WASHINGTON -- The Federal Reserve is clashing with the Department of Justice over the expansion plans of a Florida institution that is being investigated for fair-lending violations.

Fed sources said the central bank will announce today that it has approved an application by Barnett Banks Inc. to acquire some Florida thrift operations - despite a wammg from Justice that it plans to file a fair-lending complaint against Barnett within 30 days.

The Fed's action appears to have escalated tensions between the two government agencies. Observers described the dispute as the start of a rift between the two bodies that could have broad implications for the industry.

"You now have to keep your eye on two regulators," said New York attorney Warren Traiger, "one being your primary regulator and the other being agencies like Justice and Housing and Urban Development."

The Justice Department warned of its possible fair-lending complaint in a letter Tuesday, the third in a series detailing the law enforcement agency's concerns about Barnett's lending record.

The letter took sharp exception to an assertion by the Fed, made in approving another Barnett application last week, that the law agency had refused to disclose information about its probe.

The Justice Department's civil rights chief, Deval Patrick, told the Fed that his earlier letters had offered evidence of discrimination by the bank and had warned that the administration was ready to sue.

Fed Governor Lawrence Lindsey, who coordinates CRA issues for the central bank, said it had received at least the first two letters.

The third letter, he said, arrived at the Fed Tuesday evening but was not read until after Wednesday's meeting.

But he said the Fed's contention that it had not gotten information about the Barnett investigation is accurate because Justice refused to release actual evidence.

"What we were looking for was the ability to examine their claim," said Mr. Lindsey, who noted that the Fed's board comprises economists who know how to read regression analyses.

Together, the three letters outline the department's case against Barnett.

The earlier letters stated that Attorney General Janet Reno had approved a complaint charging Barnett's holding company, six affiliates, and its mortgage bank with violating the Fair Housing Act and the Equal Credit Opportunity Act.

The letters, all signed by Mr. Patrick, who is assistant attorney general for the civil rights division, also detail the evidence the department has against Barnett.

Mr. Patrick wrote that the department had completed a statistical analysis showing that the bank was more likely to reject black home mortgage applicants than white applicants with similar credit histories.

There is only a "one in a million" possibility that the discrepancy is a result of chance, Mr. Patrick wrote.

The letter contended that this is a case of actual discrimination. It does not raise the more subtle issues of marketing or branching strategies that were the core of the department's recent complaint against Chevy Chase Federal Savings Bank of Maryland.

Barnett spokesman Bob Stickler declined to comment.

In the most recent letter, Mr. Patrick said he felt compelled to reiterate the Justice Department's concerns about Barnett in light of the Fed's Sept. 21 decision approving the acquisition of Loan America.

Wednesday, the Fed voted on Barnett's bid to buy the Florida operations of Glendale Federal Bank of Glendale, Calif.

While a Justice Department spokesman did not return calls for comment, Richard Ritter, a former department attorney who now is a fair-lending consultant, said the department routinely refuses to disclose its evidence before filing suit.

"The premature release of evidence can undercut its ability to reach a settlement," Mr. Ritter said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.