Any preemption of state credit union laws or regulatory authority should only occur if an imminent risk to the credit unions’ share insurance fund is threatened.
There is overlapping state and federal legislative jurisdiction that ensures consumer access to basic financial services; to protect the privacy of consumers of financial services and the security of their personal financial information; to provide protection for consumers from abusive lending practices; to ensure disclosure of information about credit terms, interest rates, fees, and balances; to regulate branch closing; and to otherwise protect the public. In recognition that this is an area of overlapping federal and state jurisdiction, NCSL will ordinarily not oppose such federal consumer protection measures, provided that there is no preemption of complementary state consumer protection legislation.
Financial Services and Economic Development
NCSL recognizes that racial, ethnic, or gender discrimination by financial services entities may have an impact on the ability of residents in distressed communities to obtain financial assistance. NCSL also recognizes the need for financial institutions to make safe, sound, and profitable investments, recognizing the responsibility that each state has for financial regulation, solvency and ensuring fair lending to their constituents NCSL recognizes that each state legislature has the responsibility to address the unique needs of its state. Congress must not mandate federal guidelines that impede the states' abilities to regulate financial services.
As online financial services products continue to grow, clear rules must be established as to which jurisdiction’s consumers protections apply to a given transaction. NCSL believes that any such rules should be crafted through a partnership between state and federal regulators and should not place state-chartered financial institutions at a disadvantage in their ability to provide services over the internet. State banking laws provide thorough consumers protections and NCSL strongly opposes any efforts by Congress or federal regulators to preempt state banking authority in regulating financial technology companies that would limit the financial protections states provide to their citizens.
NCSL believes that state banking regulators should maintain primary responsibility of chartering and supervising financial technology companies that operate in their state. States have implemented the Nationwide Multistate Licensing System to make the licensing and registration process more uniform and efficient for companies across the country while still providing rigorous protections to consumers. States have also created standards to protect the data privacy of citizens and reduce discrimination in financial services while encouraging innovation. Regulatory sandboxes are often utilized by states to encourage new technologies and innovation without prohibitive government regulation so that states can determine the best regulatory framework for the new technology. These unique solutions should not be infringed upon so that states can continue to inspire innovation while protecting the public.
NCSL recognizes that the federal government has an interest in efficient and fair capital markets. NCSL also acknowledges that state’ securities agencies are indispensable partners with their federal counterparts engaging in the pursuit of fair and efficient capital markets by protecting local investors, workers, and communities by ensuring compliance with securities laws.
NCSL is concerned that the preemption of state securities laws and regulations will serve only to erode investor trust in the capital markets by further weakening a system designed to protect investors and putting the financial well-being of hard-working Americans at risk. NCSL opposes such federal preemption and the creation of self-regulatory organizations that usurp state authority. Instead, NCSL supports congressional efforts to expand the restoration of state securities regulators’ authority.
Currently states regulate a significant portion of mortgage lending. Federal intervention in this area of supervision will displace the state regulatory system and could erode, or even eliminate, the current authority the states have to supervise and license mortgage professionals. The local nature of real estate and consumer protection necessitates direct state authority.
States, through the Conference of State Bank Supervisors (CSBS) and the American Association of Mortgage Regulators (AARMR), developed the Nationwide Multistate Licensing System (NMLS) to improve and coordinate mortgage supervision. This state system enhances consumer protection and streamlines the licensing process for regulators and the industry. NCSL supports the NMLS to encourage a more coordinated system of state and federal supervision.
Financial Information Security
NCSL believes that states should continue to play a vital role in protecting the privacy, confidentiality, and security of sensitive nonpublic personal financial information. States long have sought to balance the economic value of information sharing with reasonable safeguards against the unnecessary disclosure and inappropriate acquisition of sensitive nonpublic personal financial information, such as credit information, account numbers, account balances, and Social Security numbers. Understanding local and regional economic situations and the unique needs of consumers within these markets, states consistently have ensured the protection of sensitive nonpublic personal financial information.
NCSL recognizes that financial information security is an area of overlapping federal and state jurisdiction. Therefore, NCSL does not oppose federal baseline standards for the protection of financial information, provided that these standards generally do not preempt complementary state laws. NCSL believes that states should have the authority and flexibility to adopt standards for the acquisition, retention, disclosure, and sharing of financial information by and among financial institutions and nonaffiliated third parties that address local concerns or respond in a timely way to incidences of neglect or abuse that may be local or regional in nature. NCSL specifically believes that Congress should preserve state authority to exceed federal baseline standards for information sharing among nonaffiliated third parties.
NCSL acknowledges the benefit to the nation's economy of a uniform national credit reporting system and does not oppose the limited areas that were subject to federal preemption by the 1996 Amendments of the Fair Credit Reporting Act and made permanent by the Fair and Accurate Credit Transactions Act. In doing so, NCSL supports the continued exemption of the state laws that were in existence prior to the 1996 Amendments and thus are currently exempted from the preemption provisions.
Data Security Breach Disclosure
Consistent with NCSL’s general policy for safeguarding financial information, NCSL does not oppose baseline federal data security breach notification standards, provided that the requirements do not preempt state authority to adopt standards that provide affected consumers additional protection and notification. NCSL also supports allowing state financial regulators and attorneys general to enforce any new federal data security breach notification standards.
In the event that Congress decides to preempt state law, NCSL urges that the preemption be narrowly construed to preempt only state laws that are inconsistent with the federal standard while preserving state laws that apply to entities that may be excluded from the federal act. Additionally, should Congress decide to preempt state data security breach notification laws, NCSL would support a strong federal law that would require notification of the affected consumers when sensitive personally identifiable information has been, or is reasonably believed to have been, accessed or acquired. In this instance, exceptions should be made only when it is concluded that there is no significant risk that the breach has resulted in, or will result in, harm to the individual whose information has been breached.