On July 30 an opportunity was missed to move comprehensive legislation that would update the Federal Home Loan Bank System.

Sen. Chuck Hagel, with the support of Senate Banking Committee Chairman Alfonse D'Amato and Sen. Lauch Faircloth, was prepared to introduce solid legislation.

Among other things, Sen. Hagel's Home Loan bank proposal would:

*Expand Home Loan bank access to small community banks, allowing them to better serve community credit needs.

*Provide voluntary membership and equal treatment for all members. (Federally chartered thrift institutions are now mandatory members, and commercial bank members have higher membership costs.)

*Create a reasonable permanent capital structure and ensure safety and soundness regulatory authority for the Federal Housing Finance Board.

*Change the $300 million annual Resolution Funding Corp. flat tax on Home Loan bank earnings to a fixed percentage of 20.75% and update investment authority to align statutory language with present-day financial and regulatory practices.

In addition, the Hagel proposal would make a number of other modernizing changes, such as updating the operational structure of the Home Loan Bank System's office of finance.

Support for the Hagel proposal was broad-based and came from those most familiar with the Home Loan Bank System. The independent, federal regulator of the Home Loan Bank System - the Federal Housing Finance Board - as well as the 12 Federal Home Loan banks, the Independent Bankers Association of America, and America's Community Bankers all endorsed the Hagel legislation.

Regrettably, just as the comprehensive amendment was due to be considered, a barrage of last-minute political criticism was launched.

Misinformed critics claimed that the Home Loan banks were straying from their collective mission by holding too many nonhousing investments. Ironically, the Hagel proposal would directly deal with this issue by establishing new risk-based, permanent capital standards. These would recast the portfolios of the Home Loan banks toward real estate and housing-related transactions.

These capital reforms, combined with the change in the Refcorp tax, would eliminate the economic need for the Home Loan banks to hold high- grade, short-term money market assets. Further, the permanent capital requirement would establish a cushion to absorb any losses.

One misinformed source made the outrageous charge that Sen. Hagel wanted to create a huge federal bureaucracy to gobble up the commercial banking industry. This is total nonsense.

The Hagel legislation would not change the nature of this cooperative housing partnership with the 4,514 commercial banks that have joined the Home Loan Bank System. In fact, the Hagel proposal would strengthen the Home Loan banks' ability to serve their member community lenders.

Another party commented that the Home Loan banks have profited "handsomely" through investment practices. This conclusion is false and fails to recognize the actual, modest return on capital.

In 1992 the Home Loan banks earned $857 million on average capital of $10.3 billion, a rate of return of about 8.35% before payments to the Treasury for Refcorp. In 1997 the Home Loan banks earned $1.52 billion on average capital of $18 billion, a return of about 8.43% before Refcorp payments - a negligible increase.

The growth in both advances and investments maintained this modest return, which by design approximates half the rate of return earned by commercial banks.

This month the Senate may again take up the Hagel proposal. I hope it does.

The Hagel proposal would provide a more effective mission-focused Home Loan Bank System. It is a pro-consumer, safety-and-soundness measure that would strengthen the capital structure of the Home Loan banks, enhance the ability of bank members to serve their communities, and ensure adequate business and investment flexibility to give members a reasonable return on their capital investment.

Sadly, if the Hagel Home Loan bank initiative is not adopted, the real losers will be U.S. homebuyers who will be denied competitively priced home mortgages and everyone on Main Street who depends on local, community lenders.

Mr. Bennett, vice chairman of M&T Bank, Buffalo, is a director of the Federal Home Loan Bank of New York.

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