WASHINGTON -- At a time when the banking industry is mobilizing to cut regulatory red tape, community activists are warning that the campaign could backfire.

The industry and the Bush administration are seeking to roll back some of the rules imposed by the Community Reinvestment Act and other measures. But the effort might end up provoking even tougher legislation, said Deepak Bhargava, a lobbyist for the Association of Community Organizations for Reform Now.

His assertion came on the third and final day of hearings held by the Federal Institutions Financial Examination Council, a consortium of bank regulators, about the regulatory burdens placed on banks.

The first two days of hearings -- in Kansas City an San Francisco - included testimony from bankers and regulators about the exhausting burdens of regulations, particularly those concerning community reinvestment and fail lending regulations.

"Banks' complaints about the CRA are not only misguided, but they are not very sensible," Mr. Bhargava said as the examination council convene last Thursday in Washington.

Some bank lobbyists agreed that bankers should be cautious.

"All of us need to be prepared for a new Congress," said Denis O'Toole, lead lobbyist for he Savings and Community Bankers Association. "I think they are going to demand a higher standard out of banks and thrifts."

Mr. Bhargava's warning came one day after the Bush administration proposed regulatory reform legislation that, among other things, would exempt rural banks with less than $100 million in assets from many of the record-keeping and reporting requirement of the CRA.

It also would insulate banks that have received top CRA ratings from challenges by community groups when the banks seek to expand.

Cecelie Counts Blakey, a lobbyist for the National Association for the Advancement of Colored People, said at last week's regulatory hearing that her group agreed with bankers that "the current system is not working."

Call for a New Agency

Instead of easing CRA requirements, however, she recommended that enforcement of CRA and the Home Mortgage Disclosure Act be consolidated into one regulatory agency.

Currently four banking regulators enforce the CRA, and the Federal Reserve Board compiles HMDA data.

Other community activists last week expressed concern that current regulatory rules are not being adhered to or enforced.

Discrimination in rural areas, in particular, is a serious problem, according to Acorn's Mr. Bhargava, who lamented the administration's efforts to ease CRA requirements for small banks.

Low Grades in Small Towns

Nearly 90% of the lowest CRA ratings are given to banks with less than $100 million in assets, he said.

Mr. O'Toole, however, said in an interview that small banks need easier compliance standards because they are overburdened with paperwork.

Bankers from large and small companies say that examiners who grade CRA activities put more emphasis on form -- record keeping and marketing -- than on actual lending and education programs.

Mr. Bhargava said at the the hearings that bankers often create their own compliance headaches by fretting more about documenting their meetings with community groups and printing "slick brochures with a minority family on the cover" than extending credit.

"With CRA, the rubber meets the road where the loans meet the |hoods," Mr. Bhargava told the examination council.

Social Consequences

Other activists pointed to the recent Los Angeles riots as a sign that banks are not fulfilling their inner-city commitments. Unfair lending practices are likely to lead to civil unrest, they told the regulators.

According to Ms. Blakey, 12 lenders in Los Angeles at year-end 1991 had the lowest CRA grades given by regulators. (Kenneth Thomas, a consultant in Miami, said that 13 banks -- or 19.4% of those that lend in Los Angeles -- were in "substantial noncompliance" with the CRA at the end of the first quarter.)

"Any attempt to weaken or gut" fair lending laws "invites a replay of the Los Angeles riots," warned Rev. Charles Cummings Jr., a board member of Acorn's Washington, D.C., chapter.

Not Just Rabble-Rousers

Although Acorn and other activist groups have sometimes been dismissed as mere rabble-rousers, bankers have learned to take their protests seriously.

Acorn takes credit for pressuring banks to make $10 billion of loan commitments in the past 10 years, primarily because of its success in raising CRA issues when banks seek to merge.

By law, regulators must take into account CRA ratings when approving mergers or any sort of expansion.

BankAmerica Corp., NationsBank Corp., and Chemical Banking Corp. committed billions of dollars to low-income communities as they were preparing for their mergers in the past year.

Before BankAmerica was permitted to merge with Security Pacific Corp., the Federal Reserve Board held three community-investment despite the fact that its lead bank had won the highest CRA rating.

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