WASHINGTON -- Forget about interest rates. The biggest challenge confronting the nation's finance companies "is what is happening in Washington," said Nancy S. Donovan, newly installed chairman of the American Financial Services Association.

"We think this administration has has decided to take a stand that promotes a greater government involvement at all levels, and especially in businesses where they feel that perhaps there are some inequities," she said in an interview last week.

And finance companies, which typically charge higher rates for loans than banks, appear to be moving up the administration's list of businesses worth monitoring, said Ms. Donovan, the 41-year-old president of Novus Financial Corp., the former Sears Consumer Financial Corp.

Old Story for Banks

Although the heat is building slowly, the nation's finance companies are coming under the same kind of fire banks have long faced.

In particular, Treasury Under Secretary Frank W. Newman has made it clear he would like to find a way to bring the nonbank financial companies under the same kind of community service requirements banks face.

But Ms. Donovan believes there is a big difference between banks and finance companies, and she plans to spend much of her tenure speaking out on those distinctions.

"It is so easy to say you charge high interest rates, but the question is: What are you doing?" she said.

Lenders of Last Resort

"We make loans that nobody else makes. We take risks that few other companies will take. And when you take risks and you do things that other people don't do, the associated costs have to be accounted for or you won't stay in that business," she added.

Finance companies, she said, are in neighborhoods that banks have deserted, and they continued to make loans when insured institutions began buying government bonds.

"We do service those markets, and we do it in good times and bad," she said. "You read articles about how so many banks have taken that money and, instead of making loans, they have placed it in Treasuries."

'We Had to Keep Lending'

With the benefit of low-cost deposits, she said, banks were able to buy Treasuries and still remain profitable.

"We didn't have that luxury. In order to keep our profits up, we had to keep lending," she said.

"I postulate that if it wasn't for this industry, there would have been a real dearth of credit out in the market that really could have pushed us into an even bigger recession than we were in for the past couple of years," she added.

Banks, she said, should be willing to take more risks than they do now, even though, she acknowledged, "there is an inherent fear that the regulators perhaps would not look favorably upon it."

Right now, the American Financial Services Association is focusing much of its energies on the new ideas "bubbling up" about how to apply banklike regulation to finance companies.

'Reverse Redlining' Measure

Besides worrying about Mr. Newman's thoughts about community investment, the trade group is concerned about "reverse-redlining" legislation that would regulate high-cost mortgages.

"The thing that bothers me most is any type of price-product control," Ms. Donovan said. "The reason is, it creates dysfunctional behavior for lenders and borrowers."

Ms. Donovan, 41, worked briefly on Capitol Hill in 1973, and then joined First Boston Corp. After obtaining an MBA from Columbia University, she joined Dean Witter Reynolds Inc., an investment banking firm later purchased by Sears-Roebuck & Co.

Among other things, she developed and launched the initial marketing effort for the Discover card. In 1989, she became president of Novus Financial.

Ms. Donovan said one of her goals over the coming year will be to have AFSA members spend more time out in their individual communities explaining how finance companies do business and more time on Capitol Hill talking to lawmakers.

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