Fed orders lender ShoreBank to suspend dividend

* Community lending leader gets Fed order in December

* ShoreBank says plans capital raising efforts

By Emily Flitter

NEW YORK, Jan 12 (Reuters) - ShoreBank, a leading Chicago-based community development lender under orders to raise capital and improve its business practices, was told to stop paying dividends last month, the Federal Reserve Board said on Tuesday.

The privately held bank was ordered by the Fed on Dec. 1 to stop the payments to shareholders. This followed an order by its primary regulator, the Federal Deposit Insurance Corp, to raise capital and improve business practices.

ShoreBank has been shaken by the recession and accompanying increase in loan defaults. The bank has $2.55 billion in assets and is nationally recognized for its programs to lend to low-income communities.

A spokesman for ShoreBank said the company, which has around 70 shareholders, submitted capital-raising plans to its regulators. He declined to comment on the bank's specific plans, but said the regulatory orders do not affect any of the bank's nonprofit affiliates.

The news has surprised many in the banking community.

"Everybody loves ShoreBank," said Ron Glancz, a partner at the Washington, D.C., law firm Venable.

"They do so many things right. They've been very creative in terms of their products," he added. "They probably just got caught like so many other banks with some borrowers who were good borrowers, but because the economy has really soured they've got bad loans on their books."

ShoreBank is certified as a community development financial institution, a designation that makes it eligible for grants and equity investments from the CDFI Fund, a federal program administered by the U.S. Treasury Department.

It has long kept a high profile in the community development world.

An example was Wall Street powerhouse Goldman Sachs turning to ShoreBank's vice president, Ellen Seidman, a former director of the Office of Thrift Supervision. Goldman appointed Seidman to the founding council of its 10,000 Small Businesses initiative in November.

The bank's woes could spell trouble for other community development lenders that are grappling, along with every other bank and financial institution, with tighter credit standards.

"In the best of times, lending in the community development world can be a little difficult," said James Ballentine, senior vice president for political operations at the American Bankers Association in Washington. (Editing by Daniel Bases and Dan Grebler)