A House committee voted to create a federal agency to protect consumers in the financial marketplace, but several days of often-contentious debate showed that obstacles still confront one of the centerpieces of President Obama's overhaul of industry regulations.
Despite strong Republican opposition and intense lobbying from banks and business groups, the new Consumer Financial Protection Agency survived its first major test Thursday when the House Financial Services Committee approved its creation 39 to 29 in a largely party-line vote.
The proposal did not emerge unscathed. It's likely that Obama still will get his new agency, just not exactly the one he wanted.
Lawmakers made some significant changes from the administration's original proposal that would lessen the agency's scope, even as Democrats beat back numerous attempts by Republicans to water it down further.
As the legislation heads to the full House and as Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) prepares to unveil his own plans for the agency in the coming weeks, the battle lines are becoming clear.
Democrats, along with consumer and public interest groups, say the agency is desperately needed after banking regulators failed to protect consumers adequately in the years leading up to the financial crisis. Republicans, backed by industry, contend that the agency epitomizes unwarranted government overreaching that would take financial decisions away from consumers and impose onerous new oversight on businesses.
The agency would have the power to write new consumer protection rules for a host of activities involving loans or credit and would have the ability to ban products and business practices that it determined were "unfair, deceptive or abusive."
The agency also would be able to examine banks and other companies for compliance with its rules and hand out penalties for violations. The legislation would grant new powers to state attorneys general to help enforce the rules and also allow them to write tougher rules for companies within their states.
"The Consumer Financial Protection Agency will prevent predatory lending practices and other abuses and will ensure that consumers get clear information they can understand about financial products like credit cards and mortgages," Obama said in lauding the House committee's action.
"This bill has now passed a major hurdle, and this step sends an important signal to the American people that we will not stand by and allow big financial firms and their lobbyists to mobilize against change," the president said.
Many Republicans, along with banking and business groups, said the measure would hurt consumers by imposing so many new rules that firms would be forced to charge more for loans and credit -- or possibly not offer them at all.
"It's not about protecting consumers; it's about a new government bureaucracy making decisions for us," said Rep. Spencer Bachus (R-Ala.), the top Republican on the House Financial Services Committee.
Regulators, such as the Federal Deposit Insurance Corp. and the Federal Reserve, also have opposed some aspects of the agency. In particular, they have raised concerns about separating reviews of banks' compliance with consumer protection rules from regular bank examinations that focus on their financial condition.
The regulators said separating those two roles could be dangerous because the consumer agency could force policies that make banks less sound financially.
Those complaints and others, along with heavy lobbying by opponents, led to significant changes in the administration's original proposal in June.
Last month, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, introduced revised legislation that removed a controversial provision that would have required companies that provide financial products to offer "plain vanilla" versions, such as fixed-rate mortgages or no-frills credit cards.
And small community banks and credit unions last week succeeded in persuading the committee to exempt them from additional examination requirements they said would be more onerous for them than for large institutions.
Banks with less than $10 billion in assets -- about 98% of all institutions -- and credit unions with less than $1.5 billion in assets would continue to have consumer compliance exams done by their federal banking regulator, and the new consumer agency would have the option of participating.
The committee approved several amendments clarifying that certain financial activities would not be regulated by the new agency. Stores that sell gift cards, for example, would not be subject to agency oversight unless they control the terms of the cards, Frank said.
But Republicans warned that the new agency could threaten all kinds of consumer products. Rep. Jeb Hensarling (R-Texas) said that because some credit cards offer airline frequent-flier miles, the agency could conceivably ban such programs.
Frank said Republicans were just trying to scare people. "The notion that this . . . would be able to ban frequent-flier miles from an airline is, to use the technical parliamentary term, preposterous," he said.