The House Banking subcommittee on capital markets is expected to approve legislation today to modernize the Federal Home Loan Bank System, despite objections from the Clinton administration.

Treasury Under Secretary John D. Hawke Jr. weighed in late Tuesday against the bill, which would allow the 12 Home Loan banks to make development loans in rural areas. In a letter to House Banking Committee Chairman Jim Leach, Mr. Hawke said the measure would extend the lending powers of the government-sponsored enterprise too far.

"As transformed by the bill, the system would lack the clearly focused public purpose appropriate for a GSE, and would have almost unlimited growth potential," Mr. Hawke wrote. "We regret that we cannot support the bill in its current form."

Lobbyists said the Treasury's opposition will most likely not affect the outcome of today's subcommittee vote. However, it may bolster the case of Rep. Leach, R-Iowa, who has also expressed concerns about expanding the system's lending powers.

Rep. Leach, as chairman, can refuse to bring the bill to the full committee for a vote.

However, an aide to Rep. Richard R. Baker, R-La., who sponsored the bill, said he doesn't expect Rep. Leach to block the measure. "While Leach has genuine concerns about the bill, he said he would work to advance it to the full committee," the staffer said.

Earlier this week, 10 of the 12 Home Loan bank presidents came out in support of the bill but asked Rep. Baker to make six changes to the legislation. The requests include: reducing the Federal Housing Finance Board's power to manage the 12 district banks and clarifying whether a home loan bank's retained earnings are owned by its stockholders or the government.

Lobbyists expect the bill voted on today by the subcommittee to contain a number of the President's suggested improvements.

One possible change would loosen membership requirements for banks with more than $500 million in assets. The current bill requires these banks to have at least 10% of their portfolios in whole mortgage loans.

Another amendment could empower the Federal Housing Finance Board, which oversees the system, to count loans other than whole mortgage loans toward this 10% test.

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