By Bill Swindell

The Senate debate over an overhaul of the nation's financial regulatory system will come down to a battle from another age: states' rights.

The echoes of Sens. Strom Thurmond, R-S.C., and Richard Russell, D-Ga., have been turned upside down in a 21st century way as progressives such as Sens. Bernie Sanders, I-Vt., and Sheldon Whitehouse, D-R.I., argue for state powers guaranteed under the 10th Amendment, this time for protecting local consumer laws.

"My experience with states' rights gets reinterpreted every day," said Sanders, who is especially critical of the pre-emption of state usury laws for credit cards.

"If you like the legislation, you are for states' rights. If you don't, you talk about the complexity of dealing with a patchwork of different states."

The issue is at the crux of the debate over Senate Banking Chairman Christopher Dodd's measure, as banks are lobbying against two provisions creating a Bureau of Consumer Financial Protection.

The Dodd language would allow state attorneys general to enforce violations of the bureau's rules on products such as credit cards and home mortgages. It also provides a limited pre-emption on states to enact even stronger consumer laws as promulgated by the bureau.

Similar language is contained in the House-passed version, which has a stand-alone agency instead of a bureau of the Federal Reserve. However, Senate Republicans and some Democrats have expressed concerns over the scope and the breadth of the bureau.

They have been receptive to industry's arguments that in a globalized marketplace, national rules need to apply. Banks argue that in an era of online banking and where area residents may live in one state, work in another, and visit a restaurant in a third state, it is unfeasible to have a myriad of conflicting state laws.

Citigroup CEO Vikram Pandit told a Troubled Asset Relief Program oversight panel on March 4 that "I believe it's better for the country, better for the consumer, that you take the best standards and make them national."

"With 51 different jurisdictions, you would have extremely difficult, and in some cases impossible, rules placed on the delivery of financial products and services," said John Dearie, executive vice president of policy at the Financial Services Forum. "It's a patchwork that would lead to costs of delivery so high, and litigation risk so substantial, that providing products and services customers want might prove simply impractical."

Banks are backing an amendment by Sen. Tom Carper, D-Del., to strip state attorneys general power from enforcing federal law, and allow bank regulators the sole discretion in pre-empting state consumer laws. Negotiations over the Carper amendment will likely be the most significant hurdle standing in the way of passage, given that consumer groups are pressing Dodd not to give an inch.

Consumer activists contend state attorneys general are typically the first to spot wrongdoing, for example, with their suits against failed subprime lenders Countrywide and Ameriquest, which were a harbinger of the problems in the housing market.

In addition, states such as North Carolina established stronger rules against predatory lending than at the national level, proponents argue, saying the state was spared the type of default rate other states suffered during the housing crisis because of such standards.

"We think that, if states want to protect their citizens against the kinds of consumer practices that have really caused an important piece of this crisis, they ought to be free to do so," said Deputy Treasury Secretary Neal Wolin.

On a related matter, Whitehouse is pushing for his amendment that would overturn a 1978 U.S. Supreme Court decision and allow states to enforce their usury rates against lenders conducting business with their residents. The ruling opened the door to higher credit-card interest rates when banks set up headquarters in states such as Delaware and South Dakota with no usury caps.

"Rhode Island and other states deserve the right to enforce interest rate limits and say enough to sky-high interest rates," Whitehouse said.

Outside of that front, the bureau will face another challenge over an amendment by Sen. Sam Brownback, R-Kan., to exempt car dealers from its oversight. The White House pressed Democrats not to support the language even though it is contained in the House-passed version. The amendment could be voted on today.

On Wednesday, the chamber rejected an amendment, 59-39, by Agriculture ranking member Saxby Chambliss to weaken some provisions for the regulation of the over-the-counter derivatives market, such as stripping a requirement that big banks spin off their derivatives desk.