CHICAGO -- Breaking a yearlong deadlock with federal regulators, Harris Bankcorp Inc. has passed its 1992 examination for compliance with the Community Reinvestment Act.

The Chicago-based subsidiary of Bank of Montreal had exit interviews recently with regulators, and sources say the bank will receive a satisfactory rating.

That would repair the "needs to improve" grade that Harris received in July 1991 and allow it to resume its agenda of aggressively building market share through acquisition.

Deals Were Impeded

After receiving the poor rating, Harris was forced to shelve plans to buy First Geneva Banqueshares. In 1990, the bank withdrew an application to purchase Frankfort Bancshares amid reports that the Fed was taking a closer look at Harris' community banking activities.

In the interim, the bank has undertaken a high-profile community development effort. Edward Williams, senior community reinvestment officer at Harris, said anticipating the demands of regulators became an integral part of its plan.

"We spent a lot of time going over what worked and what didn't work for other banks," Mr. Williams said. "When examiners see things that work well at one bank, they look for those things at others."

Vigilance in Chicago

Sources said examiners from the Federal Reserve Bank of Chicago have been particularly vigilant in enforcing the Community Reinvestment Act.

One of Harris' Chicago competitors, LaSalle National Corp., saw the processing of its application to buy Talman Home Federal Savings delayed for several months after it received a "needs to improve" rating.

The acquisition by LaSalle, a subsidiary of Netherlands-based ABN Amro Holdings PLC, was approved in February.

Harris, for its part, took what consultant Kenneth Thomas calls "the wheelbarrow approach" toward repairing its CRA record. "They threw a lot of money at the problem," said the Miami-based consultant, who is publishing a book on CRA ratings.

Harris, which has $13 billion of assets, hired Evanston-based Market Focus Inc. to analyze the credit needs of 9,000 Chicago-area businesses.

On the mortgage front, it increased the processing of applications and loans to blacks by 153% from 1990 to 1991, according to the bank's most recent Home Mortgage Disclosure Act report. Loans to Hispanics shot up 556% and those to whites were up by 50%.

The bank's loan turndown rates showed more modest improvements. While denials to Hispanics fell to 2.86% from 18.75% the year before, denials to blacks decreased only slightly.

Harris also strived to respond to regulatory criticism about its marketing approaches, particularly the claim that it did not reach out to Chicago suburbs.

At first, however, the bank responded with annoyance. Harris angrily assembled a press conference after the rating became public to contest the Fed's decision and call for a re-examination.

"We made the mistake of going where the need is greatest," Harris spokeswoman Pamela Kassner said wryly. "And with CRA you have to take care of your whole community."

Scorecard of Actions

But the bank then went ahead and formalized a CRA recovery program that led to the expected upgrade. Among its planks:

* Stronger emphasis on marketing and public relations.

* Tripling the number of home mortgage fairs and seminars it participated in -- a procedure that involved working on Saturdays and in the evening.

* Purchasing 200 home improvements loans from a south Chicago bank, and 50 mortgages from Evanston Housing Corp.

* Developing and marketing a mortgage with a 5% downpayment and other features such as flexible underwriting standards.

* Increasing the number of employees who make loans specifically for multi-family housing.

* Helping initiate a secondary mortgage market for multifamily housing loans.

Harris bankers, reversing their initial hostility to the Fed regulators, say the work has only begun.

"For any bank that gets a |needs to improve' and then gets a |satisfactory,' it's not suddenly going to be |O.K., we can coast now,'" said Ms. Kassner. "There is a long way to go for the industry as a whole."

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.