WASHINGTON — Consumer advocates cheered and the financial sector jeered Thursday as a controversial plan to create a federal agency to regulate mortgages, credit cards and other forms of consumer credit cleared a key House of Representatives committee on its way to an uncertain future.
The House Financial Services Committee, on a 39-29 mostly party-line vote, passed legislation to create a Consumer Financial Protection Agency, a centerpiece of President Obama's broader proposal to revamp financial regulation in the aftermath of the global financial crisis.
"This step sends an important signal to the American people that we will not stand by and allow big financial firms and their lobbyists to mobilize against change," Obama said in a statement after the committee vote.
The fact that a breakdown in U.S. mortgage-lending standards and widespread predatory lending triggered the financial crisis is driving the push for the legislation. As the recession deepened, banks pulled back credit and raised credit card fees, amplifying a deep contraction in credit to consumers, who drive about 70 percent of U.S. economic activity.
These factors — along with acknowledgment from bank regulators and the Federal Reserve that they'd dropped the ball on consumer protection — convinced the administration that a new approach and a separate federal entity are necessary.
Harvard University law professor Elizabeth Warren long advocated for such an agency, and after the House panel's vote she said it was a day she thought would never come.
"When I first came to Washington with the idea of this agency, everyone told me the banks always win — quit now because the banks always win," she said. "They didn't win today."
Warren now heads a special congressional panel that's overseeing how bank bailout money is being spent.
Committee Chairman Barney Frank, D-Mass., said he expected the measure to pass the full House by Thanksgiving. In a news conference, he reminded that the legislation isn't just about reining in abuses in mortgage lending or crippling credit card fees, but also forms of lending such as payday loans, check cashing operations and remittance services that have little or no government oversight.
"The sad fact is, the lower your income is in America, the more you are paying for financial transactions," Frank said.