WASHINGTON -- A proposed regulation by the Department of Housing and Urban Development designed to force banks and other lenders to make more low-cost mortgages is proving controversial even among liberals.

Karen Shaw, a staunch liberal with ties to the administration, said it would chase lenders away from the Federal Housing Administration guarantee program.

Ms. Shaw is a Clinton supporter who was once among those considered for the post of chairman of the Federal Deposit Insurance Corp. She also is president of her own company, the Institute for Strategy Development, one of the capital's better-known financial consulting firms.

Unusual Success

Her rise to the top of an industry dominated by males is all the more amazing considering she has been legally blind from a degenerative eye condition for about the last 20 years.

(A casual observer would never notice. She moves about as well as anyone without the aid of any device and is an avid runner, clipping off as many as five miles a day.) ,

Ms. Shaw usually doesn't mind government prodding the public sector to do good. However, she said the HUD regulation, which is out for comment until Sept. 13, would:

* Prohibit FHA-approved lenders from setting minimum amounts for the loans they make, and then prohibit them from charging more than two points extra for a small loan, despite the fact they are often more costly to make than bigger ones.

* Give private parties a right of action against all mortgage lenders, which Ms. Shaw said is one of its most troubling features.

"Anybody, even a competitor, can inquire whether an institution's lending practices are in compliance. And all of the sudden you start a process in which underwriting standards, cost functions, even propriety information about salaries and fees, become discoverable."

The HUD regulation implements the 1990 Cranston-Gonzalez affordable-housing law, which Ms. Shaw said the Bush administration ignored but the Clinton administration "quite rightfully" implemented.

But the regulation goes beyond the law.

"It's very troublesome," she said. "It points to the larger compliance dilemma that banks are facing in many areas. Because government hasn't the resources or the political will, or both, to take on social responsibilities, it's turning to the private sector to do it."

Ms. Shaw said that banks are ready victims because their federal deposit insurance makes them "quasi-nationalized companies."

When the government wanted to fight money-laundering, it made banks a law enforcement proxie, she said.

"You're going to see this with flood insurance, too," she predicted, with banks forced to collect all kinds of documentation for mortgage loans in flood plains to make certain the home-buyers are adequately insured.

In the same vein, the HUD regulation would force banks to become the proxies for government social policy by mandating a pricing schedule that is an attempt to force them to make certain kinds of loans.

"Most of the time, this kind of mandated social policy turns out not just to be bad but counter-productive," she said.

While nonbank lenders can just walk away from the FHA, it's a harder choice for banks because the Community Reinvestment Act and Home Mortgage Disclosure Act are forcing them to make more loans in low-income areas. FHA's guarantee on such mortgages remains a very attractive incentive.

Ms. Shaw is advising her clients not to quit the program or write letters to HUD saying flat out that they hate the proposal.

Since the Clinton administration has a concept of social obligation that requires private-sector lenders to work with the government, lenders ought to take a constructive approach and suggest improvements and modifications to the regulation, she said.

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