This was unexpected. Binyamin Applebaum reported today that banking interests have actually lost a major battle on Capitol Hill:

The House Financial Services Committee is expected to vote Tuesday to let state governments protect bank customers by imposing restrictions that go beyond existing federal laws, according to congressional and industry sources.

The move would roll back a doctrine called preemption that has allowed big banks to answer solely to federal regulators. The banks argue that operating under a single set of rules is more efficient and results in lower prices for customers. But the Obama administration, which is pushing for the change, regards preemption as a cause of the crisis because it prevented state regulators from quashing obvious abuses.

The change essentially would unleash 50 additional regulators on the largest banks.

New Democrats like Melissa Bean, whose former chief of staff is lobbying for the Chamber of Commerce on this issue, wanted to retain the preemption doctrine for financial regulation, arguing that national standards make more sense for businesses. But the Obama Administration joined with House liberals to argue for letting a thousand flowers bloom and empowering more regulators to look at the practices of the financial industry at the state level. And they won out.

The debate came to a head last week. Bean’s group said it would propose an amendment to retain the current law. Liberals warned that if the amendment drew enough Republican support to pass, they would oppose the broader legislation to create the new agency. House leaders and the White House pressured Bean and the moderates to fall in line.

Despite tremendous pressure from the banking industry, Bean ultimately agreed.

In a piece of political theater, Bean now plans to introduce the amendment and then to withdraw it, according to people familiar with the matter. She then plans to engage in a scripted conversation with Frank, in which both are to affirm the importance of further discussions about the issue. Bean can then reintroduce the amendment once the bill comes before the full House, but lobbyists on both sides say they regard the battle as over.

Ryan Grim has more on the importance of this fight. Crucially, the White House and House Democrats have seemed to figure out that giving in to Republican-friendly amendments that gut the efficacy of various bills, while not even getting their votes in return, is a loser’s game. In addition, liberals used their own leverage, threatening to oppose the underlying bill if it applied these weak standards to the Consumer Financial Protection Agency. This is the same kind of debate that’s playing out on health care.

This does not mean that the CFPA will effectively provide a deterrent to predatory lenders and financial industry thievery, however. The Financial Services Committee passed an amendment last Thursday to exempt community banks from some of the oversight, and yet those banks and credit unions still oppose the bill and will seek more concessions. In addition, many have criticized derivatives regulation from the Financial Services Committee (set to go to markup in the House Agriculture Committee on Wednesday) that exempts far too many of the financial instruments. And an amendment set to come up soon would exempt car dealer financing from CFPA regulation. Considering this is the biggest purchase outside of a home that families make, it seems ludicrous to leave them out.

However, there is no doubt that the White House and Democrats are making progress in reviving a bill that many saw as a non-starter, given the power of the banks. The CEOs of the big banks now see the Consumer Financial Protection Agency as “a given”. That’s a major change, and shows that the White House at least understands the bad optics of giving the banksters a no-strings government bailout. What regulatory reforms will be extracted in return is still up for grabs, but at least something beyond the status quo is on order. Just putting consumer protection in the hands of a dedicated agency instead of a Federal Reserve which could frankly care less about consumers represents a form of progress.