The Federal Housing Finance Board approved two rules Wednesday that federal officials said will spur more lending for local economic development.

The board unanimously backed a regulation that would make it easier for the 12 Federal Home Loan banks to issue standby letters of credit to banks and thrifts. Their use was broadened to help finance loans for residential housing and community development, assist with asset and liability management, as well as increase liquidity.

Financial institutions could pledge a wider array of collateral, too, including secured small-business loans and investment-grade bonds issued by state and local governments.

The other rule, approved 2 to 1, creates two new programs to promote investments in rural and urban communities that would benefit low- and middle-income families. Under the programs, Federal Home Loan banks could make cash advances to fund loans for small businesses and economic development projects in empowerment zones or communities hit by base closings or job losses to foreign countries.

Finance Board Chairman Bruce A. Morrison said that the new advances would encourage Home Loan banks to provide more long-term financing for development projects beyond housing, and that expansion of letters of credit will help "Wall Street come to Main Street."

He rebutted point by point a recent Treasury Department letter that criticized the rule on standby letters of credit as risky and "a needless expansion of government-subsidized competition." He defended the rule as legally within the board's mission and said that Treasury critics "would completely destroy" the Federal Home Loan Bank System if their views prevailed.

Reaction from the banking community to both regulations was mixed.

Expanding standby letters of credit will help small banks and thrifts cope with liquidity shortfalls, said Joseph Pigg, senior counsel for the American Bankers Association. "This does broaden the ability of members to access the (Home Loan bank) system."

But Charlotte M. Bahin, regulatory counsel for America's Community Bankers, said that thrift executives were satisfied with the current letters of credit program and would have preferred less burdensome guidelines for community lending advances.

Finance Board Member J. Timothy O'Neill agreed, attacking the rule on advances as inflexible.

For instance, he complained, lending would be impeded by a requirement that 51% of jobs created by one of these development projects go to lower- wage workers.

He unsuccessfully tried to replace it with a policy statement, which would not have been legally enforceable.

Mr. Morrison dismissed Mr. O'Neill's complaint as "a total canard," arguing that the board had to clarify the 1989 federal law that let Home Loan banks make advances for community investment because it was intended for a narrow segment of development projects.

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