Bank Industry Wins Round on Minority Loans : Legislation: Consumer groups promise to fight a House move to weaken federal rules.

A battle between bankers and consumer groups is brewing over a little-noticed move by a House subcommittee late last week to virtually eliminate federal regulations that require banks to lend money to minorities and small businesses, both sides said Wednesday.

The vote in the House Banking subcommittee on financial institutions represented a surprising victory for the banking industry, but consumer and community groups plan to fight back as the legislation moves to the full House Banking Committee in mid-June.

The dispute threatens to delay progress on the Bush Administration’s sweeping plan to overhaul the nation’s banking laws, which passed its first legislative hurdle last week.

“This is a classic battle between financial institutions and consumer groups,” said Ken Guenther, chief lobbyist for the Independent Bankers Assn. of America, a Washington group that represents small banks.

More significantly, consumer groups charge, the vote to weaken the Community Reinvestment Act could leave few safeguards against redlining by financial institutions. Redlining is the illegal practice of refusing to make loans for whole neighborhoods, typically those inhabited by the poor and minorities.

The community reinvestment law was passed by Congress in 1977 in order to give regulators and community groups a means to judge whether local banks were redlining neighborhoods or not.

“The subcommittee effectively repealed the Community Reinvestment Act and has rolled back the safeguards built up to foster community lending by the banking industry,” charged Chris Lewis, a lobbyist for ACORN, an advocacy group for minorities and the poor.

“What they have done is to bar virtually all public comment on the activities of the banking industry,” added Allen Fisbein, general counsel for the Center for Community Change, a Washington-based group that monitors bank lending practices.

In a complex series of legislative maneuvers just before the subcommittee completed work on banking reform last week, supporters of the banking industry on the panel passed a measure that would exempt, for the first time, at least 80% of all banks from the federal regulations that set standards for community lending. The law requires banks to publicly disclose how much lending activity they are doing in poor neighborhoods and for small businesses.

The measure, attached to the Bush banking reform package that was passed by the subcommittee, excludes all banks with assets of less than $100 million from the federal community lending standards, as well as any bank with assets of less than $250 million if it is outside a major metropolitan area.

Banking industry officials applauded the move and said the new standards will remove costly paperwork burdens from small, rural banks that were already putting most of their money back into their communities.

“These small banks weren’t the ones lending money to Brazil,” said an aide to Rep. Paul E. Kanjorski, (D-Pa.), who sponsored the amendment that included the regulatory changes.

Banking executives, who have been under mounting pressure in recent years in many cities to become more involved in community affairs and to open their lending windows to minorities, said they believed that they had to regain the legislative offensive.

“In the past, we have had burden after burden added onto us” by new regulations backed by consumer groups, complained Ed Yingling, chief lobbyist for the American Bankers Assn. “So we thought it was important to change things.”

Industry officials argue that since the community lending standards will still apply to most big city banks, the regulatory changes should not have a major impact on the ability of federal regulators and community groups to monitor bank lending in inner cities.

But a study by Fishbein’s Center for Community Change found that 88% of the banks that have received poor ratings on their community lending practices by federal regulators had less than $100 million in assets--and thus would be exempt from the law under the new rules.

The moves to scale back the local reinvestment law ironically came just one day after the subcommittee had approved a measure, sponsored by Rep. Joseph Kennedy (D-Mass.). His proposal would have forced regulators to examine a bank’s community lending activities before approving any applications to expand its operations across state lines or to take advantage of the other broad new powers proposed for banks by the Bush Administration. Those powers are likely to include the selling of stocks and other securities, as well as authority to merge banks with commercial and industrial firms.

But Kennedy’s measure was altered later to exempt banks of any size that, within the past two years, had received a satisfactory rating from regulators for meeting the standards of the Community Reinvestment Act. That would give about 90% of all banks an exemption from challenges to expansion on grounds that their community lending records are poor.