The Justice Department yesterday urged the Federal Reserve Board to loosen its restrictions on approval of nonbank bank applications.

If the Fed concurs, one of the biggest roadblocks to the establishment of these limited-service banks would be removed.

Charles F. Rule, deputy assistant attorney general in the antitrust division, advised the Fed that some of its restrictions are unnecessary to prevent a commingling of banking and commerce, which is prohibited by law. He counseled the Fed to "go further" in substantially cutting back restrictions, which he called "either unnecessarily broad or unacceptably ambiguous or both."

Among the Federal Reserve regulations to which Rule objected was one that prohibits holding companies from providing some back office services to their nonbank banks. Several bank holding companies that have received preliminary approval to set up consumer banks in the District have said they would not be viable if back office functions had to be handled separately.

The Justice Department noted that "as an advocate of competition, it seeks the elimination of unnecessary regulation and the adoption of the least anticompetitive means of achieving policy objectives."

To date, the Comptroller of the Currency has approved 215 nonbank bank applications. The Fed this year has approved only 16 locations for four bank holding companies. The Fed has made clear through court actions and regulations that it seeks to discourage the creation of these limited service banks -- which are used to evade the law against interstate banking -- until the Congress acts on changing the law.