WASHINGTON -- A top Federal Reserve official said Wednesday that the Community Reinvestment Act is improperly being used as a "catalyst for major social reform," threatening its effectiveness as a tool to ensure equal access to credit.

Richard F. Syron, president of the Federal Reserve Bank of Boston, urged lawmakers to either lower expectations about what the law can accomplish or else rewrite it to broaden its scope.

"We have to understand both the opportunities and the limitations of CRA," he said. "Fundamentally, we have to realize that it is about equal access to credit, and that alone is not a panacea for any number of economic problems."

Mr. Syron spoke at a conference in Boston sponsored by the Boston Fed and the Massachusetts Bankers Association. A text of his speech was released here.

Clinton Initiative

His comments came one week after President Clinton announced that bank regulators would reform the CRA by yearend to encourage greater investment by the banking industry in inner-city and low-income neighborhoods.

Mr. Syron praised the President's initiative, but stressed the importance of carefully examining the broader intent of the law before hashing out the specifics of how to enforce it.

"You don't want to think CRA is a panacea, because if you do, it is destined to fail," he said in a telephone interview after the speech. "The expectations are inconsistent with its ability to deliver."

In his speech, Mr. Syron said that "when you take a closer look at CRA, and peel away the layers of rhetoric that so often encompass discussions about CRA, what you find is a law that is valuable, but one that is actually quite limited in its statutory capabilities to solve those insidious problems of society."

Mr. Syron laid out his views of what CRA can and cannot do: It can ensure that banks provide equal access to credit for minorities and low-income residents, he said. But as it stands, it cannot serve as a subsidy program, an affirmative action program, or a tax on the banking industry for deposit insurance.

"By misplacing our expectations on a statute that clearly does not have the strength to tackle the social problems of such magnitude, we are in danger of losing the benefits that can be derived from the law," Mr. Syron said.

"And worse, we are in danger of generating frustration and disillusionment among all those who genuinely wish to work toward equality and prosperity for all people in our society," he added.

If policymakers want CRA to take on added responsibilities, Mr. Syron said, then the law should be rewritten. And its reach should be extended to cover all financial institutions.

"But if we determine that [the law] should be limited to equal access to credit, then I'm not sure the extension is compelling," he said.

Bankers at the conference Wednesday appeared to share the Boston Fed president's view.

"There are cases where advocacy groups and some other elected officials would like CRA to do things it was never designed to do," said Richard Driscoll, chairman of the Massachusetts Bankers Association. "When you have that attitude growing, you stand in the way of real progress."

Landmark Study

Mr. Syron has been one of the most outspoken and proactive Fed officials in fair lending and equal credit issues. His bank put out a landmark study last fall showing that even after economic characteristics are accounted for, blacks are still 60% more likely to be denied home mortgages than whites.

And this spring, the Boston Fed put together a booklet advising banks on strategies they can follow to insure they are not discriminating. That book has been widely circulated throughout the Fed system.

In his address Wednesday, Mr. Syron criticized efforts to use the Boston Fed study to detect lending discrimination at the institutions that participated in the study.

Massachusetts Attorney General Scott Harshbarger is now investigating close to a dozen lenders that participated for illegal bias. Also as a result of the study, one bank, Shawmut Bank, is being investigated by the U.S. Attorney General.

"The study was never intended as a tool for analyzing specific institutions, and in my own personal view is not an adequate tool for going so," he said. "My own fear is that using it to do so may forever poison the well for future research and analysis to develop a better understanding of these problems."

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