WASHINGTON — Community banks would be exempt from enforcement by a new consumer financial protection agency under an amendment approved Thursday by the House Financial Services Committee.

Still, industry lobbyists continued to press the panel to weaken a separate provision that would force national banks to comply with state consumer laws.

The voice vote in favor of an amendment from Reps. Brad Miller, D-N.C., and Dennis Moore, D-Kan., was a victory for banks with $10 billion or less of assets, which would continue to face enforcement of consumer protection laws from their prudential regulators. The amendment is likely to make passage of the bill, which is expected next week, much easier.

But the debate left other issues unresolved, chiefly concerns that the legislation would eliminate national bank preemption. Though Rep. Mel Watt, D-N.C., circulated an attempted compromise Thursday that was designed to roll back 2004 rules from the Office of the Comptroller of the Currency but leave some preemption intact, industry representatives said the proposed amendment did not go far enough.

"The new language is certainly an improvement over the discussion draft," said Raymond Natter, a former OCC lawyer and a partner with Barnett, Sivon & Natter. "However, while an improvement, it also has some very significant problems that make it difficult to work in the real world."

According to Watt, the amendment was meant to restore preemption to the so-called Barnett standard, a reference to the 1996 Supreme Court decision in Barnett Bank v. Nelson that said the OCC could preempt state law if it "prevents or significantly interferes with the operations of a national bank."

"We believe we have gone back to the Barnett standard and that's what we intend to do," Watt said.

Under the Barnett standard, banks could challenge a state law in court or ask the OCC to issue a letter saying the law was preempted. But under rules issued by the OCC in 2004, the agency broadly asserted preemption over most state consumer protection laws automatically — a move Democrats have protested ever since.

Despite Watt's intent, several industry lawyers, many of whom declined to speak publicly, said the amendment did not successfully restore the Barnett standard, arguing the language was far narrower. For example, under the Barnett standard, a state law was preempted if it conflicted with federal law. Under the Watt amendment, a direct conflict might override federal law, not the state statute.

"Any state law relating to financial transactions will override federal law," Natter said.

Industry representatives also said the OCC would have to undertake a rulemaking process for each state law, saying it had more flexibility under the original Barnett standard. Under the Watt amendment, banks could not challenge the state law in court, but would have to wait for the OCC to weigh in, a process that could delay the issue for months or years.

Not every industry lawyer agreed that the situation was so dire. Ron Glancz, a partner with Venable, said national banks could operate effectively under the Watt language.

"The OCC has lived with that standard for quite a while and you could even argue that the Barnett standard really reaffirms that standard that they were living under before," he said.

"Before 2004, it was really a case-by-case basis. But it was something the banks lived with before and in my own view they could live with it today."

He said the impact for thrifts would be more significant. Currently, they operate under a separate, stronger preemption standard — but the Watt language would make a level playing field.

"So what this does is it puts the thrifts on the same level, on par as national banks," he said. "They would no longer have that advantage of field preemption. That would be a substantial change for the thrift industry."

An OCC spokesman acknowledged that the amendment was "an improvement" to the original bill, but said the agency had concerns.

"There are many fundamental problems with the language that will have to be fixed for national banks to be able to effectively conduct a retail banking business and serve consumers," the spokesman said.

Watt appeared frustrated by criticisms of the amendment and the different interpretations of it, and said he was "absolutely" willing to continue working on the issue before it goes to the floor.

"I'm hoping to pass my amendment," he said. "Look at the amendment and you can describe it however you want to … . Anyway I characterize it somebody will come back and say something else."

Much of the debate during the panel vote, however, centered primarily on the Miller-Moore amendment concerning community banks. Republicans cried foul over the amendment, arguing that Democrats were being hypocritical by carving out community banks when they have repeatedly said the existing regulators failed at enforcing consumer protections.

"Isn't this counter to what you have been saying on previous issues?" asked Rep. Patrick McHenry, R-N.C.

Miller defended the amendment, saying community banks were not the main problem during the crisis. He also added that the CFPA retained power to step in against a community bank if it did not think the banking regulators were doing a good job.

"Smaller banks and credit unions are not without sin but they have not been the worst actors," he said. "If a small bank is a bad actor, the CFPA can do something about it. The CFPA will still write rules that apply to everybody."

But McHenry did not give up.

"My question is … in essence it is exempting about 98% of institutions … . I'm just trying to understand, does the gentleman support CFPA?" he asked.

House Financial Services Committee Chairman Barney Frank came to Miller's defense, saying it was about curbing the burden on community banks.

"There is no exemption of rulewriting or case-by-case enforcement," Frank said. "When we met with the community banks … we talked about ways to accommodate their concerns."

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