Amid continued wrangling over the Community Reinvestment Act, the Senate Banking Committee approved a financial reform bill Thursday that would exempt from the law small, rural banks.

Financial reform was also before the House Banking Committee, which successfully navigated through several controversies such as CRA and the mixing of banking and commerce. Debate there is expected to continue at least through Friday.

Furious over Senate Banking's 11-9 party-line vote, Democrats warned that rolling back CRA for banks with assets under $100 million and operating in nonmetropolitan areas would doom the entire legislative package.

"We are about to have a train wreck here," said Sen. Christopher J. Dodd, D-Conn., who pointed to President Clinton's earlier threat to veto the bill because of CRA and other provisions. "There is an illusion this (issue) is going to go away. It's not."

Sen. Paul S. Sarbanes of Maryland-the committee's ranking Democrat whose plan to replace the bill with last year's version was defeated-branded the vote "a significant step backward."

But Sen. Phil Gramm, the Banking Committee chairman, stood his ground, calling last year's bill a confusing, inferior product. Nevertheless, he accepted a Democratic amendment that would toughen restrictions on bank sales of insurance and promised to negotiate in other areas.

The Texas Republican returned barbs from across the aisle by accusing Democrats of being "extremists" and questioning the President's motives for intervening so early in the legislative process. "I am increasingly convinced the President does not want a bill."

Though applauding the CRA exemption, the Independent Bankers Association of America teamed up with the small-bank trade group in Texas to blast Sen. Gramm's bill as anticompetitive and dangerous. They focused their objections on provisions limiting bank insurance sales and letting commercial firms enter the banking business by buying unitary thrifts.

"Community bankers call on Chairman Gramm to reevaluate his unwise position," said IBAA executive vice president Kenneth A. Guenther and Christopher L. Williston, president of the Independent Bankers Association of Texas.

Edward L. Yingling, chief lobbyist of the American Bankers Association, was more upbeat.

"Obviously, before it really has a chance to move in the Senate, there is going to have to be some reaching out to Democrats," he said. "The key thing is the fact that it is out of committee so early in the Congress. The quick start is very significant."

In House Banking, lawmakers began deliberations by rejecting nonfinancial powers for banks, expanded community reinvestment requirements, and mandatory low-cost banking accounts.

The House bill would let national banks underwrite securities and conduct merchant banking activities in operating subsidiaries. It would also bar cross-ownership of banks and commercial firms. Republican committee members challenged these limits but gave up under resistance from Chairman Jim Leach and ranking Democrat John J. LaFalce.

Rep. Marge Roukema, R-N.J., proposed forcing securities underwriting and merchant banking powers out of the bank and into holding company affiliates. She said committee leaders "caved in" to Treasury Department demands that operating subsidiaries have broad powers.

"It is inappropriate to disparage what I think are the predominant views of the committee," Rep. LaFalce of New York responded testily. "The chairman and I have concluded that the provision is necessary if you want something passed into law" rather than be vetoed.

Rep. Leach, R-Iowa, agreed, saying Treasury officials made "a compelling argument" that curbing operating subsidiaries too much would cause bankers to abandon the national bank charter.

Rep. Roukema withdrew her amendment but vowed to carry on the fight when the bill advances to the full House.

The committee defeated on a 39-to-17 vote a proposal by Rep. Luis Gutierrez, D-Ill., to extend CRA beyond banks to insurance and securities units of holding companies.

Banking lobbyists won a key victory when the committee shot down 31-27 a proposal by Rep. Maxine Waters, D-Calif., to require banks merging with a securities firm or an insurance company to offer affordable accounts to low-income customers.

Rep. Leach countered that the pricing of services is "something that should be left to the market."

Shunning the "most vulnerable in our society," Rep. Waters threatened, would be a "deal breaker."

House Banking also defeated a proposal by Rep. Barbara Lee, D-Calif., that would have prevented "undue concentration" of financial resources by barring mergers among the 20 largest banks, insurance companies, and securities firms.

Sen. Gramm's bill would repeal the separation of investment and commercial banking and let banks and insurance companies own each other. Unlike the House bill, it would shield merging banks from CRA protests provided they had a "satisfactory" or better community investment rating for the previous three years.

Banks could not enter nonfinancial businesses but could engage in broad merchant banking activities. Commercial companies could not form new unitary thrifts but could purchase existing thrifts. National banks under $1 billion of assets could underwrite securities and insurance in operating subsidiaries.

The Senate Banking debate was largely a partisan finger-pointing match, but some hints of cooperation emerged. For instance, Sen. Gramm gave in to pressure by insurance agents and Democrats to impose tougher restrictions on bank sales of insurance.

The committee adopted on a voice vote a proposal by Sen. Richard H. Bryan, D-Nev., which revived a industry compromise negotiated late last year that would ban state laws that "prevent or significantly interfere with" bank insurance sales. However, the bill includes 13 exceptions to prevent banks from engaging in deceptive or coercive sales practices.

State insurance commissioners and federal regulators could dispute each other's rulings in court, and a judge could not grant the customary "deference" to decisions by federal regulators to override state laws adopted before Sept. 3, 1998.

Sen. Sarbanes commended the move but said "that doesn't move us on the overall question of getting a bill."

The Independent Insurance Agents of America worked hard to strike a better deal with Sen. Gramm but were satisfied with a return to last year's pact. "We neither support nor oppose the bill, but we want it to continue moving forward," said Robert A. Rusbuldt, the group's executive vice president.

"While it's far from ideal, we ... support it," Mr. Yingling said. "It is better from our perspective than" a deal that Sen. Gramm and the agents nearly reached Wednesday night.

Both banking and insurance lobbyists were encouraged about Sen. Gramm's commitment to getting the bill enacted. "Believe me, he knows what has to be done to pass a bill on the Senate floor," Mr. Rusbuldt said, forecasting compromises on CRA and bank operating subsidiaries.

Sen. Rick Santorum of Pennsylvania was the lone Republican to vote against the CRA exemption for small, rural banks, and pledged with Sen. John Edward, D-N.C., to develop ways to keep CRA for all banks while relieving the compliance burden on small institutions.

The CRA exemption would have failed without the vote of one Democrat, Sen. Tim Johnson of South Dakota.

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