Under pressure from community activists, federal regulators have downgraded Mercantile Bank's Community Reinvestment Act rating.

The St. Louis-based bank said late last week that it had received a "satisfactory" CRA rating for May 1995 through June 1997 from the Office of the Comptroller of the Currency. The Comptroller's Office had awarded the bank "outstanding" ratings in its two previous CRA exams.

The decision is significant because activists had used Mercantile as a test case for new procedures that encourage community groups to confront regulators during exams rather than protest merger applications. Mercantile was one of the first large banks examined under new CRA rules that took effect last year.

"We see this as a milestone," said Patrick Woodall, a policy analyst at the Association of Community Organizations for Reform Now, which accused Mercantile in meetings with regulators last spring of favoring wealthy, white mortgage borrowers.

"Community groups have been complaining about banks with poor community reinvestment records, and the regulators are finally listening," Mr. Woodall said. "The OCC decision shows a revitalized commitment to enforcing fair-lending laws."

M. Dean Keyes, the bank's vice president and director of community investments, said examiners at the OCC's Kansas City regional office wanted to award the institution an "outstanding" rating, but they were overruled by officials at the agency's headquarters here. Mercantile appealed the grade in December, but the agency refused to back down.

"The Washington office overruled this and said we should be rated 'satisfactory,'" she said in an interview. "We appealed this because we believed very strongly we deserved an 'outstanding.'"

Mercantile blamed its lowered rating on bugs in the new evaluation procedures, which emphasize the number of loans made in low- to moderate- income census tracts.

"When we volunteered to be one of the first banks to be evaluated under the new regulations, we knew that we were charting unknown waters," Ms. Keyes said.

Mercantile officials complained that examiners unrealistically expected the banks to maintain a consistent share of the loan market in every census tract, including those where there was minimal loan demand.

"The new regulations may not reflect economic reality," Ms. Keyes said. "The percentage of housing that is owner-occupied is substantially lower in the low- to moderate-income neighborhood. Although we are trying to stimulate as much demand for mortgages as possible, the fact is that, almost by definition, there is less demand in these neighborhoods."

The bank called its community lending work "outstanding" and argued that it was the largest mortgage lender to low- and moderate-income people in its area in 1996, with 27.7% of its loans going to low- and moderate-income borrowers. It said its market share in this group of borrowers was about 10% in 1996-1 percentage point lower than its market share among middle- and upper-income borrowers.

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