BANKING : Fed Official Urges Banks to Hang Onto Home Loans

Federal Reserve Board Gov. Lawrence B. Lindsey proposed Monday that lenders help fight lending discrimination by keeping more of the home loans they make instead of selling them in the secondary market.

Lindsey said the result would be that lenders could be more flexible in extending credit to low-income and minority areas. It would also allow them to get to know borrowers better.

Lindsey made the proposal in a speech to a conference in Santa Monica sponsored by the Federal Reserve Bank of San Francisco, and elaborated on it during an interview.

Entities such as the Federal National Mortgage Assn., or Fannie Mae, buy loans from lenders but set quality guidelines on what they will accept to protect against defaults. Lenders who sell mortgages complain that the guidelines are too rigid--which Fannie Mae denies--and thus discourage them from making loans in low-income areas where they need to be more flexible in evaluating such factors as a borrower’s credit history and income.

Lindsey described the process as a “one-size-fits-all” approach. He added that Fannie Mae recognizes the problem and has shown more flexibility in recent years.

He acknowledged that it would be difficult to provide banks incentives to hold loans in their portfolios. He noted that banks would have to assume more risk than they do when they sell loans. He also said that current federal bank rules actually discourage banks from keeping the loans on their books because they are considered riskier assets.

Nancy Badely, spokeswoman for the California Bankers Assn., questioned whether Lindsey’s proposals are practical. Among other things, she said, banks would need larger staffs and more money to more thoroughly evaluate prospective loans at a time when banks everywhere are under pressure to cut costs.