WASHINGTON - Bankers overwhelmingly oppose a Federal Reserve Board proposal to allow the industry to voluntarily collect data on the race and sex of small-business loan applicants.

In a majority of the 125 comment letters, bankers said the Fed's proposed change would increase compliance costs while providing little public benefit.

Regulators have toyed with small-business data collection requirements for two years. The agencies stripped a mandatory collection provision from the revised Community Reinvestment Act rules last spring. But the Fed, in a separate document, proposed amending the Equal Credit Opportunity Act rules to permit bankers to voluntarily collect the data.

The April 21 proposal would permit bankers to ask applicants about their race and sex. If the borrowers refused, bankers could not record the data based on their observations.

While the Fed contended the data collected would be voluntary and would be kept confidential, bankers were skeptical.

"Electing not to collect the information will alone be considered incriminating," wrote Nessa E. Feddis, senior federal counsel at the American Bankers Association.

Bankers said the supposedly confidential data would become public, whether released by regulators, the courts, or banks under pressure from the Justice Department and community groups.

The data also would be incomplete, producing a misleading picture of the industry's practices, wrote J. Pat McMurray, chairman of First Security Bank of Boise, Idaho.

Banks, judged on the misleading data, could find themselves "falsely convicted in the court of public opinion," warned Steven I. Zeisel, senior counsel to the Consumer Bankers Association.

Customer opposition creates another problem, said Clinton W. Walker, a vice president at Citicorp. "No matter what we tell them, many of our potential customers would consider our efforts to collect such data to be a privacy invasion, and others would become suspicious of our motives," he said.

Data collection also would be nearly impossible to implement, wrote Richard L. Mount, president of the Independent Bankers Association of America. He asked what a bank would do if a borrower's parents were of different racial or ethnic backgrounds.

The compliance costs would be enormous, Keycorp executive vice president R. Bruce Campbell said. Keycorp alone would have to train 15,000 employees from 14 states about the subtle differences between this proposal and other data-collection requirements, he said. The bank also would have to redesign several computer systems, and change scores of loan applications, he said.

NationsBank Corp. dropped its earlier support for the plan, saying it fears community groups would force banks interested in mergers to collect the data. That would place these banks at a competitive disadvantage, said Patrick M. Frawley, director of regulatory relations at the Charlotte, N.C.-based giant.

Chemical Bank managing director Carol J. Parry said she is worried that regulators would rely on the data during CRA exams, possibly downgrading banks that produce inaccurate numbers or don't provide a second review for each minority small-business loan.

The proposal also would make it easier for community groups or the Justice Department to defeat a bank in court, wrote Nancy J. Kesler, director of regulatory relations at Barnett Banks Inc. "It would create more discoverable data, even if proven inaccurate or incomplete," she said.

Community activists and several small banks supported the proposal. The rules would create "a useful device" for promoting fair lending, wrote Allen Fishbein, general counsel at the Center for Community Change. A mandatory collection requirement would work even better, he said.

The proposal also would allow banks to better assess their outreach efforts, Asian Business Association president Fiona Ma wrote. "This will ultimately promote inner-city development, increase minority economic development, and facilitate employment for our low-income and minority communities," Ms. Ma wrote.

Race and sex data would "substantiate our claim that our lending is not discriminatory," added Edgar B. Smith III, president of Cairo Banking Co. in Cairo, Ga.

The Fed is expected to tackle the proposal at a public meeting late this fall.

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