WASHINGTON - Banks could face fines of up to $1 million a day and loss of deposit insurance for violating proposed Community Reinvestment Act rules.

CRA reform, in the works for the past 18 months, enters a new phase today as comments come due on the government's second proposal.

The regulators clearly are bracing for lawsuits challenging their authority to apply potent enforcement powers to CRA infractions. The Comptroller of the Currency has asked the Justice Department to confirm its right to take such extreme steps. Justice has not weighed in yet.

"We believe we have the authority" said Stephen M. Cross, the deputy Comptroller for compliance management.

"But, we recognize that the issue exists and it is not black and white."

If Justice sides with the regulators, banks that score "substantial noncompliance" on the proposed lending, investment, and service tests could be hit with a panoply of punishments, including:

* Civil money penalties as high as $1 million per day per violation, but averaging between $5,000 and $10,000 a day.

* A ban on banking officers or directors who obstruct community reinvestment efforts.

* Cease-and-desist orders requiring banks to reimburse victims and pay damages.

* Loss of deposit insurance, effectively closing down the bank.

* Last year, fewer than 30 banks received "substantial noncompliance," the lowest of four possible grades.

The agency argues that nothing in the act explicitly prevents it from using enforcement powers. Also, another section of the law orders each agency "to use its authority" to encourage banks to meet community credit needs.

Community activists said this allowed regulators to slap cease-and-desist orders or civil money penalties on banks that do not adequately reinvest in their communities.

"Congress construed it purposely in the broadest way," said Allen Fishbein, general counsel to the Center for Community Change.

However, banking attorney Ronald Glancz, a partner with Venable, Baetjer, Howard & Civiletti here, said a different part of the act specified how regulators should enforce the law. That section gives examiners the authority to use CRA to reject applications to expand or to move a headquarters.

"That's been the interpretation for a number of years," Mr. Glancz said. "So, I don't know where they just got this [new] authority."

Banking trade groups agree with Mr. Glancz.

James D. McLaughlin, the American Bankers Association's director of agency relations, said the statute lets regulators reject applications, not wield enforcement powers.

"If they want that authority, they should look to Congress," added Diane Casey, executive director of the Independent Bankers Association of America.

Enforcement powers are reserved for safety and soundness violations, a category that CRA does not cover, Ms. Casey argued.

"You are pandering to the consumer constituency that wants a hard-line response," Ms. Casey said. "But, you are not fixing anything."

Community groups favor Mr. Fishbein's interpretation, arguing that regulators possess both the legal right and the public policy imperative to use their enforcement powers.

"A number of people have said CRA doesn't have a lot of teeth," said John Taylor, executive director of the National Community Reinvestment Coalition. "Enforcement powers are a way for regulators to show lenders how forceful they are."

Al Hirshen, the former director of the Office of Community Investment at the Federal Home Loan Bank Board, said both sides are off track.

Examiners should invoke fair-lending rules, found in regulations B and Y, to penalize insufficient community reinvestment, he said.

"It would be much clearer," said Mr. Hirshen, a lawyer now at San Francisco's Pettit & Martin.

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