Escalating the war of words over the Community Reinvestment Act, Senate Banking Committee Chairman Phil Gramm said the law encourages "bribery" and "extortion."

"No bank should be allowed to pay money in order to gain support in a CRA evaluation and no organization should be allowed to ask for money as a condition for silence," the Texas Republican said in a Feb. 1 letter to President Clinton released Tuesday.

The solution is to outlaw these payments, Sen. Gramm said. "By removing cash from the process, I hope we can restore honesty," he said. "People who believe a bank is doing either a poor job or a good job should say so because that is what they believe, not because they have been paid to hold an opinion."

Sen. Gramm was responding to a speech President Clinton gave last week to the U.S. Council of Mayors. The President questioned why banks object to the CRA even though the industry is earning record profits.

"I'll bet the town banker is doing pretty well where you live-in a big city or small town," he said Friday. "And yet, unbelievably enough, when we are proving it is working, the Community Reinvestment Act is under attack again."

Financial reform legislation being drafted by Sen. Gramm is expected to eliminate community reinvestment requirements that were included in last year's version of the bill. That change and several others could anger Democrats, bankers, and insurance agents.

Sen. Gramm's bill also reportedly would permit cross-ownership of banks and commercial firms, keep unitary thrift holding companies intact, and permit securities and insurance underwriting in the operating subsidiaries of banks with less than $1 billion of assets.

Though they cautioned the details remain fluid, industry lobbyists and Hill sources familiar with the plan said that it is also expected to eliminate many-if not all-limits on bank sales of insurance.

A Senate Banking Committee spokeswoman confirmed that Sen. Gramm is considering letting bank holding companies conduct limited commercial activities-possibly capping these activities at 25% of revenue.

Sen. Gramm would prefer to deal with Community Reinvestment Act reforms separately, she added. However, if Democrats insist on some CRA requirements for holding companies created under the bill, Sen. Gramm would seek pro-bank reforms such as limits on payments to community groups.

But as Sen. Gramm mulls major revisions, two House Republican leaders warned Tuesday that tinkering with financial reform legislation could endanger its broad support.

"This is very highly fine-tuned" and any changes could chip away support in the House, Majority Leader Richard K. Armey told reporters after a speech. "You move one comma and you are not going to pass it."

House Commerce Committee Chairman Thomas J. Bliley Jr., also speaking to the Council of Insurance Agents and Brokers, warned Sen. Gramm against trying to dilute CRA. "If he tries to do that in the banking bill, he will blow it up," Rep. Bliley said.

Sen. Gramm and Sen. Paul S. Sarbanes, the ranking Democrat on the committee, are scheduled to meet Friday to discuss the legislation in anticipation of a draft being released on Monday. A committee vote is scheduled for Feb. 25.

Senate Banking's vote scheduled for today on regulatory relief legislation has been postponed until Feb. 11.

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