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Clinton eases bank lending rules Increased credit for smaller firms is effort to spur jobs


WASHINGTON -- President Bill Clinton put another piece of his economic jigsaw puzzle in place yesterday, easing bank lending regulations to spur the flow of credit to small and medium-sized businesses, the main source of new jobs.

"Getting financing to these businesses is absolutely essential to the future growth of America," Mr. Clinton told a group of bankers and business executives at the White House. "We'll see the benefits, and so will our children."

At the same time, Democrats in Congress tried to place another piece of the puzzle, seeking to enlist the support of the presidents of the 12 regional Federal Reserve Banks for the Clinton program.

Critics quickly seized on both developments. They argued that easier lending regulations could undermine the banking sector, leading to another taxpayer bailout. They also charged that the unprecedented joint appearance of the regional federal bankers represented political pressure on the Fed to keep interest rates low to limit the impact of the Clinton tax increases and spending cuts on economic growth.

Mr. Clinton said his lending reforms were designed to end the "credit crunch" on small business, and "will not cause a single bank to fail, and it will not cost the deposit insurance funds one dollar."

Noting that banks were enjoying record profits, he said: "Now that banks are in the strongest positions they have been in for quarter of a century, they ought to be able to give us the strongest economic boost we've had for small business in quarter of a century."

At the White House was Arnold Jolivet, president of the 1,000-member Maryland Minority Contractors Association, who applauded the president's efforts.

"These business have been literally trampled by the credit crunch," Mr. Jolivet said. "The No. 1 barrier to small business expansion was the unavailability of funds. The president understands that, understands the psyche of small business -- if you have money, you expand, you hire more people."

Another Marylander at the White House was Victor Frenkil, chief executive officer of BCI contractors of Baltimore. He found the president's presentation "outstanding."

"To maintain and hold together an organization has been most difficult," he said. "If we can get more credit we not only could hire more people, but we could keep from firing more people."

The regulation changes are designed to make it easier for creditworthy applicants to be given loans, lessen duplication of federal bankexaminations, reduce red tape, ease collateral requirements and improve the process of appealing decisions by federal examiners.

By reordering examination priorities, the administration also plans to devote more attention to policing fair lending practices and riskier bank investments. The Federal Reserve recently announced it was investigating 200 banks under suspicion of mortgage discrimination.

The new approach was drafted by the federal regulators of banks and thrifts -- the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve and the Office of Thrift Supervision.

Details of many of the reforms, which can be introduced administratively without new legislation, have yet to be worked out. But officials said they would begin to be released in two or three weeks.

One of the major changes is to relax a strict by-the-numbers approach to lending decisions and allow bankers to use their judgment of an applicant's character and reputation as well as his or her company's cash flow and profitability.

The American Bankers Association welcomed the initiative, saying it would lead to greater credit availability and economic growth.

"It will instantly allow bankers to make vitally needed loans to creditworthy small businesses that have had trouble meeting the government's magic formulas," said William H. Brandon, Jr., president of the ABA, who called on Congress to pass legislation ease other forms of federal regulation.

But Consumers Union, a public interest lobby, said the plan "raises many red flags," including:

* Lending based on character: This "could spell trouble. How will a borrower's good character protect a bank when the borrower simply can't repay the loan?"

NB * A time-consuming appeals process: This "will bring effective

bank supervision to a halt." Banks can already seek court protection from arbitrary agency actions. "Giving them two bites at the apple will force the agencies to climb up a mountain in a windstorm to protect the public's pocketbook.

* Eased collateral requirements: Fraudulent real estate appraisals were a prominent factor in hundreds of savings and loans failures. "If the new appraisal requirements are dismantled, there will be no solid collateral to absorb the loss when the borrower defaults, and taxpayers take the hit."

"Recent history shows that you don't stimulate the economy by allowing banks to make bad loans," the group said.

"Now is not the time to dwell on the bankers' self-serving complaints against government regulation. Now is the time to focus on the public's complaint against deregulation and the huge taxpayer bailout it produced."

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