Definition
Preemption involves one state’s laws being ignored due to more lenient federal legislation.
Analysis
Preemption is a situation that allows a company to operate in a state with heavy restrictions while being regulated by its state of domicile with lighter restrictions. When federal laws are less restrictive and allow for preemption, one company can simply base its operations in a lenient state and do business in another state in which its business practices violate state law.
Preemption had a tremendous impact on the credit card industry after Congress adopted changes to the Riegle-Neal Interstate Banking Act in 1997. This allowed banks to ignore the consumer protections afforded by state law when the banks were operating from another state.
Prior to that, South Dakota Governor Bill Janklow was instrumental in bringing about change in South Dakota starting in 1980. The result was that Citibank moved operations to South Dakota so that it could bypass New York usury laws.
The argument of preemption has more recently come up in discussions surrounding the proposed FHA Housing Stabilization and Homeownership Retention Act of 2008. H.R. 5830 originally allowed for mortgage lenders to preempt state laws by basing operations from more lenient states.
The Miller-Latourette Amendment was proposed to close this loophole. This would allow states to enact more stringent regulation, as Maryland already has done, which would apply to all banks.
