A debate between House Democrats over something called “regulatory pre-emption” could pre-empt one of the White House’s top proposals for policing the mortgage industry, the Wall Street Journal reported. Members of the party in power are divided over the Obama administration’s plan to create a new federal agency that would oversee lenders of consumer credit nationwide. At issue is whether the proposal should let more restrictive state laws should take precedence over the federal rules when it comes to regulating national banks like Bank of America, J.P. Morgan and Wells Fargo. The proposed Consumer Financial Protection Agency is a centerpiece of the White House’s plan to overhaul the national financial system. Under its proposal, the agency would be empowered to write and enforce regulations on a variety of consumer borrowing instruments, including home loans and credit cards. But the White House also wants to permit states to write their own tougher rules banning certain suspicious fees and practices, a change to legal precedents that typically give national banks immunity from state regulations. There is scientific data to support the effectiveness of the Obama administration’s proposed rule change. “As DS News reported last week,” a recent study by researchers at the University of North Carolina found that foreclosures were lower in states with tougher laws against predatory lending. But the laws’ effects were mitigated by subprime and Alt-A lending among originators and brokers for national banks, who didn’t have to meet the states’ stringent standards. Even so, House debate over the bill has exposed serious weaknesses among the split Democratic majority at a critical juncture for the administration. Momentum for the reform has already been stunted, as representatives of the Treasury Department prepare to make a case for giving the department many regulatory powers intended for the new CFPA. The issue is expected to be big news this week, as the chairman of the House Financial Services Committee, Barney Frank (D.- Massachusetts), plans a committee vote to birth the new agency. At the same time, committee member Melissa Bean (D.-Illinois) is pushing for an amendment to keep state laws from being enforced over the CFPA’s rules.

Under her proposal, state legal officials could still file civil charges against banks for federal rules violations under certain conditions. Bean says her concern is that 51 different sets of rules could drive up the national banks’ cost of doing business, an expense that could be passed on to consumers in the form of tighter credit. But her opponents say states need greater leeway in case federal regulators — for example, those appointed by a Republican-led White House or Congress — ease the pressure on banks and lenders. The debate has popped the lid on a Pandora’s box of troubles for the White House. The Democrats’ divisions have emboldened interest groups and government agencies with a dog in the fight to vocalize their opinions on the plan. Echoing Bean and supporters of her amendment, a spokesman for Bank of America said the company favored “enhanced” legal protections for consumers, but still was “concerned about the impact on efficiency of each state had different rules and regulations for bank products.” Consumer groups, however, side with the White House and say the Bean amendment would erode consumer protections when a new president takes office or the federal regulators reduce their market oversight as the economy improves. In the meantime, the Treasury is dipping its toes in the water, hoping that it can still gain newfound regulatory power at the CFPA’s expense. “If a state wants to provide for its citizens’ stronger consumer protections, it ought to be able to do so,” Deputy Treasury Secretary Neal Wolin recently said to the press. For his part, Frank prefers letting states impose their tighter restrictions. However, he’s trying to save face for the administration by keeping a negotiations open with his party’s disagreeing members. “We’re still having discussions with our members on the issue,” a spokesman for Mr. Frank said.