WASHINGTON - Federal Reserve officials are questioning whether they have legal authority to enforce elements of the Clinton administration's community reinvestment reform proposal.
In particular, these officials are debated whether the proposal's new enforcement powers would stand up to legal challenge, given the wording of the Community Reinvestment Act.
Despite those reservations, the Fed was expected to vote today to put the plan out for public comment.
Overreaching Is a Concern
But the concerns could fuel debate about whether regulators are overreaching their authority. They could also raise questions about whether Congress needs to make legislative changes to accommodate the administration's proposal.
All along, administration officials have said they want to limit reform to regulatory action, not handing over the issue to Congress. Privately, officials have told banking groups that the industry would be much better off if the administration rewrites the rules than if Congress amends the law.
Legislative sources said Congress is planning to hold hearings on the plan in January.
Wednesday, the administration proposed tough new lending, branching, and investment standards, as well as hefty documentation burdens, for banks with assets exceeding $250 million. It also proposed streamlining exams for small banks.
The Federal Deposit Insurance Corp. voted in a brief meeting Thursday to put the plan out for comment.
Lively Debate Foreseen
Debate at today's Fed meeting is expected to be vigorous. While Fed Governor Lawrence B. Lindsey has been a key author of the proposal, several board members have expressed strong concerns about the plan.
Banking experts said that an initial look at the proposal does raise questions about its scope, particularly in the enforcement area. The proposal calls for regulators to use enforcement powers - like civil money penalties and cease-and-desist orders - against banks that are given "substantial noncompliance" ratings.
"It seems to me there are some serious questions as to whether you can impose civil money penalties for violations of CRA," said Gil Schwartz, a partner at Skadden, Arps, Slate, Meagher & Flom. "Arguably, you would be violating the law."
"I think you've got to take a good, hard look at this and ask: |Does it really fit in the current statute?'" said James McLaughlin, the American Bankers Association's regulatory director. "Technically, that is not envisioned in the statute."
"That's an extremely interesting legal question," said Karen Shaw of the Institute for Strategy Development. "But the practical question is: |Who's going to sue them?'"
Others, including community activists, dismiss the legal concerns.
"Our sense is, the agencies have very broad enforcement authority that has been entrusted to them by the Congress over the years," said Chris Lewis, a banking lobbyist for the Consumer Federation of America.
Another legal issue raised by regulators during the proposal's drafting was whether they could include evaluation of branches and banking services in CRA rules, even though the law does not mention them as an element of community reinvestment.
According to an OCC spokeswoman, agency lawyers studied this issue and concluded that, because they influence credit availability, banking services were within the law's current scope.
The Fed vote on the proposal will come as the central bank and the Clinton administration battle over key issues like regulatory consolidation. Just two weeks ago, the administration proposed merging the banking agencies into a single superregulator, a plan the Fed hotly opposes.
"The Fed is being banged on from a number of different directions," said Bert Ely, an industry consultant based in Alexandria, Va. "It is having to expend a lot of ammunition righting off losing power.
"They cannot afford to take on the administration in a big way on this issue, given that they are already taking on the administration on the consolidation issue."
The Fed played a critical role in developing the agencies' CRA reform package. In essence, the Fed was able to water down many of the plan's key elements.