* House backs away from making watchdog separate agency
* Agreement resolves dispute between two chambers
* Sen. Durbin’s debit card fee plan in bill, with changes (Adds details, Krueger, Durbin, credit union group comments)
By Kevin Drawbaugh
WASHINGTON, June 21 (Reuters) - The Federal Reserve, criticized for failing to protect consumers in the run-up to the credit crisis, would be the home of a new financial consumer watchdog under an agreement announced on Monday.
U.S. House of Representatives Democrats said they will go along with a plan to put the watchdog inside the Fed as an independent unit operating within the central bank.
The watchdog would have substantial budget, staffing and rule-making power, but its rules could be overridden in some cases by a new inter-agency council of regulators.
In backing away from their earlier support for setting up a powerful stand-alone agency, House Democrats resolved a lingering dispute with the Senate and moved lawmakers closer to completing historic Wall Street reform legislation.
A Senate-House panel is slated to reconvene on Tuesday to work on finalizing the sweeping bill which promises to be the biggest overhaul of financial regulation since the 1930s.
Enactment of the bill into law, targeted to occur before July 4, would give President Barack Obama and the Democrats a major domestic policy victory to add to healthcare reform going into November’s general elections.
The reforms are meant to prevent a repeat of the 2007-2009 credit crisis that tipped the economy into a deep recession, triggered massive taxpayer bailouts of big banks, and unleashed a wave of regulatory reform initiatives worldwide.
The new watchdog, which would consolidate consumer-related duties now dispersed across several agencies, would oversee mortgages, credit cards and other consumer financial products that critics say were poorly supervised in recent years.
House Democrats negotiating the legislation will seek to subject payday lenders, check cashers and private student loan providers to the watchdog’s supervision, said a statement from Representative Barney Frank, chairman of the panel.
The House said it wants to add certain exclusions to the watchdog proposal for auto dealers and pawnbrokers.
House Democrats also said they will support putting new limits on debit card transaction charges, known as interchange fees, with some changes to a proposal that was originally offered by Democratic Senator Richard Durbin.
“Interchange is now basically done,” wrote Concept Capital analyst Chris Krueger in a research note. “Game over.”
Durbin said the changes would exempt from the rule prepaid and debit cards used in distribution of government benefits. He said the agreement would allow the Fed in some cases to adjust fee rates on cards for fraud prevention costs.
“We were able to reach an agreement which makes minor changes to strengthen consumer protections and bring competition to a market where there is none,” Durbin said.
The National Association of Federal Credit Unions said it was “greatly disappointed” by the agreement on Durbin’s proposal, predicting it would raise consumer costs and disadvantage credit unions versus large card issuers.
In another aspect of the reform legislation, Frank said he wants to beef up a rule that would require mortgage lenders to carry on their books at least 5 percent of the risk from home loans that they make and then sell off as securities.
The 5-percent “skin-in-the-game” provision is in the base bill being considered by the Senate-House panel. But the Senate added an exemption for some low-risk residential mortgages.
Frank wants to strip that out, along with a provision that would require regulators to consider alternate forms of risk retention for commercial mortgage-backed securities.
Both of Frank’s initiatives on this front would be a blow to the Mortgage Bankers Association, which opposes the risk retention requirements and backed the exemption provisions. Frank’s proposals still need approval by the joint panel.
The Senate-House panel is trying to combine bills already approved by the two chambers and aims for final legislation by Thursday. The finished product must win approval once more, then go to Obama to sign.
A senior Obama administration official said on Monday the congressional panel would finish a bill by the end of this week and it would be the strongest reform plan to emerge from a G20-member government.
Lawmakers are still seeking compromise on proposals to force banks to spin off swap dealing desks, and to curb risky proprietary trading by banks unrelated to customers.
Groups likely to take the hardest profit hits from the proposed reforms, taken as a whole, include Goldman Sachs (GS.N), Morgan Stanley (MS.N), JPMorgan Chase (JPM.N), Bank of America (BAC.N) and Citigroup (C.N), according to analysts.
Tightening financial oversight in a coordinated way will be a key topic at a meeting of the Group of 20 economic powers in Canada next weekend.
The congressional conference committee last week concurred on widening audits of the Fed, but dropped a provision to make the head of the New York Fed a political appointee.
Lawmakers also reached full or partial agreement on measures dealing with credit rating agencies, private equity and hedge funds and raising bank capital standards. (Additional reporting by Corbett Daly, Andy Sullivan, Karey Wutkowski, Tim Ahmann, Patricia Zengerle, Alister Bull; Editing by Andrew Hay)