Yesterday, the House Financial Services Committee began marking up the Consumer Financial Protection Act of 2009, a key component of President Obama’s proposal to overhaul regulation of the financial services sector. In its current form, the Act would create a Consumer Financial Protection Agency (or CFPA) that works in conjunction with states to detect and prevent predatory and fraudulent financial and credit schemes. However, many in the Committee, led by Rep. Melissa Bean (D-IL) are attempting to remove from the bill a provision that preserves states’ ability to regulate the financial services sector in conjunction with federal regulators, and change the bill so that the CFPA would instead “preempt” state regulators with a single, national regulatory scheme.

Drawing off the ideas laid out in our 2004 book, Redefining Federalism: Listening to the States in Shaping “Our Federalism,” CAC in recent years has been part of a coalition of progressive groups focusing on preemption. While not opposed to preemption in all circumstances, CAC believes our Constitution’s text and history demand that Congress preempt States only when there is a strong justification and that Congress must be precise in describing what state and local laws are displaced.

Our work in this area was perhaps most visible during California’s efforts to implement a new set of strict auto emissions standards for greenhouse gases; a regulatory change that required that state to obtain a waiver of preemption from the EPA under the Clean Air Act. In December 2007, under the Bush Administration, the EPA denied California permission to change its standards, against the outspoken advice of its career experts and despite having never previously, in 30 years, denied a California waiver application. Meanwhile, automakers mounted legal challenges against states that were attempting to follow California’s lead, arguing that their efforts to improve auto emissions standards were preempted by federal law. We argued, in return, that such state-led measures were precisely the sort of policy innovations Justice Louis Brandeis envisioned when he famously identified the role of states as “laboratories” of democracy in our federalist tradition.

Justice Brandeis’s vision had been seriously undermined by the Bush administration, which turned its back on traditional conservative notions about protecting the States and waged an aggressive war against state and local regulation – particularly in areas such as environmental law, banking law, and regulation and labeling of pharmaceutical products.

Since coming to office in January, President Obama has departed dramatically from his predecessor’s position on preemption, doing all he can administratively to reverse the Bush policy. Almost immediately upon taking office, Obama ordered the EPA to reconsider the denial of California’s waiver. He then went several steps further, granting the waiver in May and simultaneously adopting the California standards nationwide, thereby reaffirming California’s long-established role as the nation’s leader in advancing auto emission standards.

Also in May, Obama took the other highly significant step of issuing an executive order explicitly reversing the Bush Administration’s policy on preemption, instructing the heads of all federal agencies to comprehensively review and revise pro-preemption language in all regulations promulgated in the last ten years. This action definitively signaled that Obama sought to preserve states’ historic and invaluable roles as protectors of their own citizens’ health, safety, and natural environments.

Now, however, as the legislative battle over financial regulatory reform moves forward, Obama has reached perhaps the greatest challenge to reforming the Bush Administration’s culture of preemption. Obama has indicated that he does not want the proposed CFPA to preempt state regulatory efforts, allying himself with several prominent state attorneys general, including Andrew Cuomo (NY), Lisa Madigan (IL), Martha Coakley (MA), and Tom Hiller (IA), who strongly oppose preemption in this area. These individuals are among a group of twenty-three state AGs who recently sent a letter to the heads of the House Financial Services and Senate Banking Committees that presents a compelling case for why Congress should preserve states’ roles as financial regulators in addition to creating a CFPA, noting that state AG offices are historically best able to detect and respond to the ever-evolving gauntlet of fraudulent and predatory lending schemes in their states.

With congressional debate over the CFPA now underway, we’ll soon learn how successful Obama and the state AGs are likely to be in translating changes in the Executive Branch’s policy on preemption into victories on Capitol Hill. For that to happen, the Obama Administration will need to fight the institutional forces that have kept the policy in place, and states and their progressive allies will need to make their voices heard.