WASHINGTON - Community bankers are leading the charge against the latest government attempt to define subprime lending, arguing that it is too broad and would hamper their efforts to meet their areas' legitimate credit needs.

In dozens of comment letters due last week to federal regulators, community bankers from across the country criticized a proposal to use the quarterly call report to define subprime lending and mandate new disclosures on such loans.

"Careful balance is needed to avoid reducing credit for those who need it most," Tom Holdhusen, president of Ipswich State Bank in South Dakota, wrote in a July 21 comment letter to the Federal Deposit Insurance Corp.

"Increasing the costs to lenders through capital and other requirements may lead to unnecessarily tightened lending standards, which may affect protected classes of borrowers and constrict CRA lending," continued Mr. Holdhusen, whose institution has $29.3 million of assets. "Banks should not have to face this conflict. In many cases, loans to individuals who have less-than-perfect credit are essential to the well-being of local communities."

In their proposal this spring to revamp call reports - which banks must file quarterly to detail their financial condition - regulators suggested defining subprime lending as "extensions of credit to borrowers who, at the time of the loan's origination, exhibit characteristics indicating a significantly higher risk of default than traditional bank lending customers."

The risk of default may be measured by credit or repayment histories, debt-to-income ratios, or credit scores, according to the proposal for revising call reports that banks are scheduled to begin using in the first quarter.

Bankers' letters ranged from those opposing any inclusion of data about subprime loans in call reports to those objecting to the proposed definition as too broad.

"The proposals relative to subprime lending should not be buried in an annual update to the call report requirements. The agencies should, instead, publish another separate proposal dedicated to this issue," Gerald M. Noonan, president of the Connecticut Bankers Association, wrote on July 27.

These "new reporting requirements could have the potential to create significant and unnecessary regulatory burden; discourage certain forms of community lending; and produce inaccurate data for decision-making purposes," he wrote.

Community bankers' primary concern is an inflexible definition of a complex business.

Jeryle W. Story, senior executive vice president of Southside Bank, an institution with $1 billion of assets in Tyler, Tex., wrote on July 11: "Trying to create a definition that 'fits all' does not work. Circumstances created by time, location, customer history, direct loans vs. purchased loans, are all factors that make the definition unrealistic and burdensome. The definition to be workable would have to have ranges of factors that identify possibilities for default."

Though community bankers focused their comments on the definition of subprime loans, large banks were primarily concerned about a proposal to merge the existing annual report of trust assets, in which banks report on trust activities, with the quarterly call report.

The change would be "an undue administrative burden" and adds a "reporting deadline to the many other quarterly reporting deadlines," First Union Corp.'s assistant general counsel, John J. Abdallah, wrote in a July 28 letter focusing solely on trust activity reporting.

He recommended semiannual, rather than quarterly, reports.

Big banks also opposed eliminating the additional 15 days banks with more than one foreign office are given for submitting their call reports.

Comments on the proposal, which was issued by the Office of the Comptroller of the Currency, Federal Reserve Board, and FDIC, were due July 31. However, the agencies are still accepting comments. Agency spokesmen said the final revisions are expected to be unveiled this fall.

The Office of Thrift Supervision on Friday issued a proposal with similar changes for its counterpart, the thrift financial report. Comments are due Oct. 3.


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