SAN DIEGO -- Federal Reserve Board Governor Lawrence Lindsey warned the banking industry on Monday to curb lending discrimination before Congress steps in with costly remedies.

"The prospective regulatory burden which will result from not solving the fair-lending problem is potentially enormous," he said. "A service industry, like banking, which does not serve its customers or which operates in a vacuum of reason and judgment will soon find the vacuum filled by legislative fiat."

Mr. Lindsey was the keynote speaker at the American Bankers Association's three-day national regulatory compliance conference, which drew more than 450 bankers.

Broader CRA in Works

He told them that the Clinton administration already was prepared to propose, this year or next, legislation that would broaden the Community Reinvestment Act. He declined to discuss the details, however, to avoid "scooping the President."

He chided the industry for standing by while a "few bad actors" fueled such laws as the Truth-in-Savings Act, which requires detailed disclosure of account information.

The law, which took effect last week, was enacted in par cause some banks paid interest only on part of depositors' balances, he said. The ABA should have denounced this "outrageous" practice in full-page ads in these banks' home towns, according to Mr. Lindsey. Such self-policing might have headed off Congress, he said.

"We think Truth-in-Savings was a bad bill and it was overkill. spurred on by the investable balance controversy, " said Edward Yingling, the ABA's executive director of government relations. "But the bill predates the investable balance issue and it is a mistake to blame passage entirely on that issue."

Mr. Lindsey also criticized the industry's reaction to the CRA, which requires banks to make loans in local communities. Rather than constantly whining about the paperwork, he said, bankers ought to tout the $35 billion in CRA loans made.

"I would respectfully suggest that your industry change its tune," said Mr. Lindsey. "Compared to the amount of positive things being done, the actual paperwork and employee costs under current efforts for CRA is a relative bargain."

Bankers, and examiners, obsessed with CRA paperwork ought to relax, he said.

But Mr. Lindsey thinks lawmakers are on the verge of overreacting to charges that banks are discriminating against blacks. Lending discrimination does exist, he said, but "relatively minor adjustments to institutional behavior will constitute appropriate remedies."

For example, banks ought to review every loan application that is rejected to ensure that it was denied on proper grounds, he said. And bankers conducting the review ought to talk directly with the person denied a loan because "this conveys the impression that the bank cares."

Mr. Lindsey blasted Congress for passing laws that he feels are too specific.

"We're on the verge of a maximalist approach to regulation," he said. "Left unchecked the result will be a weaker and less resilient industry and fewer choices available to customers."

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