WASHINGTON (Reuters) - Auto dealers scored a win on Tuesday while banks faced the prospect of further trading restrictions as lawmakers raced to complete the biggest overhaul of the financial regulation since the 1930s.
Democratic negotiators resolved some of the most contentious sticking points as the sweeping rewrite of Wall Street rules entered the home stretch.
Payday lenders, check cashers, and private student loan providers would have to answer to a new consumer-protection agency but auto dealers with finance operations would escape scrutiny, according to a preliminary agreement that had yet to be formally adopted by a Senate-House panel tasked with crafting a final bill.
Big Wall Street banks, which already face seeing their profits crimped by new rules, could be subject to more restrictions on proprietary trading activities as Christopher Dodd, a Democrat and the top senator on the panel, said he would push to further tighten the proposed rules.
Democratic lawmakers want to craft a final bill in time for President Barack Obama to trumpet the reforms at meeting of the Group of 20 leading economic powers this weekend. The lawmakers hope to get a bill signed into law by Obama before July 4, which can happen only after a final bill is approved by both the House and the Senate.
The Obama administration hopes the bill will serve as a blueprint for other countries trying to coordinate global regulation of financial markets, which is seen as key to preventing banks from moving operations to other countries to avoid restrictions.
Congressional negotiators still must resolve tough disputes over derivatives regulation and other issues that have billion-dollar ramifications for the financial industry.
"If we are not able to finish by Thursday, then this bill cannot pass until the middle of July," said Representative Barney Frank, the Democrat who is chairing the joint panel.
Enactment of the far-reaching legislation would give Obama and the Democrats a major domestic policy victory to add to health-care reform going into November's general elections.
The reforms are meant to prevent a repeat of the 2007-2009 financial crisis that tipped the economy into a deep recession and triggered massive taxpayer bailouts of big banks.
Democrats were still seeking compromises on proposals to force banks to spin off their lucrative swaps dealing desks and to curb trading for their own accounts, risky practices that have been blamed for contributing to the crisis.
On Capitol Hill, a swarm of bank lobbyists, often working closely with Republicans, has tried to block or water down the bill, but has faced an uphill battle amid deep voter anger with Wall Street.
TOUGHER 'VOLCKER RULE'
Democrats resolved several differences between the bills passed by the House and Senate, though the panel had yet to formally sign off on some.
They agreed to house a new consumer financial watchdog within the Federal Reserve, which could result in less clout than if it were a stand-alone agency, and give it oversight of a wide range of nonbank lenders.
Democrats also agreed to allow other regulators to strike down the consumer-protection bureau's actions if they decided they would threaten bank deposits or financial stability.
The exemption for auto dealers that do not finance their own lending was carved out over the objections of the Pentagon, which said service members were being exploited by unscrupulous dealers.
Banks and Republicans have unsuccessfully tried to kill the new consumer agency by arguing that it could choke off credit, but Democrats said curbs on abusive lending were needed.
"The bank regulators simply do not have consumer protection high on their agenda," Frank said.
Dodd said he would try to stiffen the so-called Volcker rule, which would limit banks' proprietary trading, by giving regulators less discretion to interpret them, perhaps later on Tuesday or on Wednesday.
The rule's author, White House economic adviser Paul Volcker, also backs toughening the restrictions.
Banks have pushed hard for limited exemptions to the Volcker rule to allow them to continue sponsoring or investing in private equity and hedge funds.
The tougher proposal would include carve-outs for insurance companies and asset managers -- an important issue for moderate Republican senators like Scott Brown.
Negotiators must ensure the bill remains tough enough to retain the support of liberal House Democrats, while heeding the concerns of moderate Senate Republicans like Brown and Susan Collins. Some support by Republicans is needed to win passage of the bill in the Senate.
Lawmakers reached agreement on the main elements of a provision sought by Collins that would require bank holding companies to boost their capital reserves and exclude hybrid instruments known as trust-preferred securities when calculating a key measure of their balance-sheet strength.
Collins said she supported phasing in the requirements over five years, as Democrats on the committee have proposed.
In another possible blow to banks, House Democrats insisted that low-risk home loans be subject to a requirement that mortgage lenders carry on their books at least 5 percent of the risk from loans they make and then sell off as securities.
Dodd, however, insisted that the low-risk loans be exempted. He also rejected a House proposal to scrap a provision that would require regulators to consider alternate forms of risk retention for commercial loans.