WASHINGTON - Small banks gained a major ally in their quest for an exemption from the Community Reinvestment Act when House Banking Committee Chairman Jim Leach took their side Wednesday.

Speaking to a panel of community activists and economists during a hearing of his panel's financial institutions subcommittee, the Iowa Republican said small banks are unduly burdened by CRA.

Rep. Leach said small banks already serve their communities out of sheer self-interest. As a result, he said, CRA does little more than increase those institutions' compliance costs.

"It is not unrealistic to lift burdens off of some people whose practices were not affected one iota but whose burdens increased significantly," Rep. Leach said.

He added a warning to CRA supporters: "I would stress that this committee at this time is not looking at overturning CRA . . . it is looking at refining CRA. However, unless CRA is refined, it is going to be overturned."

Wednesday's hearing focused on broad regulatory reform legislation introduced in the House by Rep. Doug Bereuter, R-Neb. The measure would, among other things, exempt from CRA banks with less than $100 million of assets and based in towns smaller than 30,000.

Bart Harvey, chairman and chief executive of the Enterprise Foundation, argued that exempting small banks from CRA gives "the greatest benefits to banks with the worst CRA performance records."

"While the banking industry has argued that small banks would not be able to operate without serving their communities' needs, 1994 data show that 92% of the banks that received poor CRA ratings were small banks," said Mr. Harvey, whose nonprofit group provides affordable housing.

A Bereuter bill provision that would increase, from $50 to $500, the liability of owners of stolen ATM cards if a bank believes the cardholder "substantially contributed" to unauthorized transfers drew fire from Michelle Meier, counsel for Consumers Union.

"Consumers would be forced to litigate the issue if they disputed that," Ms. Meier said.

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