The House Commerce Committee is expected to drop from its financial modernization bill a controversial plan to boost the power of states over bank insurance sales.

Despite lawmakers' change of heart, however, banking lobbyists said it is still too early to say whether the industry will support the broad legislative package, which allows banks to merge with insurance, securities, and nonfinancial firms. The industry has lobbied intensely during the past two weeks to fight off any new insurance restrictions.

The committee's surprise reversal indicates that the panel is still struggling to complete its proposal and is unlikely to be ready for a vote on the legislation Wednesday as scheduled. Staffers for the committee say Chairman Thomas Bliley, R-Va., is determined to craft a plan that will gain broad industry support to avoid a bitter legislative fight.

Other important changes to the bill are also under discussion, sources said. For instance, the commerce panel also may weaken a measure approved by the House Banking Committee in June that would let banks merge with nonfinancial firms. One possible proposal would scale back plans to let banks earn up to 15% of their revenues from nonfinancial business. Plans to let nonfinancial firms acquire banks may be dropped altogether.

The commerce panel's plan also may eliminate a banking committee provision that would let banks sell municipal revenue bonds.

The commerce panel's latest plan came as a shock to insurance industry officials because preliminary drafts unveiled late last month had included many of the provisions they wanted.

"We're now getting close to a dream bill for bankers on the insurance provisions," said Gary E. Hughes, general counsel for the American Council of Life Insurance. "If this stands, we have absolutely no choice but to oppose this bill."

Insurance officials complained that the commerce committee has reneged on its pledge to roll back the Office of the Comptroller of the Currency's authority to grant new insurance powers to national banks. Though banks would still be forbidden to underwrite insurance, the panel has dropped plans to specify products that would be off-limits to banks.

The panel also balked at trying to spell out rules for bank insurance sales.

"To the insurance industry, the whole reason for the bill is to deal with the problem of the comptroller's authority," said David J. Pratt, a lobbyist for the American Insurance Association.

The provisions were dropped because of an "unbridgeable chasm" between the banking and insurance industries, according to a commerce committee memo outlining the latest proposal.

Bank lobbyists played down the insurance industry's threat to oppose the legislation. "I think there is some calculation on Capitol Hill that they are bluffing," said Edward L. Yingling, chief lobbyist for the American Bankers Association.

Mr. Yingling noted that the commerce panel plan still includes a major provision sought by the insurance industry: States would be on an equal footing when they challenge the comptroller in court. Under the plan, legal disputes over bank insurance sales would be exempt from a 1984 Supreme Court decision requiring courts to defer to federal regulators.

But Mr. Hughes said the insurance industry won't back down. "The commerce committee just asked us to pay any price to get a bill, and we're not going to do it," he said.

Several sources said significant changes could be made as negotiations continued last weekend. Rep. John Dingell, the committee's ranking Democrat, continued to insist that restrictions on bank insurance sales remain in the bill.

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