Most urban banks have seen their service areas, or fringes of them, transformed over the years - and many have since been assailed for Community Reinvestment Act shortfalls.

Efforts by Merchants Bank of New York to fix its rating have ended in success - but urban niche banks frequently can be susceptible to CRA problems.

Lack of Relevance Seen

Warren Traiger, a New York City attorney who advises banks on CRA issues, says: "Notwithstanding the fact that CRA was originally an antiredlining law, it just doesn't have a lot of relevance for banks like Merchants."

Because the bank offers few retail products, it did not have any traditional solutions to the problem of a bad rating. Nor did it have any ties to Chinatown, whose growth led to the "needs to improve" grade issued by the Federal Reserve.

Mr. Traiger, who was retained to advise Merchants, says: "Almost everyone agrees that Chinatown is overbanked. There are 12 or more Chinese banks, and just about all the money centers have significant branches there."

States' Closer to Reality'?

The key to Merchants' success, Mr. Traiger says, was the hands-on" culture at the bank. "Once I delivered the message, there was no problem involving the senior people."

Mr. Traiger adds that Merchants' executives might have been justified had they protested. After all, the state of New York already had rated Merchants "satisfactory."

Showing Their Plans

"It may be, and not just with CRA, that states are closer to reality. To be sure, New York reminded Merchants that there's an affirmative responsibility to ascertain and address the needs of all segments within its delineated communities. But, the state knows full well that Chinatown is overbanked, and it saw fit to use persuasion, while the Fed interpreted CRA literally."

For banks like Merchants, Mr. Traiger hopes Congress eventually will provide CRA compliance options.

In lieu of them, Jim Carras, president of Carras Community Investment Inc. in Fort Lauderdale, Fla., says banks should structure their business plans to show the regulators how they will meet the community's needs even though the idea "is anathema to a lot of longtime CEOs."

He adds, "If you're not a mortgage lender, but you're making a few here and there, it does open you up to criticism. I've seen it often. But CRA says you have to make your mortgages available to a community, and market them. If they're not that important to you, you might want to drop them altogether."

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