Senate Banking Committee Chairman Phil Gramm sparred Wednesday with Treasury Secretary Robert E. Rubin and federal regulators over proposed changes to community reinvestment laws.

The officials testifying before the committee complained that Sen. Gramm's plan would leave government officials unable to effectively review compliance with the Community Reinvestment Act. Protesters would be muted and legitimate arrangements between banks and community groups would be criminalized, they said.

"The vibrancy of CRA is at stake," Mr. Rubin said under questioning from Banking Committee members.

Sen. Gramm's draft reform bill-which was issued last week and is expected to be updated by Friday-would shield from community group protests banks that have "satisfactory" or better CRA ratings over three previous years.

The Texas Republican also tentatively offered "anti-extortion, antibribery" provisions that would make it a crime to pay or demand money from a bank for positive CRA testimony in connection with merger or other applications.

Bristling at criticism that he would grant banks a free pass or "safe harbor" from the CRA, Sen. Gramm defended his proposals and contended that community activists are increasingly pressuring banks for grants in return for not lodging protests on merger applications.

To Mr. Rubin, Sen. Gramm related a story about James C. Walton, the son of Wal-Mart Stores founder Sam Walton and chairman of Arvest Bank Group in Bentonville, Ark. Sen. Gramm said examiners gave Arvest's First National Bank and Trust Co. in Rogers, Ark., a "needs to improve" in the investment portion of its CRA exam.

The Office of the Comptroller of the Currency, according to Sen. Gramm, lauded the bank's outreach programs to immigrant poultry workers but said its CRA score could be raised if officials gave money to community service groups and enlisted their participation in helping these workers.

"This is exactly the kind of thing that I intend to stop," Sen. Gramm said."It is outrageous. It is occurring all over this country, and I feel adamant about it."

First National president Robert Brothers slightly contradicted Sen. Gramm in a telephone interview Wednesday. The OCC told the bank it had to make a direct investment in qualified community groups or a community development corporation in order to improve its investment score. But he said it did not specify where the investment had to be made.

The bank argued that it was spending money on bank employees involved in its outreach programs, Mr. Brothers said, but was told that that counted only toward the service portion of the exam.

The bank received an overall CRA grade of "satisfactory," according to OCC records.

Mr. Rubin declined to comment on any individual cases before the OCC, which is a unit of the Treasury, but argued that current federal and state laws outlawing extortion were sufficient. He said an informal Justice Department review found that Sen. Gramm's "anti-extortion" proposal was vaguely worded and could criminalize "normal, legitimate, arm's-length" transactions.

Committee Democrats agreed with Mr. Rubin that Sen. Gramm's CRA ideas could have a "chilling" effect. "You actually wind up terminating discussions altogether" between banks and community groups, said Sen. John F. Kerry, D-Mass.

Sen. Gramm criticized Comptroller of the Currency John D. Hawke Jr. for his agency's use of examiners to obtain the names of bankers who would speak favorably about the CRA to the media. Sen. Gramm said that he was tipped off by First Union Corp., which he said received an order for the names of CRA supporters within the company after chairman Edward E. Crutchfield criticized the CRA process last month.

Mr. Hawke said the agency merely requested information and did not intend to coerce First Union or any other banks. He said that he halted the requests as soon as he heard of them, and repeated an earlier apology.

"It is enormously important that the bank examination process be kept free from politics," said Mr. Hawke. Sen. Gramm complimented his rapid response.

Despite the flare-ups over CRA, Sen. Gramm said that he was willing to entertain alternative wording of the CRA-related provisions as well as other controversial sections in order to pass financial reforms after 25 years of failed attempts.

"I think we have waited long enough," Sen. Gramm said. "The stars are aligned and, more importantly, we are ready."

Mr. Rubin said a bipartisan compromise could be fashioned around Sen. Gramm's proposal to let banks, insurance companies, and securities firms affiliate, as well as one that would preserve bank insurance sales powers. Yet besides CRA-related provisions, he knocked Sen. Gramm's draft proposal to permit only national banks below $1 billion of assets to underwrite securities and insurance in operating subsidiaries.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.