WASHINGTON - The Clinton administration Thursday backed legislation to shield thrift bad-debt reserves from $3 billion in back taxes.

But Cynthia G. Beerbower, Treasury deputy assistant secretary for tax policy, said the tax break shouldn't last forever, because unlimited exemptions for institutions that concentrate on residential lending are risky.

Still, House Ways and Means Chairman Bill Archer said Congress wants to retain indefinitely mortgage lending incentives for thrifts, even if they are forced to convert to commercial banks.

"I believe there should be some standard for concentrating on residential lending and I think most members of Congress would agree," he said at a hearing.

The Texas Republican introduced a bill last week that will suspend "recapture" of tax breaks thrifts received for their bad debt reserves if thrifts are forced to convert to banks.

Under the bill, reserves taken prior to 1988 would be exempt from taxes. Reserves taken later would be exempt only if a thrift met a an annual mortgage origination test.

The Treasury Department argued that the test will lead thrifts to ignore market forces. Allowing the exemption to continue indefinitely provides an "artificial incentive" to concentrate on residential mortgages, Ms. Beerbower said.

Resolving the bad-debt question is a key part of plans to replenish the thrift insurance fund and eventually convert nationally chartered thrifts to commerical banks. The fund rescue and charter conversion are included in budget bills passed by the House and Senate banking committees.

Rep. Archer said he hopes to pass the bad-debt bill "soon" and tack it onto budget reconcilation legislation.

Ms. Beerbower argued that refinancings and home equity loans should not count toward the residential loan test.

Thrifts would qualify for the exemption annually by maintaining mortgage originations at a level equal to or greater than their average in the previous six years.

By including refinancings in the test, which were unusually popular during 1993, converted thrifts must meet an unfair standard to qualify for the exemption, she said.

The thrift industry agreed. "Thrift executives feel they could be penalized by the test," said James F. Montgomery, chairman and chief executive officer of Great Western Financial Corp. in Los Angeles.

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