Obama sees "battle" as financial plan forges ahead

WASHINGTON (Reuters) - The Obama administration advanced its financial regulation reform agenda on Tuesday, moving ahead on reshaping the $92-billion student loan market and unveiling a proposed shake-up for credit rating agencies.

On other fronts, the administration's wide-ranging plan was hit by delays, with a key U.S. House of Representatives panel postponing votes on proposals to curb executive compensation and to form a new Consumer Financial Protection Agency (CFPA).

Delay is routine on Capitol Hill, but it could be even more of a problem for financial regulation reform, an ambitious effort already being overshadowed by healthcare reform and other issues.

As the economy and the troubled world financial system stabilize, however slowly, the administration's push to tighten the rules for banks and the capital markets, already an uphill climb, will only get more challenging, analysts said.

President Barack Obama told NBC's Today show that his reform agenda will be a "major battle" in Congress.

"Part of what really gets me frustrated is when I hear that some of the banks are resisting the idea of a consumer finance protection agency that we've put forward," he said.

"This is going to be a major battle on the Hill because a lot of these banks have a lot of influence," he said.

Handing Obama a procedural victory, the House Education and Labor Committee approved a bill backed by the White House that would fundamentally change U.S. higher education finance, shielding it from Wall Street's wild ups and downs.

The bill, which will go next to the full House for a vote, would kill the giant Federal Family Education Loan Program (FFELP), the mainstay of a government-backed student loan business that once furnished handsome profits for lenders such as Sallie Mae, Student Loan Corp, JPMorgan Chase & Co and Bank of America.

Democrats have long wanted to close FFELP, which they view as too costly and an unreasonable lender subsidy program. Republicans said the bill would hurt the lending industry.

"Today's vote is a vote to put students before banks," said Representative George Miller, Democratic chairman of the House Education Committee that approved the bill by a 30-17 vote.

LENDERS STILL REELING

Most college student lending would shift, under the bill, to the Direct Loan program run by the Education Department from the FFELP, whose lenders have been reeling politically since a 2007 scandal revealed that some of them had given money and gifts to college financial aid officers to drum up business.

The bill was criticized as "misguided" by Kevin Bruns, head of America's Student Loan Providers, a lender lobbying group.

Highlighting the fight that lies ahead on the House floor and in the Senate, Bruns said committee approval was "just the first step in a lengthy legislative process."

Shares in Sallie Mae closed down 2.9 percent at $9.51 in otherwise broadly bullish New York Stock Exchange trading.

On another issue, the Treasury Department on Tuesday sent a draft bill to Congress that would rewrite the regulations for credit rating agencies, such as Moody's Corp MCO.N>, Standard & Poor's and Fitch Ratings.

Widely criticized for their role in the financial crisis that has undermined world economies for months now, credit rating agencies would be barred from consulting for companies whose creditworthiness they are evaluating, under the bill.

The U.S. Securities and Exchange Commission would get new powers to regulate credit raters and companies that hire them would have to disclose when they go "ratings shopping."

The reforms are meant to help "reduce reliance" on credit rating firms, Treasury said in a statement.

Shares in Moody's closed down 6.3 percent at $26.80 on the New York Stock Exchange.

BILL DRAFTING SESSIONS DELAYED

Separately, the House Financial Services Committee on Tuesday said it had postponed sessions to draft and vote on two central components in the Obama reform plan.

A proposal to create a Consumer Financial Protection Agency will not be taken up next week by the committee, but instead in September, after Congress' summer recess, the committee said.

The panel also said it was delaying a Thursday drafting session on a bill to give shareholders a louder voice in setting corporate executive pay, and to ban pay schemes that encourage excessive risk at financial institutions.

That session has been moved to next week "at the request of the Republicans," said Steve Adamske, a committee spokesman.

In a sign of procedural progress for the reform plan, House Agriculture Committee Chairman Collin Peterson told reporters he and Financial Services Committee Chairman Barney Frank had agreed on aspects of regulating over-the-counter derivatives.

He said OTC derivatives would have to go through clearinghouses, as part of the deal, and that so-called "naked" credit default swaps would probably be banned.

"We will have one big bill this fall," Peterson said.

(Additional reporting by Charles Abbott, Karey Wutkowski, Patrick Rucker and Tabassum Zakaria)

Reporting by Kevin Drawbaugh)