WASHINGTON -- The banking industry reacted with anger and resignation to Monday's announcement by the Justice Department that it had reached a fair-lending settlement with Chevy Chase Federal Savings' Bank.

The government charged the suburban Maryland bank with violating fair-lending laws by not operating enough branches in minority metropolitan Washington, areas. This is the first time Justice has brought a fair-lending suit that was not based on whether an institution unfairly rejected minority loan applicants. "Justice is still seeking people to hang and to make an example of to spread fear throughout the banking industry," said one particularly irate banking-industry observer who requested anonymity.

Michael F. Crotty, the deputy general counsel for the American Bankers Association, said the government has required other banks-to open additional branches as part of previous settlements. But, the government has never based a claim on branch locations before, he said. The decision represents a challenge to the industry, Mr. Crotty said, adding that next the government might tell banks where they must loan money.

"They certainly appear. to be heading in the direction of credit allocation, which appears to be an anathema to our industry," Mr. Crotty said.

Paul Hancock, who heads the housing and civil enforcement section of JuStice's civil rights division, said bankers should not be surprised by the department's actions. He said he's been outlining for months in speeches to bankers the theory that branch locations could violate fair-lending laws.

An even greater concern, Mr. Crotty said, was how banks should react to the decision. "Fair lending is something to worry about," Mr. Crotty said. "What you do about it is anybody's guess,"

Mr. Crotty and ,others said they are unsatisfied with the development of the fair-lending law, which to date is not yet based on any court decisions because all of the targeted banks have settled. The government uses those settlements as leverage, telling other institutions that-they must agree to similar - or even more severe - terms to get rid of their cases, he said.

"There will no doubt come a point where the industry will say, 'no more,'" Mr. Crotty predicted. Then, the industry will get a fair-lending trial, which hopefully will firmly establish the law in this area.

However, Lucy Griffin, a principle at Compliance Management Services in Falls Church, Va., said any bank that challenges Justice takes an enormous risk.

She said a fair-lending suit could take up to five years to resolve in court. Because bank regulators are supposed to take fair lending into account when voting on expansion issues, the targeted institution could find itself stuck in regulatory limbo for the length of the litigation, she said. Stagnation could economically ruin the bank because it no longer could grow to serve its customers, she said.

"Banks, politically and pragmatically, have no choice but to settle," Ms. Griffin said. Consumer groups took a different view of the settlement.

"This may well be a landmark," said Chris LeWis of the Consumer Federation of America. It is something we applaud and obviously are pleased to see."

Debby Goldberg, a neighborhood reinvestment specialist at the Center for Community Change, said the government made a logical jump from loan applications to branch locations. She said institutions that wanted to avoid lending to minorities didn't open branches in minority neighborhoods. Minorities then didn't come to the institution for loans because most people go to their local bank for such services. Now, banks know they can't use branching as an excuse to avoid minority lending, Ms. Goldberg said.

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