House panel approves major element of US financial reform

Oct 22, 2009, 16:34 GMT

Washington - A centrepiece of President Barack Obama's overhaul of US financial regulation was approved Thursday by a key committee of the House of Representatives.

The House Financial Services Committee voted 39-29 to create a Consumer Financial Protection Agency, a watchdog designed to protect consumers from unfair or misleading practices by financial firms.

The agency is a one of a series of reforms proposed by Obama in the wake of a devastating financial crisis that has been partly blamed on lax regulation.

Supporters argue that financial firms used misleading terms to trick consumers into taking on loans with high interest rates they could not afford. What ensued was a record number of mortgage defaults that are largely to blame for bringing Wall Street to the brink of collapse.

The new agency would act as a clearing house for bank loans, credit cards and other financial products, but it was scaled back somewhat from Obama's original proposals.

The agency would only have oversight over major banks - those with more than 10 billion dollars in assets. Critics argue the agency simply adds another layer of bureaucracy that will overburden financial firms and discourage innovation.

The Financial Services Committee is considering Obama's reforms one piece at a time and has been holding a divisive debate since last week. Most of the proposals, which include more oversight powers for the Federal Reserve and stiffer capital requirements for banks, are backed by majority Democrats but opposed by opposition Republicans.

The first element - a plan to regulate over-the-counter derivatives - was approved last week. The committee was expected to approve stiffer rules for credit card companies later Thursday.

Obama wants Congress to approve the rash of proposals by the end of the year.