WASHINGTON - Federal Reserve Governor Lawrence B. Lindsey warned Wednesday that reform of the Community Reinvestment Act will add to the financial and regulatory burdens of the banking industry, at least in the short run.

Even if the President's initiative to refocus the law eventually cuts the paperwork burden, adjusting to the new rules will impose heavy costs on the industry, he said.

"Even the most brilliant regulatory reform will involve a short-run increase in costs," Mr. Lindsey said. "Whenever we change the rules of the game, costs must go up."

Mr. Lindsey made his comments at a symposium sponsored by Social Compact, a group of financial companies trying to strengthen lending in underserved areas. More than two dozen bankers, community activists, legislators, and regulators participated in the roundtable discussion.

President Clinton has asked the banking regulators to reform community reinvestment laws by yearend so they focus more on results and less on paperwork. Three of the four regulators involved in the process were at the roundtable Wednesday, and expressed some doubt that they will be able to meet the President's deadline.

|A Bit of a Stretch'

"I don't know whether we'll make it by the end of the year," said Jonathan Fiechter, acting director of the Office of Thrift Supervision. "It's probably a bit of a stretch."

Mr. Lindsey reiterated comments he has made several times in recent weeks that reforming CRA could backfire, imposing even greater burdens on the industry without increasing lending to the underserved.

"The question is, will we make things better?" he said. "The answer to that question is maybe."

|Unintended Consequences'

"Good intentions are fine, but they often have unintended consequences," he added.

When regulators last refined the CRA rules, Mr. Lindsey said, they tried to foster an attitude among the lending community that banks have an opportunity and an obligation to serve underserved communities.

"I don't think we've given that approach enough time," he said. "But ... the political process has run out of patience. Rather than looking at attitude, we are looking to results."

Some bankers expressed apprehension about CRA reform. "One concern we have is this reform will add more regulations and more negative oversight to banks as opposed to positive incentives," said Carol Parry, who oversees community reinvestment at Chemical Bank.

Mr. Lindsey was hard-pressed to come up with any incentives the regulators will provide, other than the possibility of "a set of rules that is easier to comply with in a technical sense."

"Whatever rules we end up with, they are not going to be the key to success," Mr. Lindsey said. "People are."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.