UPDATE 2-U.S. House panel closer to consumer watchdog vote

* Credit, mortgage, title insurers exempted from CFPA

* Final committee vote expected on Thursday

* Preemption amendment more restrictive of state laws (Adds bill amendments, Bernanke, Schumer comments)

By Kevin Drawbaugh

WASHINGTON, Oct 21 (Reuters) - A U.S. congressional committee moved closer on Wednesday to endorsing a proposed financial consumer watchdog, while adopting amendments that reduced its reach in some ways and expanded it in others.

The Obama administration's Consumer Financial Protection Agency (CFPA) is a linchpin of its plan to tighten regulation of banks and capital markets with the aim of preventing a repeat of last year's devastating financial crisis.

Democratic supporters of the CFPA say it is needed to replace agencies that failed to protect consumers through the crisis. Republican and financial sector critics call it a new layer of bureaucracy that could stifle financial innovation.

The insurance industry scored a win in the House of Representatives Financial Services Committee bill drafting session on Wednesday when it adopted an amendment exempting credit, mortgage and title insurers from the proposed CFPA's purview.

The Obama administration had included these insurers in its original proposed legislation to create the agency.

Banks that are some of the strongest critics of the bill came out of the session with a mixed result. Their lobbyists wanted lawmakers to kill an Obama provision that would give state governments wide latitude to write and enforce consumer protection laws that are stricter than the CFPA's.

Striving for a compromise, the committee adopted an amendment allowing states to do that, but also giving federal regulators power to block state rules found to "significantly interfere" with the ability of national banks to do business.

The committee approved an amendment excluding retail transactions involving store credit from CFPA oversight, while including consumer credit reporting agencies in its purview.

Action was postponed on an amendment to exempt many car dealers from oversight.

A final committee vote on the bill was expected on Thursday. Analysts said the bill was likely to be approved.

The new agency would regulate credit cards, mortgages, bank fees and other financial products. It would strip existing agencies, including the Federal Reserve, of consumer protection duties by centralizing them.

A full House vote was not expected until November. The outlook for the proposed agency was unclear in the Senate, where lawmakers are moving more slowly on financial reform.

HOUSE ACTION JUST 'THE START'

The House committee vote is only the start of the fight, said policy analyst Jaret Seiberg.

"The CFPA piece of financial reform is likely to change greatly in the Senate," said Seiberg at investment firm Concept Capital.

Others saw the watchdog penalising larger banks.

"We are entering an era of one set of rules for large banks as compared to smaller banks," said Brian Gardner, policy analyst at the financial firm Keefe, Bruyette & Woods.

A turning point in the bill's journey through the committee was the deletion last month of an administration provision that would have required banks to offer "plain vanilla" financial products, such as 30-year fixed-rate mortgages.

Opponents considered that too much government meddling in the private sector's business decisions.

In addition to dropping the plain vanilla provision, committee Democrats exempted many businesses from CFPA oversight, including an amendment exempting banks with less than $10 billion in assets.

That won the support of the powerful community bank sector, which has fared better on Capitol Hill than the megabanks that were bailed out by taxpayers in the crisis.

Separately, the committee on Thursday was set to consider legislation that would advance the implementation date to Dec. 1 for new rules limiting credit card interest rates and fees.

Now slated to take full effect in February 2010, the regulations were approved by Congress and signed into law earlier this year by President Barack Obama.

Federal Reserve Chairman Ben Bernanke said in a letter released on Wednesday that earlier implementation could benefit consumers, but may also lead to bank compliance problems.

"If Chairman Bernanke will not act to speed up the effective date of these credit card reforms, we should quickly pass legislation in both the House and Senate to do so," said Democratic Senator Charles Schumer in a statement.

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