When Jimmy Carter nominated Naval Academy classmate Robert H. McKinney to become the chief regulator of the nation's savings and loan industry last spring, organized consumer groups felt they had been sold out.

And they felt that Carter had sold out good regulation as well.

Now some of McKinney's staunchest critics are begrudgingly, or not so begrudgingly, changing their minds. Their initial opposition to McKinney was understandable. To them McKinney represented almost everything that is bad in a potential regulator.

As chairman of a major Indianapolis savings and loan, McKinney was an important member of the very industry he was supposed to regulate.

He smelled roundly of conflict of interest because the law firm he was a senior partner in did legal business for the S&L he simultaneously headed.

Other business ventures he engaged in could have done business with either home builders or home buyers.

Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee which eventually approved McKinney's nomination, opposed him. "I have grave doubts you can be a regulator in the public interest," Proxmire worried at McKinney's nomination hearing.

Rep. Benjamin Resonthal (D-N.Y.) sent a team of investigators from the House subcommittee he heads to thoroughly examine McKinney's savings and loan. While Rosenthal never found the damaging evidence he hoped for, he opposed the nomination. So did Ralph Nader, who stood for two hours at the final committee vote hoping his presence would sway enough senators to scuttle the nomination (McKinney's nomination was sent to the Senate floor on a 12-to-3 vote).

For four uninterrupted hours, leaders of the AFL-CIO, Common Cause, the NAACP, and the Consumer Federation of America testified before the Senate Banking Committee in July and criticized the admittedly successful, energetic lawyer-banker-businessman for a lack of sensitivity or compassion for the central city and the people who live there.

Through it all, McKinney claimed he was getting a bum rap. And his opponents, starting with Proxmire, are beginning to agree.

For in the three and a half months he has headed the Federal Home Loan Bank Board, McKinney has come out with very strong rules to prevent savings and loan associations from ignoring the inner city in their lending and has set out to make urban lending a high priority of the bank board.

He soon will announce formation of a new division designed to teach savings and loans how to do the urban lending he says they should do. In a move that hardly will please savings and loan associations, he will appoint an activist to head up his urban education division: Alvin Hirschen, for eight years director of the National Housing Law Project at the University of California's Earl Warren Legal Institute.

Bob Kuttner, Proxmire's banking committee staff man who investigated the McKinney nomination, said he came away with an "awful lot of respect for his character." If he was or was not unfairly tarred with being insensitive to the inner city, he is doing a lot to change that image, Kuttner noted.

Early last month, McKinney unveiled - at a White House briefing - a set of proposed regulations designed to substantially reduce the practice of denying loans to run-down, and usually black, sections of cities, a practice known as redlining.

The proposed regulations prohibit S&Ls from denying loans because of the age of the house or the condition of the neighborhood. They also require the institutions to develop written standards to be used in processing loans, and to review advertising and marketing practices to ensure equal opportunity in home financing.

While the initial reaction from the S&L industry was critical. McKinney noted in a recent interview that, at the trade association's annual meeting several days later, industry leaders adopted the very principles that underly the new regulations (which will not go into effect until at least mid-January).

McKinney says the step itself is a modest one that will not force banks into making bad loans, but will force them to recognize that not only do they have a "legal and moral obligation" to make loans in the city but that there are also "a lot of good loans there that people have been ignoring through neglect."

McKinney acknowledged that he is seeking through his early moves to develop a new image for the bank board. "The bank board has been viewed as too close to the industry it regulates. People have made jokes that industry leaders have their own desks here," he lamented.

"I want to make it clear that the bank board is going to regulate the industry. It is not just the redlining regulations. They are the beginning. The bank board is going to try to lead the industry down the path that is best for the country," he said.

"The bank board is going to be different," he avers. "It is going to be firm."

The former head of the Carter campaign in Indiana - who at first resisted the appointment, preferring an ambassadorship, because he thought the regulatory job neither broad enough nor challenging enough - said that he also will develop incentives for S&Ls to make more inner city loans (the redlining regulations are the stick, he says, and the incentives will be the carrot).

"But I want to go slow on creating incentives" - they will be discussed at a meeting this month - because "I don't want to create the inference that there aren't good loans there already," McKinney added.

He maintains that much of the redlining problem is an attitudinal one that cen be corrected by explaining the facts to S&L executives and lending officers through education.

It is easier, and less expensive, to lend $1 million in $50,000 chunks in the suburbs than to make smaller, harder-to-arrange loans in the city, McKinney said. He wants to bring the 12 Federal Home Loan banks (the setup is patterned after the Federal Reserve system) more directly into implementing bank board policies, especially in his embryonic urban thrust.

He will have each of the 12 banks appoint an inner city lending officer and ask them to appoint one in each of the major metropolitan areas in their region as well. The regional home loan banks will make a conscious effort to "educate" S&L executives and lending officers, to inform them of urban problems and to get local financial leaders to participate in solving inner city problems. Too often, the financial leaders of communities do not participate with political and neighborhood leaders, he said.

Hirschen's new department, which will be announced shortly, will oversee the "education" effort. So as not to touch off industry resistance to the approach, he plans to appoint a deputy director who is familiar with the industry. Although he would not identify Hirschen by name (sources confirm he is the choice), McKinney called Hirschen an individual "who has been in the trenches and knows how to deal with housing laws. Housing and Urban Development programs and neighborhood groups."

If McKinney may prod the industry on urban lending, he takes its side inadvocating expanded financial powers and "alternative mortgage instruments" to protect S&L earnings during periods of rising interest rates.

S&Ls, who make mostly home mortgage loans, lend out money for long periods of time (sometimes as long as 30 years) at fixed interest rate, while the deposits they attract are for short terms. Because the interest on their assets is fixed, they often cannot generate enough income to pay high enough interest rates, so depositors often pull their funds out of S&Ls and invest in such things as Treasury bills. (The situation is even more complicated because government regulations, backed by the S&L industry, set ceilings on the amount of interest an S&L can pay anyway).

As a result, during periods of rising short-term rates, S&L find it hard to attract and keep deposits, and sky high rates on new mortgage loans and scarcity of home mortgage loans follow.

McKinney said he hopes to be able to devise a variable-rate mortgage that is acceptable both to consumers and to Congress. Interest payments on a variable rate mortgage follow the rises and falls of short-term interest rates. Similar bank board proposals to protect S&L incomes during periods of rising interest rates have met with considerable congressional pressure.

The bank board chairman said he must come up with a good index to gauge when the interest rate should rise or fall) and must build in sufficient protection for the consumer.

It is not the end of the fixed-rate mortgage, however. He said he doubtted that more than 10 per cent of the population ever would want a variable-rate mortgage and he would require S&Ls to offer both - with sufficient inducement for the home buyer to take the riskier variable-rate loan. He noted that if inflationary expectations change and people think interest rates will decline in the future, then the attitude toward variable rate mortgages also would change.

McKinney also thinks S&Ls should get broader power to make consumer loans (most S&L lending is concentrated in housing), but said such enlarged powers should come slowly. Not only does it take a long time to learn how to exercise now lending powers, but the industry must be careful to continue to concentrate most of its lending in housing, he said.

McKinney said the he hopes he can build a solid record on redlining and general urban issues so that Congress also will go along with his programs to strengthen the industry.

To that end he is out to improve both his and the bank board's image on Capitol Hill.

He visits the Hill a lot now, he says, and "starting in January I am going to make at least one personal contact a day," McKinney said.

McKinney said he has changed his original assessment that the job would not be challenging enough. "The job's harder than I though it would be," he admits.

He also admits to sharing the frustration of many a fast-moving executive who joins the government. He has found that a barked command in the federal bureaucracy does not necessarily result in action as it does in private enterprise.