WASHINGTON -- Bank regulators dropped a plan -- vehemently opposed by bankers -- to use a range of enforcement powers to compel compliance with the Community Reinvestment Act after a Justice Department finding that the agencies lack the legal authority.

"I think it is great," said James McLaughlin, the American Bankers Association's director of agency relations. "It confirms what we have been saying all along. It basically saves the banking industry a lawsuit."

Agencies reviewing applications from banks and thrifts always have considered CRA compliance. However, they had proposed going a step further by approving a range of sanctions that could be applied against institutions that did poorly on their CRA exams.

Under the pending CRA proposal, institutions to be in "substantial noncompliance" -- the lowest of four possible grades could be hit with enforcement actions ranging from civil money penalties to loss of deposit insurance.

Now, however, "Those parts of the regulation that addressed the sanctions will not be in the final regulation," said Matthew Roberts, special counsel to the comptroller of the currency.

Consumer activists expressed disappointment with the decision, saying it would let too many banks off the hook.

"What is means is that we are stuck in the status quo," said Allen J. Fishbein, general counsel at the Center for Community Change. The decision allows small banks that don't file applications to avoid CRA completely, he said.

A memorandum released Thursday by the Justice Department states that the agencies must restrict their enforcement efforts to the application process. The Comptroller's office had sought a legal opinion in order to quell bankers' protests.

"Congress specified only this one enforcement mechanism in the CRA, and we do not believe it is permissible for the agencies to employ other enforcement mechanisms," Assistant Attorney General Walter Dellinger wrote.

Also, enforcement powers can be used only against institutions that are obligated to follow a rule. The CRA, however, does not impose an obligation. Rather, it applies only to banks that need to file applications.

The decision does not mean that banks can ignore the act, Mr. Dellinger wrote. "Nor is it intended to suggest that other provisions of the proposed CRA regulations imposing requirements on financial institutions, such as data collection and reporting requirements, are not authorized," he wrote.

"We are pleased that we got the opinion and that the issue is resolved," Mr. Roberts said.

The ABA's Mr. McLaughlin said he is especially pleased that the Justice Department adopted both legal objections that his organization and others had raised.

"The Justice Department made the only decision it could have made," said Diane Casey, executive director of the Independent Bankers Association of America. "We are absolutely delighted." The ruling reestablishes CRA as a rule enforced by incentive, rather than punishment, she said.

Attorney Ronald Glancz, who represents several banks on CRA issues, said the ruling makes sense.

"That's the right decision," he said. "It is something that will be in bankers and regulators interest in the long run."

Others share his legal assessment. "It sounds to me that they have reached the right conclusion," said D. Jean Veta, an attorney at Covington & Burlington in Washington. "I think it would be very difficult to impose enforcement sanctions on banks on the basis of CRA because the statute doesn't provide for it."

The finding appears to contradict the Justice, Department's recent decisions on the fair-lending front, said William J. Sweet Jr., a partner at Skadden, Arps, Slate, Meagher & Flom who represented Chevy Chase Federal Savings Bank in a recent case.

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