Despite strong Republican opposition and intense lobbying from banks and business groups, the proposed Consumer Financial Protection Agency survived its first major test Thursday when the House Financial Services Committee approved its creation 39 to 29 in a largely party-line vote, the Los Angeles Times reported.

The agency would have the power to write new consumer protection rules for a host of activities involving loans or credit and would have the ability to ban products and business practices that it determined were “unfair, deceptive or abusive.”

It also would be able to examine banks and other companies for compliance with its rules and hand out penalties for violations. The legislation would grant new powers to state attorneys general to help enforce the rules and allow them to write tougher rules for companies within their states.

Iowa Attorney General Tom Miller, who has pushed to retain state enforcement provisions within the federal legislation, called the committee’s action a “huge milestone.”

“There is a long way to go, and there are some things we’d like to improve in the bill, but this is a huge step forward,” Miller said in an e-mailed statement. The agency “will help us avoid the kind of abuses that led to the financial debacle and economic devastation of the last couple years.”

“Second, the bill protects the critical role of states in consumer protection,” Miller continued. “As the legislation goes forward, there will be more attempts to gut our state authority to protect consumers.  State attorneys general mobilized before the House committee votes, and we will continue to weigh in as the bill moves forward.  It is crucial to preserve a strong role for states to enforce the law and protect consumers.”

Lawmakers made some significant changes from the administration’s original proposal that would lessen the agency’s scope, even as Democrats beat back numerous attempts by Republicans to water it down further.

Last week, small community banks and credit unions succeeded in persuading the committee to exempt them from additional examination requirements they said would be more onerous for them than for large institutions. Banks with less than $10 billion in assets, which accounted for about 98 percent of all institutions, and credit unions with less than $1.5 billion in assets would continue to have consumer compliance exams done by their federal banking regulator. The new consumer agency would have the option of participating.

As the legislation heads to the full House and as Senate Banking Committee Chairman Christopher Dodd, D-Conn., prepares to unveil his own plans for the agency in the coming weeks, the battle lines are becoming clear.

Democrats, along with consumer and public interest groups, say the agency is desperately needed after banking regulators failed to protect consumers adequately in the years leading up to the financial crisis. Republicans, backed by industry, contend that the agency epitomizes unwarranted government overreaching that would take financial decisions away from consumers and impose onerous new oversight on businesses.

“It’s not about protecting consumers; it’s about a new government bureaucracy making decisions for us,” said Rep. Spencer Bachus, R-Ala., the committee’s ranking Republican. Read related story.