updated 10/21/2009 1:49:10 PM ET 2009-10-21T17:49:10

The House Financial Services Committee voted Wednesday to let states regulate large national banks when it comes to protecting consumers from fraud and abuse unless federal regulators intervene.

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The measure, approved by voice vote, is a blow to the banking industry, which doesn't want to have to comply with myriad state laws that are often tougher than federal regulations.

Democratic Reps. Melvin Watt of North Carolina and Dennis Moore of Kansas offered the measure as an amendment to a broader bill that would establish a new federal agency dedicated to protecting consumers. The committee was on track to pass that bill later Wednesday or Thursday.

Democrats are casting Watt's amendment as a compromise because it would allow federal regulators to exempt banks from state laws on a case-by-case basis. The Obama administration and Rep. Barney Frank, the committee's chairman, had wanted to go further by subjecting banks to state laws without a chance for appeal.

The vote was the latest clash between Democrats, who are pushing for tough new rules for Wall Street after last year's economic crisis, and the financial industry, which says their proposals would be too onerous and would result in increased costs.

Rep. Melissa Bean of Illinois, an influential moderate Democrat, was expected to fight Watt's proposal on the floor. Bean, who was unable to attend Wednesday's vote because her family was sick with the flu, says subjecting national banks to state laws is impractical.

"Rolling back this 140-year-old precedent of federal rules to a system of 50 different state regimes increases costs for training and compliance, which gets passed to consumers," Bean said in a statement released ahead of Wednesday's vote.

The financial industry, which also opposes creation of the new Consumer Financial Protection Agency, had gained traction in recent weeks after Democrats agreed to spare most banks and credit unions from additional agency examinations.

Democrats also dropped from the bill a proposal by President Barack Obama that banks be required to offer standardized products and take steps to ensure consumers understand what they are buying. Citing concerns by small neighborhood banks, lawmakers said such requirements would have been too difficult to enforce.

Rep. Maxine Waters, a California Democrat whose home state has been hit hard by foreclosures and mortgage scams, said she was not happy with the exemption provided under the latest proposal that would give large national banks a chance to appeal state laws.

"We should not be picking around the edges of consumer protections," she said. "We should be bold. We should be revolutionary."

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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