The Federal Home Loan banks are opposing a proposal designed to increase funding for economic development lending.

In recent comment letters to the Federal Housing Finance Board, 11 of the 12 Home Loan banks said the proposal would impose unnecessary regulatory burdens.

Instead, the finance board should issue guidelines to help the banks devise their own economic development programs, the 11 Home Loan banks said.

"A regulation may lead into the top-down creation of unnecessary reporting burdens, costs to the member shareholders, restrictions, and mandates," wrote Charles M. Hill Sr., executive vice president of the Federal Home Loan Bank of Chicago.

The finance board proposed in April a set of rules that would spell out how the Home Loan banks should create lending programs for low- and moderate-income communities or areas designated for federal economic development assistance. For instance, the rules would spell out how much money a Home Loan bank could advance under the programs each year and how much interest the banks could charge.

Michael A. Jessee, president of the Boston Home Loan Bank, said institutions would be reluctant to offer new programs if the proposal was adopted. "The proposed rule goes considerably beyond the steps that are necessary to accomplish this goal," he wrote.

The Dallas bank did not comment on the plan, which also would create specific programs for rural and urban economic development.

The proposal is intended to help the Home Loan banks create community investment cash-advance programs, which were permitted by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Under the programs, the Home Loan banks are allowed to offer funds at a lower cost than traditional advances.

The finance board said the rules were needed because banks have shied away from economic development programs. Agency data show that 4% of the $18.1 billion issued under the cash advance program during the past eight years has been targeted for economic development.

Several Home Loan banks also complained that, rather than generating additional borrowing, members would substitute the program's low-cost advances for traditional advances. "We are convinced that a significant portion of (these) disbursements simply displace profit-generating advance activity," said Nancy C. Miller-Herron, chairwoman of the Home Loan Bank of Cincinnati.

Community groups, however, said rules would make the programs easier to use. "The clearer the finance board can be on targeting, use, and access, the more likely we are to see an increase in economic development," said Roy O. Priest, president of the National Congress for Community Economic Development.

But officials at World Savings and Loan Association argued that the cash advance program should be limited to mortgages. "The proposed rule represents another attempt by the Federal Housing Finance Board to usurp the authority of Congress and, in effect, amend the Federal Home Loan Bank Act by regulatory fiat," wrote Robert C. Rowe, World Savings' general counsel.

World Savings also opposed plans to let nonmember financial institutions get low-cost advances under the program. "This is particularly important when one considers the fact that nonmember mortgagees furnish no capital to the banks," Mr. Rowe said.

For its part, the finance board is "keeping an open mind" on whether to issue rules or guidelines, said an agency spokeswoman.

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