Sept. 23 (Bloomberg) -- Retailers, merchants and non- financial businesses will be spared from oversight by a consumer protection agency, Representative Barney Frank said in proposing to scaling back the Obama administration’s proposal.

Financial institutions won’t have to offer “plain vanilla” products and services or assess whether consumers understand the products they offer, according to a proposal that Frank, chairman of the House Financial Services Committee, sent yesterday to panel Democrats. The committee today continued its hearings on the regulatory overhaul.

A proposal “will make several key changes to the Obama administration’s draft legislation to make clear that CFPA will not disrupt merchants, retailers and other non-financial businesses” or overburden banks, Frank, a Massachusetts Democrat, said in an outline.

The agency, aimed at shielding consumers from lending abuses, is part of President Barack Obama’s plan to overhaul financial regulations. The agency proposal has been criticized by the banking industry, which is lobbying to kill the plan, saying it would reduce consumer choice and access to credit.

Obama and other Group of 20 leaders who meet in Pittsburgh tomorrow will discuss plans that would force banks to curb leverage, hold more equity capital and keep a greater pool of assets that can be easily traded. Officials are seeking an accord to prevent a repeat of the worst crisis since the Great Depression and ensure a sustained recovery.

System ‘Failed’

“The need for a dedicated, consolidated consumer- protection agency is clear,” Treasury Secretary Timothy Geithner said in testimony today. The current system “failed to protect consumers from unexpected risks,” and instead “led them into a housing and consumer-debt crisis.”

Geithner told the committee he was “very supportive” of the revisions in Frank’s proposal.

Frank’s proposal reflects “significant improvements” on some issues, although further action is needed to avoid higher costs and constraints on credit, American Bankers Association President Edward Yingling said today in a statement.

Yingling said the agency would gain “extensive new powers” to write its own rules and may be in conflict with safety and soundness regulators.

The banking industry supports Frank in dropping the plain vanilla language and a requirement to determine what a consumer understands, said Scott Talbott, senior vice president of government affairs for the Washington-based Financial Services Roundtable.

Strengthen Regulators

“We don’t think a separate agency is necessary,” he said yesterday in a telephone interview. “Strengthening the existing regulators is a more effective way to protect consumers.”

Frank’s draft requires banks to have simultaneous federal safety and soundness and consumer compliance exams. The Federal Reserve will fund the agency, which will be run by a director with a board of financial and housing regulators.

Obama proposes giving the regulator power to set standards and enforce violations at banks and non-banks. The Fed and regulators that oversee credit-card and mortgage companies would cede their consumer-protection powers to the agency.

Frank, who is leading efforts in the House to translate Obama’s regulatory reform plan into legislation, has scheduled a hearing on the agency proposal on Sept. 30.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: September 23, 2009 11:02 EDT