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Financial reform could make US states powerless-Govs

WASHINGTON, Oct 14 (Reuters) - The reform fervor gripping Washington is worrying many states, with U.S. governors on Wednesday speaking up about a bill that Congress is drafting to create consumer protection regulations in the financial services sector.

Democratic Representative Melissa Bean may block a provision in the bill that would give states rights to protect consumers from risky financial products, according to a source familiar with the matter.

The U.S. House of Representatives Financial Services Committee could vote on the bill as early as Wednesday.

California Gov. Arnold Schwarzenegger and New Jersey Gov. Jon Corzine said in a letter to the committee the bill should not impair “the ability of states to enforce laws regarding investor protections, community reinvestment and fair credit.”

“To preempt our ability to protect consumers and investors is shortsighted and would increase risk because the diversity of consumers, financial services products and institutions, investors, and local market conditions are too great for any single regulator,” they wrote.

The two wrote on behalf of The National Governors Association, saying it supports the bill’s provisions to allow states to enforce their consumer protection laws against financial institutions.

Right now, the bill would “set federal rules as a floor, not a ceiling, allowing the states to adopt and enforce stricter consumer protection laws,” they said.

Bean is expected to propose an amendment removing that provision, with the support of U.S. businesses.

The governors say the legislation should instead include language specifically stating that federal powers cannot preempt state authority, arguing that states often can move more quickly than federal agencies in identifying problems and enforcing regulations.

“For example, while Congress has yet to enact comprehensive predatory lending reforms, more than 30 states have already put such reforms in place,” they wrote.

The legislation, which would establish a Consumer Financial Protection Agency, will likely be included in a consolidated financial regulation reform bill the House could vote on next month.

Those fears of uniformity, which states say could supersede their unique laws and traditions, and preemption, which could render them powerless, have grown in recent months as President Barack Obama pushes to reform other parts of the U.S. government.

With healthcare reform progressing in the U.S. Senate, some states have threatened to pass laws barring a nation-wide, uniform health insurance plan within their borders. Others have opted out of requirements for a national identification card as well.

Federalism -- the idea of a nation made up of smaller, semi-autonomous states -- was deemed so important by the founders of the United States that they included it in the “Bill of Rights,” the first 10 amendments to the U.S. Constitution.

The tenth amendment says that “powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states.”

Reporting by Lisa Lambert and Rachelle Younglai; Editing by Diane Craft