Against the background of an important meeting Tuesday on the fate of financial modernization legislation in the Senate, a newly-released Federal Reserve Board memo seems to confirm that CRA issues will continue to hamstring efforts to pass legislation this year.

In an analysis requested by Sen. Phil Gramm, R-Texas, the Fed said that the version of the legislation passed by the House Banking Committee last month "significantly expands" CRA mandates beyond current law. The analysis, disclosed in a letter to Gramm signed by Fed chairman Alan Greenspan, said CRA mandates are expanded in "three principal ways." For example, the analysis showed, banks seeking to engage in the securities or insurance businesses would have to satisfy CRA mandates as a "pre-condition" for entering the new business. Second, banks that don’t satisfy the CRA mandates would face enforcement action in the form of penalties or divestiture of the new business. A third expansion would subject uninsured wholesale financial institutions, the so-called "woofies" so prized by securities and insurance firms, to CRA mandates, even though "they don’t enjoy the benefit of federal deposit insurance," the analysis said.

The Fed analysis was released as Gramm prepares to meet with Sens. Trent Lott, R-Miss., the Senate majority leader, Thomas Daschle, D-S.D., Senate minority leader, and Paul Sarbanes, D-Md., ranking minority member of the Senate Banking Committee, on how the Senate should proceed in dealing with financial modernization legislation. Gramm’s bill does not impose the additional CRA requirements mandated in the House bill, but it was passed by a partisan, 11-9 vote in the Senate Banking Committee last month. The Clinton Administration has already sent out a letter threatening to veto the Gramm bill, and Daschle recently re-introduced a version of financial modernization legislation like the one passed by the Senate Banking Committee last year.

While the Senate leaders meet, signs are emerging that House Speaker Dennis Hastert, R-Ill., has asked the Commerce Committee Republican leadership to endorse in principle the House Banking Committee version of the legislation and seek amendments on the House floor on issues likely to generate controversy. The issues Hastert is concerned about are greater SEC scrutiny of bank securities activities; elimination of language currently in the bill restricting the unitary thrift holding company; and stronger privacy language than that is contained in the current House version of the bill.

Industry lobbyists said Hastert’s objective is to get the bill through the House by Memorial Day. Otherwise, Hastert has said, floor action could be delayed into July because June has been set aside to deal with appropriations bills. While Reps. Tom Bliley, R-Va., chairman of the Commerce panel, and Mike Oxley, R-Ohio, chairman of the finance and hazardous materials subcommittee, have apparently nodded assent, it is unclear what Rep. John Dingell, D-Mich., ranking minority member, will decide. Dingell, a former chairman of the full committee, has broad support on the committee, industry lobbyists said.