WASHINGTON -- The Federal Reserve Board is striking a defiant and controversial pose on fair lending and community reinvestment issues.
The governors' position stands in contrast to the views of other regulators, who have expressed greater support for revising Community Reinvestment Act rules and for prosecuting banks accused of discriminatory lending.
Banking advocates are split on the significance of the Fed's more critical approach to these issues, with some saying it could threaten the central bank's influence in the area.
"It could backfire on the Fed," San Francisco banking lawyer Al Hirshen said of the central bank's apparent foot-dragging.
The departments of Housing and Urban Development and Justice could take over more fair lending and CRA enforcement responsibilities from the central bank, he said.
Yet, others call the Fed's stand on these issues courageous.
"I think they have done a heck of a job," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America.
Mr. Guenther said the Fed is acting as an independent check on Justice's power.
"The Fed essentially said, 'Justice, you went too far here,'" Mr. Guenther said.
He also said the governors effectively used a recent public meeting of the central bank's board to alert the industry of the need to comment on the newly proposed CRA reporting requirements for minority- and gender-based small business loans. executive vice president of the Independent Bankers Association of America.
Mr. Guenther said the Fed is acting as an independent check on Justice's power.
"The Fed essentially said, 'Justice, you went too far here,'" Mr. Guenther said.
He also said the governors effectively used a recent public meeting of the central bank's board to alert the industry of the need to comment on the newly proposed CRA reporting requirements for minority- and gender-based small business loans.
"Their concerns have a real end in mind; in this case, it's the race and gender reporting requirements," Mr. Guenther said.
The governors did offer some harsh criticism of the revised CRA proposal, issued Sept. 26. They especially focused on the new plan's additional reporting requirements.
"I am still troubled by the fact that, in my opinion that although a bit better disguised, this is an attempt at credit allocation," Gov. John P. LaWare said at the Fed meeting announcing the proposal.
"It is hard to escape the hypothesis that we are going to have more paperwork," added Gov. Susan M. Phillips.
Even Chairman Alan Greenspan added his views. "We need to be careful we don't substitute form for substance, but there is a lot of form in this proposal."
The governors also have appeared more lenient on fairlending issues. -Three days after the CRA meeting, the Fed approved the expansion plans of Barnett Banks Inc. despite a Justice Department warning that it planned to sue the holding company for fair-lending violations.
Gov. Lawrence Lindsey said the Fed's own review of evidence the bank presented led it to conclude that Barnett was innocent.
The Fed's actions stand out because they differ dramatically from other regulators' actions. For example, the hoard of the Federal Deposit Insurance Corp. approved the CRA proposal without much debate or criticism.
Also, the Office of the Comptroller of the Currency appeared to dodge the Barnett case by delaying it until the agency completes a new CRA exam of several of the bank's affiliates, That should take considerably longer than Justice's 30-day litigation window.
This difference in views appears to indicate that the rift between the Fed and Justice is growing, said Warren Traiger, a New York fair-lending lawyer.
"I think it is overstating it to say the Fed is becoming irrelevant," Mr. Traiger said of fair-lending issues.
"But, they are no longer the only player in town."
Bankers need to remember this new fact of life, he said.
"That's what's scary," he said. "You have unclear standards on two fronts."
This new reality means satisfactory CRA ratings from the Fed will not be sufficient to shield an institution from Justice's spotlight, Mr. Traiger said.
"That is not a sign-off from the federal government that their fair-lending standards pass muster," he said.
The Fed's biggest risk would come if it approves more applications from institutions Justice plans to charge with fair-lending violations.
"It would make them quite embarrassed in that they might approve an application and then the Justice Department might find discrimination," he said.
If this happens too frequently, the CRA enforcement tables would ram, said Mr. Hirshen, a partner with Pettit & Martin law firm.
Banks would act to avoid fighting Justice in court, rather than changing to please the Fed. That means following Justice's comments first, the Fed's second.
The Fed's foot-dragging is. counterproductive anyway, according to Mr. Hirshen.
"The momentum is too strong for the Fed to hinder it," he said of reform.
Richard Ritter, a former Justice Department lawyer who consults on fair-lending issues, said the Barnett situation particularly bothered him because the central bank ignored Justice's. finding of discrimination.
But, he said he is not convinced the Fed should automatically defer to Justice.
"That is a tough call because the stakes are so enormous," Mr. Ritter said. "If the Fed were to hold up a merger, that could take years and would have enormous costs."
Others question whether the public is served when the central bank bows to Justice.
"It sounds like checks and balances to me," Steve Roberts, the partner in charge of the regulatory advisory practice of KPMG Peat Marwick, said of the current situation.
