Moving to clear away an obstacle to passage of a Wall Street reform bill, key U.S. senators have struck a compromise balancing state and federal powers in bank consumer protection, aides said on Tuesday.

Senator Thomas Carper will unveil an amendment later on Tuesday dealing with the issue, an aide said.

Senate Banking Committee Chairman Christopher Dodd, who has struck the deal with Carper, said on the Senate floor that votes will be held on the matter later on Tuesday.

The Dodd-Carper compromise concerns a dispute that has been impeding progress for months on Dodd's landmark reform bill. The biggest overhaul of financial regulation since the 1930s, the Dodd bill was expected to win final passage within days.

The compromise between the two Democrats would give state attorneys general a prominent role in protecting consumers, but bar state AGs from bringing federal lawsuits against national banks, and from going into another state to bring charges against a bank, according to an agreement summary obtained by Reuters.

For example, under the agreement, the California attorney general could not bring claims in Nevada based on new federal consumer protection rules, the summary said.

In addition, the compromise limits the power of federal bank regulators to preempt, or overrule, state consumer protection laws at a level that was established in a 1996 Supreme Court case involving Barnett Bank, the summary said.

It is yet to be seen how some of the liberals in the Democratic caucus will react, but these negotiations are a positive sign for an issue that had seen little movement in the past several weeks, said policy analyst Paul Miller of FBR Capital Markets in a research note.

PATCHWORK SYSTEM

Banks in the United States are regulated by a patchwork of federal and state-level agencies. Large national banks, such as Citigroup and Bank of America, are overseen by the U.S. Office of the Comptroller of the Currency.

After the 2007-2009 financial crisis, the OCC, the Federal Reserve and other federal agencies were sharply criticized for failing to do more to protect consumers from sharp practices in the mortgage and credit card business, some involving banks.

Dodd addressed this issue in two ways in his bill. First, he proposed setting up a new financial consumer protection watchdog to regulate mortgages and credit cards. Second, he proposed enlisting state attorneys general in this effort.

Consumer advocates have pushed for years to give state authorities more clout, arguing that they often do more to protect consumers than federal regulators.

Lobbyists for large banks with nationwide operations have been intensely focused for months on this issue, pushing to preserve the status quo on state preemption and weaken the Dodd bill's proposals that would give state officials more clout.

The Dodd bill originally called for reining in the power of the OCC to preempt, or overrule, state laws.

Under the compromise, an aide said, the bill's limits on the OCC would remain, but be moderated slightly.

In addition, the Dodd bill calls for establishing a new financial consumer protection watchdog within the Federal Reserve. Banks have also been working hard to put checks on the watchdog's powers and states' power to enforce its rules.

In the compromise, state attorneys general would be able to enforce the new rules issued by the watchdog. But they could not bring federal class action-like suits against national banks and will not be able to go into another state to bring charges against a national bank, the summary said.

(Reporting by Kevin Drawbaugh; Additional reporting by Andy Sullivan; Editing by Jan Paschal)

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