While lawmakers continued public debate on financial reform this week, compromise legislation began to take shape behind the scenes.

Key Republicans plan to release a bill early next week that is likely to include a major concession by Senate Banking Committee Chairman Phil Gramm on the Community Reinvestment Act provisions.

As he hinted in debate earlier this week, Sen. Gramm is expected to abandon an exemption for small, rural banks from the CRA in exchange for making the law less of a regulatory burden on those institutions and mandating that banks disclose payments they make to community groups to fulfill reinvestment commitments.

The Texas Republican is also expected to relinquish his demand that banks with three consecutive years of "satisfactory" or better CRA ratings be shielded from protests unless significant new evidence emerges that their practices have deteriorated since the last exam.

But he and other Republicans will probably continue fighting provisions in the House bill that would require a bank to have, and keep, a "satisfactory" or better CRA rating to merge with an insurance or securities company. Possible compromises include dropping the requirement that these compliance levels be maintained after mergers, or stripping the bill of divestiture and other tough penalties when such ratings fall.

Finally, Sen. Gramm may offer some ways to ease CRA compliance burdens on small banks -- for example, lengthening the time between CRA exams to five years from 18 months.

Whether Democratic lawmakers and President Clinton will support this and other compromise proposals in the Republican bill remains unclear.

Democrats strongly objected Wednesday to Sen. Gramm's persistent call for mandatory disclosures of bank payments to community groups. He said some groups are forcing banks to pay them not to oppose a merger, but Democrats said evidence of blackmail is lacking and that these agreements are often made public anyway.

Beyond the CRA, Republicans still must resolve disputes over consumer privacy protections, powers for bank subsidiaries, and limits on unitary thrifts.

Democrats could derail the bill over procedural matters. They have complained all week about the decision by Sen. Gramm, House Banking Committee Chairman Jim Leach, and House Commerce Committee Chairman Thomas J. Bliley Jr. to draft their own compromise without Democratic input.

During the conference committee's public debate Wednesday, Rep. Barney Frank, D-Mass, said, "This is sort of a waste of time because the bill is being written privately by three people." In a clear warning to Republicans, he emphasized that Democrats feel no public pressure to pass this relatively obscure legislation.

But banking industry lobbyists said Thursday that financial reform has regained momentum under pressure from House and Senate GOP leaders.

"We have an excellent chance to get it done" this year, said Edward L. Yingling, chief lobbyist for the American Bankers Association. "The bill is clearly moving toward middle positions on the key issues. ... There is going to have to be some give on all sides."

Some sources were predicting the legislation would be approved by the conference committee next week. But lobbyists and congressional sources said its final fate depends on whether Republican leaders compromise enough with the Clinton administration to enact the legislation -- or if they see greater political gain in passing a bill the White House cannot support and then maligning the President as obstructionist.

"The key issue before the Republican leadership is, Are they going to craft a bill that is going to be signed or vetoed by the President?" said Kenneth A. Guenther, executive vice president of the Independent Community Bankers of America.

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