A David and Goliath battle is shaping up in the Boston financial world.

An eight-member activist group is trying to block the expansion of the state's largest bank--the First National Bank of Boston--because they say the bank is violating the 1977 Community Reinvestment Act, which requires banks to meet investment needs in their communities.

Redlining

Community groups have often accused First National and other banks of "redlining" in several towns by denying mortgages and other loans. Now the Massachusetts Urban Reinvestment Advisory Group (MURAG) wants banks to base loans on financial credibility--not addresses.

The First will have a chance to counter those charges Wednesday night in a hearing before the State Board of Banking Corp. The banks, the community groups and MURAG's representatives are expected to testify.

At issue is the First's application to purchase a bank in Haverhill. MURAG, however, has turned the everyday incorporation petition into a debate over the First's investment policies.

Denial

A spokesman for the First denies that the bank violated the reinvestment act. But James Carras, MURAG's executive director, says the bank has been "grossly negligent."

MURAG records say First has given no mortgages in four years to residents of Chinatown, the North End, South Boston, Mission Hill, Charlestown and the West End. During the same period, the bank made one home loan in East Boston and one in Roxbury.

"Those figures speak for themselves," DeWitt C. Jones IV '79, a MURAG member, said yesterday. The bank spokesman refused to comment on the figures.

One group expected to testify is the Fenway Project Area Committee (FENPAC), a community group trying to encourage development in the Fenway area.

"The First National Bank has absolutely no history of investment in the Fenway Community." Thomas Andrews, the chairman of FENPAC, said yesterday, adding, "They have banks in the area; they just haven't invested."

If MURAG blocks the First's efforts to expand to Haverhill on the grounds of violating the act in other parts of the city, the bank would have to reevaluate its community investment policies, Andrews said.

Blocking

"A bank like the First is always looking to expand. If they're blocked in this case, they would be blocked in any other," Andrews said.

Carras added that because the bank is so large, any change in the First's investment policies would drastically affect communities throughout the state.

Policy Change

Even if MURAG cannot block the Haverhill purchases, its members are optimistic about their chances for changing the First's investment policies.

Andrew said, "Banks don't like the hassle of being hauled through the regulatory process and all the negative press they get."

MURAG Background

The eight-member group evolved a year ago from the Jamaica Plain Banking and Mortgage Committee, a community group that tried to pressure banks into investing MURAG's members include former Jamaica Plain community activists, three VISTA volunteers and a college intern.

MURAG has battled two other banks on community investments. In one, MURAG blocked the purchase of bank by the Provident Bank, but in March the group failed to stop the expansion of Freedom Federal Savings and Loan on Cape Cod. But the latter case was not a total loss for MURAG. Since the last hearings in March the bank has improved its community reinvestment and loan programs, Carras said.

Mutual Satisfaction

One indication of MURAG's effect on the banking community came in the spring. The Merchant Bank of Boston--which was hoping to buy a branch, asked MURAG to agree not to file a complaint with the banking board. In return, the bank would sign an agreement to improve its community investment policies.

The written agreement was the first of its kind in the nation, Jones said, adding, "It won't be our last."