WASHINGTON - California would stop doing business with commercial banks that do not rate "high satisfactory" in all three of the Community Reinvestment Act's categories - lending, investment, and services - under pending legislation that also would apply to nonbanks.

If enacted, the bill would affect any financial services firm with operations in the state.

"It will have national implications immediately. Every large bank is going to be thinking: We're going to be doing business in California; we better clean up our [CRA] rating," said Robert L. Gnaizda, policy director of the Greenlining Institute, an umbrella group for community and minority advocates.

The California Bankers Association said it backs the bill because it would require rivals to reinvest in their communities as banks must.

"Our view is 'hurray' if institutions other than banks and [savings and loans] would also have to demonstrate their good citizenship," said Gregory O. Wilhelm, the group's director of government relations. "Our institutions devote a lot of energy to doing the right thing under CRA. Other financial institutions doing business with the state should be subject to the same standards."

The Western League of Savings Institutions also supports the provisions applying the same standards to nonbank competitors, but is critical of the "high satisfactory" rating system. "That is overkill," said Edward Levy, the group's senior vice president and state legislative counsel.

The legislation was introduced Feb. 28 by Louis Papan, the powerful Assembly Banking Committee chairman. "Community groups suggested, and the chairman agreed, that in order for a financial institution to get the State of California's business, it would have to meet certain requirements under federal CRA. And if there is no CRA requirement for an institution, there would an analogous state requirement," said William C. George, chief consultant to the Assembly Banking and Finance Committee.

The legislation would require institutions to maintain at least a "high satisfactory" in the three areas that make up the CRA exam: lending, service, and investments. It also directs California's Commissioner of Financial Institutions to adopt similar guidelines for nonbanks, such as firms in the insurance industry, by July 1, 2001.

Some of California's largest banks and thrifts, including Bank of America, Wells Fargo, California Federal Bank, and Washington Mutual, declined to comment on the bill. Many of the state's larger bank companies have earned outstanding ratings, so the legislation would mainly affect smaller banks.

"We have a focus on community banks - we want to encourage them to deal with their communities," Mr. George said.

Craig Hudson, executive director of California Independent Bankers, said the group has not decided whether to oppose the bill. "We are in negotiations with Mr. Papan and his staff," Mr. Hudson said. "Once again bigger banks have committed errors that we, the smaller banks, have to pay the penance for."

Mr. Papan's committee is expected to vote on the bill in May or June. It is not clear what action will be taken by the state Senate, and Gov. Gray Davis has not taken a position on the legislation. However, supporters like Mr. Gnaizda insisted that lawmakers in the consumer-friendly state want to put some teeth in CRA ratings.

"This bill would create the competition that the CRA ratings were intended to create, but for which the federal regulators have abdicated their responsibility," he said. "Federal regulators have failed to fulfill their obligations to secure adequate community reinvestment."

There are four CRA ratings: "substantial noncompliance," "needs to improve," "satisfactory," and "outstanding." The rating is determined by averaging a more detailed score for a bank's involvement in community lending, service, and investment. Those individual aspects of the CRA exam are scored with a "high" or "low," for example "high satisfactory" or "low satisfactory."

Regulators, however, only release the overall scores. About 92% of all banks have "satisfactory" ratings, and 6.9% are rated "outstanding."

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