SAN ANTONIO - Federal Reserve Governor Lawrence B. Lindsey warned on Wednesday that unless carefully crafted, reform of the Community Reinvestment Act could create more problems for the banking industry than it solves.

While changes in the rules are needed, he said, bank regulators must avoid pushing the law so far that it becomes a tool for credit allocation.

"Will more specific guidance by Congress or the regulators in fact generate the desired result - equal access to credit for all creditworthy Americans?" Mr. Lindsey asked. "The best I can say is, maybe."

Local Solutions Favored

"But certainly, whatever we decide will have a price," he added. "National solutions to local problems generally cost more in time, resources, and money than local solutions to local problems."

Mr. Lindsey, made his comments at a community investment conference sponsored by the Federal Reserve Bank of Dallas. The Fed governor is a lead player in the CRA reform effort that was initiated by President Clinton last month.

Historical Comparison

Regulators have until the end of the year to refocus the law on actual loans made in low-income areas.

In his luncheon address - held just before regulators convened their second public hearing on CRA reform - Mr. Lindsey compared the impact of impoorly recrafted CRA to the experience of Philadelphia's Bank of north America, which was chartered in 1782.

After complaining that the bank was not lending enough to them. farmers convinced the legislature to repeal the bank's charter and replace it with a more restrictive one, Mr. Lindsey said. This act caused the bank to falter, leading to an economic slump throughout Pennsylvania that hurt the farmers the regulation was designed to help.

"I think there are some important lessosns to be drawn from this early experience," Mr. Lindsey said. "First, political supervision of bank lending practices is nothing new, and may be an inevitable part of a democratic societ."

|Harmful to Society'

He added, "The second lesson of history. is that moving in a purely political direction of banking, or heavy-handed credit allocation, is not only bad for banking, it is harmful to society as a whole."

These lessons must be kept in mind in the CRA debate, he said.

"CRA is part of a long-standing balance between the need for some political oversight of the lending process and the problems that result if such oversight becomes excessive," the Fed governor said.

"We must bear in mind that because political oversight is at best a blunt instrument, striking an appropriate balance between constructive oversight and overburdening regulation will inevitably be a difficult task."

In his speech Mr. Lindsey also warned bankers that if they don't shape up their minority lending records, regulators and lawmakers are likely to step in with more heavy-handed rules.

Wages of Discrimination

"As long as behavior exists which seems outrageous to reasonable individuals - and that includes any amount of discrimination - the threat of legislative and/or regulatory action, with all of its attendant burdens, remains likely," Mr. Lindsey said.

"The prospective regulatory burden which might result from not solving this problem is potentially enormous, so it can only be left of bankers to eliminate both the practice and the perception of discrimination," he added.

Finally. Mr., warned Lindsey bankers that as the focus on minority' lending intensifies, reliance on statistical analysis of lending data will grow stronger.

"Statistics have played a major role in our consideration of the mortgage discrimination problem to date," he said. "Their role as an enforcement tool is just now beginning, and is likely to increase dramatically in the years ahead."

The Justice Department, in particular, has relied heavily on statistical models in analyzing bank's minority lending. But Mr. Lindsey, once a Harvard economics professor, warned that the this approach has its limitations.

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.