WASHINGTON (Reuters) - The Congress’ chief author of financial regulatory reform moved on Tuesday to kill the most controversial part of an Obama administration proposal for a new government watchdog for financial consumers.

Rep. Barney Frank (D-MA), Chairman of the House Financial Services Committee, speaks to reporters during the Reuters Global Financial Regulation Summit in Washington, April 28, 2009. REUTERS/Jonathan Ernst

Banks would not be required to offer so-called “plain vanilla” versions of financial products, such as mortgages, under draft legislative language drawn up by Democratic Representative Barney Frank and obtained by Reuters.

The draft language comes in the face of opposition among businesses and existing regulators to President Barack Obama’s proposed Consumer Financial Protection Agency (CFPA), part of his sweeping program to tighten bank and market regulation.

In opting to delete the “plain vanilla” provision from his version of the proposal, Frank, who chairs the House of Representatives Financial Services Committee, has effectively acknowledged that it was an over-reach by the administration.

The Frank bill must undergo committee review. But it will likely be the vehicle Democrats use for moving the CFPA plan to the full House for a vote, and possibly to the Senate.

In addition to dropping “plain vanilla,” the bill explicitly exempts many businesses from CFPA oversight, including securities, commodities, investment and general insurance products; accountants and tax preparers; real estate brokers and agents; lawyers; auto dealers; communications providers; and providers of retirement and pension plans.

Frank’s draft emerged after he met on Tuesday with Senate Banking Committee Chairman Christopher Dodd and U.S. Treasury Secretary Timothy Geithner, who is expected to fight for the CFPA in testimony before Frank’s committee on Wednesday.

“Our proposal will not create new bureaucracy for banks,” Geithner said in prepared remarks to be delivered to the panel that were posted on the committee’s website on Tuesday.

The CFPA is designed to be a central agency to handle consumer protection duties now vested in several agencies, including the Federal Reserve. It “will consolidate fragmented consumer authorities into one agency ... which will write rules, oversee compliance, and address violations by non-bank providers, as well as banking institutions,” Geithner said.

FED CRITICIZED

Many existing agencies, including the Fed, have been roundly criticized in Congress for doing a poor job of protecting financial consumers in the run-up to and during the financial crisis that last year engulfed world economies.

Obama will attend a summit meeting this week of the Group of 20 major nations where leaders are expected to grapple with difficult financial regulatory reform issues.

Besides consumer protection, another issue is how to deal with troubled large banks and companies like those given massive taxpayer bailouts over the past year, such as American International Group and Citigroup.

In his prepared testimony, Geithner said that the United States would not identify in advance financial firms it views as systemically important, like those that were bailed out.

The administration plans to subject financial firms judged to be so important that their failure would threaten the entire system to a new and tougher regulatory regime. This would impose higher capital requirements on them to offset the perceived benefits of being deemed too-big-to-fail.

“Crucially under our proposals, there will be no fixed list of Tier 1 FHCs (financial holding companies), and identification of a firm as a Tier 1 FHC will not convey a government subsidy,” Geithner said.

DODD WARNS ON DEADLINE

Earlier on Tuesday, Senator Dodd said he wants his banking committee to act on financial regulatory reforms before the end of 2009, but warned that that deadline, self-imposed by the Obama administration, could slip.

“We want to clearly get something done before the end of the year in our committee, and possibly beyond that, but obviously healthcare (reform) will determine to some extent how much we can get done,” he told reporters.

Speaking after his meeting in the Capitol with Frank and Geithner, Dodd said: “Nothing has been written yet. There’s been no agreement specifically on any legislative language.”

Dodd is deeply involved in the congressional debate over healthcare, in addition to leading the banking committee.

Frank said the half-hour meeting was “not a wake” and that the participants made “substantial progress.”

Chances are still “very, very good” that Congress will have a financial reform bill by the end of the year, Frank said.

He and Dodd spoke just minutes before Democratic Senator Jack Reed, a banking committee member, introduced a bill to regulate over-the-counter derivatives, a free-wheeling market widely blamed for amplifying the financial crisis.

Like earlier proposals, Reed’s legislation would force “standardized” OTC derivatives to go through clearinghouses, while placing other new limits on the market.