WASHINGTON - Rebuffing a lower court, the U.S. Court of Appeals for the Seventh Circuit on Wednesday ruled that national banks with offices in small towns may sell insurance to customers anywhere.

The federal appeals court decision validates the Comptroller of the Currency's interpretation of banking law at a time when Congress is considering curbing the agency's authority.

"The assault on the Comptroller seems misdirected," said David Roderer, a partner with Jones, Day, Reavis & Pogue. "Maybe Congress has to go back to the National Bank Act itself."

A three-judge panel concluded that the Nation Bank Act's requirements allow banks to sell insurance only from towns with fewer than 5,000 persons, but places no geographic requirements on customers.

The case matched NBD Bank with Indiana Insurance Commissioner Donna Bennett. A magistrate court in December 1994 gave the commissioner the power to bar national banks from selling insurance to anyone who did not live in a small town.

The Comptroller, however, has allowed banks based in small towns to sell insurance anywhere, clarifying in 1986 that the town-of-5,000 limit applies to the location of the bank, not the customer.

The seventh circuit is the second federal appeals court to back the Comptroller's interpretation of the National Bank Act. In July 1993, the U.S. Court of Appeals for the District of Columbia Circuit said the law does not require the customers to live in small towns.

"It's an important reaffirmation of the authority of national banks to make insurance products available to their customers," said Julie Williams, the Comptroller's chief counsel. "The positions that we are taking in this area, we think are solidly founded on the law, and the courts are backing us up repeatedly."

Legislation pending in the House would bar the Comptroller's office from expanding bank insurance powers for five years. Ms. Williams said the appeals court decision ought to send a signal that the agency does not deserve this constraint.

"Any suggestion that what the OCC is doing in this area is not solidly backed up by what's in the law is just not correct," she said.

NBD officials applauded the decision.

"This is like Christmas in October to us," said Judy Brown, the bank's vice president and legal counsel. "It's NBD's intent to be very active in providing insurance to its customers."

While the holding company is headquartered in Detroit, NBD Bank said it plans to sell insurance from a branch in Corydon, Ind., a town with a population of roughly 2,700.

Officials at the Indiana Insurance Commission would not comment until they had a chance to study the decision.

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