Merrill Lynch & Co. agreed Wednesday to invest $77 million in urban Los Angeles during the next three years -one of the largest community development commitments ever by a securities firm.

The pledge includes $40 million for no-down-payment mortgages, $20 million for small-business lending, $5 million for small- business equity investments, and $3.1 million for affordable-housing developments.

Merrill Lynch developed the plan with the Greenlining Institute, a San Francisco-based coalition of community activists that is trying to boost investment in inner-city areas.

"This partnership makes plain good business sense," Merrill Lynch chairman Daniel P. Tully said in a statement. "One of our strategic objectives is to expand our relationships in markets in and out of the U.S. where we expect significant wealth creation."

Greenlining general counsel Robert L. Gnaizda said he expects the Merrill Lynch deal to become a national model.

"We believe that within a relatively short time this will lead to commitments by other major investment houses," he said. "We are going to see a creative splurge."

Securities firms, which are not subject to the Community Reinvestment Act, have traditionally limited their community development efforts to affordable housing and bond investments. Bankers have often criticized this approach, saying it is unfair to require only banks to invest directly in inner-city areas.

Merrill Lynch's decision to enter the market directly won praise from bankers.

"This is a tremendous public relations gesture on their part," said James D. McLaughlin, director of regulatory and trust affairs at the American Bankers Association. "Securities firms have made a lot of money in the mortgage-backed securities market and yet they have not really made the commitment that the banking industry has to helping low- and moderate- income areas."

"We think this is a positive development," BankAmerica Corp. spokesman Russ Yarrow said. "We discovered a long time ago that community reinvestment was good business. But there is plenty of room for competition."

Warren Traiger, a New York lawyer who advises financial services companies on reinvestment issues, said Merrill Lynch's program could sink legislative efforts to broaden the reach of the Community Reinvestment Act to include securities firms.

Several Democrats say that widening the scope of CRA would be a priority if their party regains control of Congress in November.

Merrill Lynch senior vice president Paul W. Critchlow said the company launched the program to make money. "There is a very sound business rationale to test this kind of market," he said. "It is very vibrant and entrepreneurial."

Merrill Lynch Credit Corp., a Jacksonville, Fla.-based home lender, will provide the no-down-payment mortgages. It will boost its commitment by $10 million if the program proves profitable by the second year.

The firm's small-business and financial services unit will offer the small-business loans. A new entity will coordinate the equity investments.

Merrill Lynch also agreed to:

*Provide free planning advice to 250 small businesses.

*Invest $1 million for low-income housing in Orange County.

*Hire 30 financial consultants to solicit outside investments for low- income communities.

*Consider creating a mutual fund that invests in companies based in low- income areas.

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