WASHINGTON (MarketWatch) -- A controversial amendment to allow bankruptcy judges to modify mortgages so homeowners can avoid foreclosure will be voted on as part of sweeping bank reform legislation under consideration by the full House.

The House Rules Committee on Thursday, which is charged with deciding which provisions can be attached to major legislation under consideration on the House floor, cleared a vote by the full chamber on dozens of provisions including the so-called "cram-down" measure to enable bankruptcy courts to reset mortgage terms.

"It's going to be contentious," said House Financial Services Committee Chairman Barney Frank, D-Mass., after being questioned about whether he believes it will pass.

The cram-down measure, which was introduced by Rep. John Conyers, D-Mich., chairman of the House Judiciary Committee, would allow bankruptcy courts to extend repayment periods, reduce interest rates and fees and adjust the principal balance of mortgages so homeowners can avoid foreclosures.

Conyers argued that cram-down was necessary because the existing administration mortgage modification program has proven to be "woefully inadequate."

However, Frank argued that a key lobby group, the Independent Community Bankers of America, which represents small banks, would turn against the bank reform bill if cram-down was included in the bill.

Lawmakers are in the midst of three days of consideration on the financial regulatory reform bill that is already 1,279-pages long. The rules committee reviewed 238 proposed amendments before clearing 36 measures for consideration on the floor after rejecting dozens of GOP proposals.

Votes are expected on amendments that would make it easier for investors to file lawsuits against credit raters, impose stringent post-Enron accounting regulations on small corporations and a measure requiring the Government Accountability Office to audit the Federal Reserve's balance sheet within two years.

The legislative package already includes new fees, leverage limits and other restrictions on 'too-big-to-fail' institutions, legislation to audit the Federal Reserve and investor protection regulations. See bank reform story.

Consumer protection

Lawmakers will also vote on a provision from Rep. Walt Minnick, D-Idaho, to create a controversial Consumer Financial Protection Council that is a significantly weaker alternative than the bill's Consumer Financial Protection Commission.

The consumer commission would write rules and enforce them for mortgages and credit card products. The proposed council measure, which is supported by the U.S. Chamber, would keep existing regulators in place but coordinate between them to write consumer protection rules.

"I think we're going to beat it [the Minnick measure], but it's a real test," Frank said. "A Consumer Protection Agency is a number one priority for all consumer advocacy groups."

Consumer groups oppose the measure. "The intent of the Minnick amendment is to kill real consumer protection," said consumer advocate Ed Mierzwinski, director at U.S. Public Interest Research Group.

SOX is back?

Legislation introduced by Rep. Paul Kanjorski, D-Penn., that would void a measure permanently exempting smaller public corporations from outside audits of their internal controls was also cleared for a vote on the House floor.

Largely due to GOP support, the House Financial Services Committee in November approved a provision exempting corporations with $75 million in market capitalization from a rule implemented as part of the post-Enron Sarbanes-Oxley Act of 2002.

At issue is a provision that would require an outside auditor to declare that the company's internal controls over financial reporting are correct.

Mid-size and larger corporations are required to obtain the outside attestation already. However, the Securities and Exchange Commission has periodically extended the deadline for when small public companies must comply with the section, responding to complaints from small businesses about the related costs. Under current rules, small companies have to comply with the rule for fiscal years that end on or after June 15, 2010.

"Internal control plays an important role in protecting a business's resources and can help reduce the risk of fraud," said Center for Audit Quality Executive Director Cindy Fornelli. Fornelli said she supported Kanjorski's effort to restore the provision.

Fed audit-- expedited

A series of measures introduced by Rep. Michael Burgess, R-Texas, were also cleared for a vote on the House, including a provision that would require the Government Accountability Office to conduct an audit of the Federal Reserve's monetary policy as well as how much the central bank has lent and will lend to specific banks within two years of when the legislation was approved. The House Financial Services Committee in November approved a Fed audit bill introduced by Rep. Ron Paul, R-Texas.

More changes to be considered

A variation on a controversial measure introduced by Rep. Melissa Bean, D-Ill, seeking to give federal regulators greater power over states when imposing consumer-protection restrictions was included in the base bank reform legislation.

"If a particular consumer issue is not addressed by a federal regulator, the state could step in based on the measure," said Rep. Ed Perlmutter, D-Colo., a member of rules committee. "It gives the federal regulator a little more ammunition to preempt the state, but the state regulator can fill a vacuum."

Credit rating agencies also were targeted by lawmakers. A variation of a measure introduced by Rep. Brad Sherman, D-Calif., that would alter the Securities and Exchange Act of 1934 to make it easier for investors to file lawsuits against credit rating agencies, was also included in the broad bank reform package.

The measure would lower the liability standard for credit rating agencies from "knowingly or recklessly," to "gross negligence." However, based on the measure, the plaintiff investor has the burden to prove that the rating agency acted in gross negligence, Sherman said in an interview.

"The goal of this measure is to put the fear of god in the credit rating agencies so they might think twice before giving AAA ratings to problem securities," Sherman said.

Lawmakers also made adjustments to a measure that would exempt banks with $10 million or less in assets from a Consumer Financial Protection Commission examiner.

Banks with $10 million or less in assets would have their main regulator, such as the Comptroller of the Currency, handle consumer protection exams. Every U.S. bank already is examined by their main regulator for safety and soundness concerns such as whether they have sufficient capital on hand.

However, for the largest financial institutions, Frank said the provision was changed to give the CFPA the discretion to decide whether it needed to have an examiner directly assigned to mid-sized and larger banks. The concern is that mid-sized institutions may be hit with overly burdensome onsite examination teams, as the legislation is written, said Perlmutter.