WASHINGTON - A House panel voted to trim back the Justice Department's ability to prosecute fair-lending cases, pleasing bank lawyers but enraging civil rights activists.

And in another victory for the industry, the House Banking subcommittee on financial institutions also agreed to make it easier for officers and directors to defend themselves in suits that often arise after a bank fails.

Both amendments were adopted as the panel cleared a regulatory relief bill sponsored by Rep. Doug Bereuter, R-Neb., on a 13-to-6 vote. The measure is scheduled for consideration by the full committee next week.

One bank lawyer said the industry would "be tickled pink" by the fair- lending amendment. And Robert Ledig, a partner at Fried, Frank, Harris, Shriver & Jacobson, said it would lessen the chance of a bank's being judged to be in violation of the Fair Housing Act.

Attorney General Janet Reno reacted angrily, saying the amendment would cripple the government's efforts to fight discrimination. "It is unthinkable that the Justice Department would no longer be able to challenge patterns of discrimination," she said.

Ms. Reno said loan applicants are still turned down on the basis of race, and called on the full banking committee to reject the amendment.

One industry antagonist, John Relman, director of the fair housing project at the Washington Lawyers Committee for Civil Rights and Urban Affairs, took a decidedly different view.

"It is horrible," he said. "That would be an absolute catastrophe."

The provision, offered by Rep. Bill McCollum, R-Fla., would require a banking agency or the Department of Housing and Urban Development to refer a case to the Department of Justice before it could start investigating, a mandate that could limit the number of prosecutions.

The Florida Republican's amendment, approved on an 8-to-5 party-line vote, also would gut the disparate impact test, a controversial theory that looks for subtle bias against entire minority groups. The theory holds that institutions may be guilty of discrimination if their policies result in unequal treatment for different groups, even if that was not the intent.

With the McCollum amendment, the Justice Department would be forced to find an individual victim and show that the institutions intended to discriminate.

The test has not been used in a lending case. But bankers are concerned that it could be used as the legal underpinning for a number of loan pricing cases it is currently investigating, including one involving an automaker's finance and mortgage banking concerns.

Many of the amendments approved by lawmakers would make technical adjustments in the bill's language. However, one provision would provide the targets of director-and-officer liability suits with several new protections.

The measure gives defendants three defenses that the courts previously have barred - prudent business judgment, unforeseeable economic changes, and prior regulatory approval.

"There is no doubt this will benefit directors and officers who are being sued," said Ira H. Parker, a partner at Alston & Bird.

The provision, which was approved 11 to 7 Wednesday afternoon, will "go a long way towards restoring some confidence to make people willing to serve as officers and directors," Rep. McCollum said.

However, the amendment prompted an outcry from the ranking Democrat on the subcommittee, Rep. Bruce Vento of Minnesota, who said the measure "creates a roadblock for agencies trying to protect the taxpayer."

The McCollum provision also provides added incentives for the Resolution Trust Corp. and the Federal Deposit Insurance Corp. to settle cases. It requires the agency to pay the defendant's legal costs if a court award is lower than the defendant's settlement offer.

The measure also would penalize the outside lawyers the agencies hire to prosecute these cases. The lawyers must accept a one-third cut in their fees if the court award is lower than the settlement offer.

The panel also accepted an amendment from Rep. Sonny Bono, R-Calif., broadening a proposed small bank exemption from the Community Reinvestment Act. Under the Bono provision, all nonurban institutions with less than $100 million of assets would qualify.

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