One idea would create a consumer entity with its own powers inside an existing regulatory agency or within a new super regulator. The negotiations, still in the early stages, are attempting to find common ground between Dodd's desire for an independent agency and adamant objections to the idea from Sen. Richard Shelby of Alabama, the top Republican on the banking committee.
Republicans have so far refused to consider supporting the independent consumer agency. Democrats are willing to discuss alternatives as long as the plan creates meaningful protections against predatory lending and other abuses that contributed to the financial crisis.
Among the options is letting state regulators set their own, higher standards for lending. Big banks currently enjoy protection from tougher state law, and strongly oppose the change.
The internal discussions, described Friday by a number of people familiar with the talks, cover a range of regulatory topics, including who should be assigned the job of monitoring the financial markets for potential threats to the nation's system.
Negotiators have debated the merits of making the Federal Reserve or the Federal Deposit Insurance Corp. the lead agency in such an effort, or whether to create a single, all-seeing regulator for the task. They have also discussed giving greater powers to the FDIC, including the ability to oversee bank holding companies, a task currently carried out by the Federal Reserve.
The talks have also centered on how to best dismantle large, interconnected firms without resorting to a taxpayer bailout. Though Obama would prefer a system under the authority of Treasury and the FDIC, the Senate is looking at a special bankruptcy court, with a separate executive branch authority used only as a last resort.
The Obama administration has given Dodd wide latitude to negotiate with Shelby, though officials say they ultimately don't want to give away key principles. Meanwhile, Dodd's announcement last week that he was not seeking re-election appears to have given Republicans a greater willingness to negotiate with him.
The consumer finance agency is one of the major sticking points. Anything short of an independent consumer agency would be a blow to Obama and consumer advocates who argue current banking regulators failed to monitor lending practices.
"We've been clear on the things that are important to the president: That there be a strong set of consumer protections with a strong new capacity to enforce those protections," said Lawrence Summers, director of the White House National Economic Council.
"Leaving consumer protections in the hands of regulators who failed to protect consumers before is a recipe for continued problems," added Travis Plunkett, legislative director for the Consumer Federation of America.
Banks and their advocacy groups have fiercely fought an independent agency and almost managed to strip it from a House version of the regulatory bill late last year. The agency ultimately survived a close vote. The House bill contains many of the goals proposed by the Obama administration.
The Senate bill is likely to be significantly different if Dodd succeeds in his efforts at a bipartisan bill. But that would mean Obama would not get everything he wants.
Overall, the legislation aims to create a system to monitor the financial markets for potential threats to nation's system and identify firms and activities that should be subject to heightened standards. It also seeks to provide a mechanism to dismantle large failing firms without massive taxpayer bailouts and it would bring previously unregulated, complex transactions under greater scrutiny.
AssociatedPress Writer Daniel Wagner contributed to this article