The Federal Reserve Board on Friday withdrew a controversial proposal to let banks record the race and gender of all borrowers.

The Fed rejected last-minute pleas by Comptroller of the Currency Eugene A. Ludwig and Associate Attorney General John R. Schmidt, who said the government needs the data to fight lending discrimination.

Members of the Fed questioned the usefulness of the data, saying it would be collected by only a small fraction of the industry.

Several Fed governors said they were uncomfortable picking sides in the debate between those who support a "color-blind" approach to programs and those who believe the only way to ensure fairness is to look at a person's race and gender.

"This is a political matter in the most fundamental meaning of that term," Fed Governor Lawrence B. Lindsey said. "As such, the appropriate mechanism for making decisions regarding this issue is the legislative process."

"The Federal Reserve's role is not to write public policy, but to implement it," agreed Fed Governor Laurence H. Meyer. "This is one where Congress should decide."

Mr. Ludwig, in a brief interview, said the Fed's decision will make it "very difficult" to ferret out discrimination outside of the home mortgage arena, which already has a data collection requirement. He also said it will make it tougher for banks to conduct extensive fair-lending self-tests because they will not know the race and gender of borrowers.

"I have a lot of respect for the board," said Mr. Ludwig, who sent a letter Friday to the board arguing for the proposal. "But I clearly have a different point of view on this."

At the same meeting, the Fed raised to 25%, from 10%, the amount of revenue Section 20 affiliates may earn underwriting and dealing in commercial securities. The move had been expected.

"This is a win-win for the financial services industry," said Richard Whiting, general counsel to the Bankers Roundtable. "The larger banks' international competitiveness will be enhanced, more regional banks will enter the market, and the consumers will receive more competitive and less costly services."

The Fed also adopted a rule protecting the confidentiality of fair- lending self-tests using "mystery shoppers."

But the rule will not protect information culled from loan files, said James D. McLaughlin, director of regulatory and trust affairs at the American Bankers Association. That could force many banks to disclose their fair-lending self-tests, he warned.

"The protection is extremely narrow," he said. "It doesn't create the kind of (self-testing) incentive that we had hoped."

Industry officials, however, were much more pleased with the Fed's decision to withdraw the April 15, 1995, proposal on race and gender data collection.

"The board did the right thing," said Karen Thomas, director of regulatory affairs at the Independent Bankers Association of America. "We felt a voluntary rule would have become mandatory. There would have been unfair pressure on banks to collect data."

"A lot of banks thought it would be a slippery slope from voluntary to mandatory data collection," Mr. McLaughlin said. "That would have imposed considerable costs on the industry for what would have been incomplete data."

One banker, who requested anonymity, said the data would have helped his institution better market its products. But the banker said he feared it would become fodder for repeated Community Reinvestment Act protests.

"It looked like it was just going to be another weapon for people to beat up on us with," the banker said. "But I and other bankers would have loved to have it for internal purposes."

Community activists were quick to pan the decision. "This is the Federal Reserve's Christmas present to the American banking industry," said John E. Taylor, president of the National Community Reinvestment Coalition. "They are keeping the veil of secrecy on what is happening in commercial lending in America's communities. We are severely disappointed."

Robert Gnaizda, general counsel to the Greenlining Coalition, said the Fed's decision will hurt institutions that want to market loans to minority businessmen.

"It is going to reward banks who make loans to white-owned check cashing and liquor stores in the inner city, rather than to minority owned businesses which employ minorities and are the key to the revitalization of our inner cities," Mr. Gnaizda said.

"Here was an opportunity for the government to encourage without mandates, to give the tools without the impediments, to offer a carrot without the stick," said Rev. Charles Stith, president of the Organization for New Equality. "That opportunity was missed."

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