It's too late to change the 1992 HMDA data about to be made public, but bank compliance officers should prepare for more intensive exams sure to be triggered by reports showing poor performance.

Preliminary studies of the 1992 data reveal that disparities in lending between whites and minorities have not improved substantially over the 1990 and 1991 data. If the early findings are borne out when the full data, due in early November, are released, institutions can expect more intensive fair lending exams.

Unfortunately for many banks, especially those that have worked harder to lend to members of minorities, it looks like the '92 HMDA reports will continue to reflect more rejections of minority home loan applicants than for white applicants. Scores of banks have vastly improved their outreach programs in low- and moderate-income neighborhoods with great racial and ethnic diversity, only to find their HMDA application denial rates rising.

Banks can expect pressure to explain away these disparities. If they can't, they should expect examiners, federal investigators and testers at their doorsteps. One regulator, familiar with the new fair lending exam policies, said "you haven't seen anything yet."

According to interviews with compliance officials across the country, as banks' outreach broadens, more applicants are drawn into the process, but more are ultimately turned down because of impaired or scant credit histories. The rejection rates are increasing despite eased underwriting standards and assistance to improve the borrowers' applications.

Those rejections are drawing more attention from consumer groups like the Association of Consumers for Reform Now, which conducted a recent study of HMDA data that cast bankers in an unflattering light.

"Yes, we are troubled by the HMDA numbers," the American Bankers Association said in a formal response to the ACORN report. "But we are just as troubled by the widespread misunderstanding of what those numbers can mean. ...

"[M]any banks ... reaching out into their communities ... have seen their numbers worsen. In fact, the harder some banks try, the worse their HMDA numbers will get, because less-credit-worthy consumers may feel encouraged to apply for the first time."

But this explanation will not go down easily with regulators. Fair lending examiners will look closely at the loan files of rejected minority applicants to ascertain if the rejected applicants were, in fact, treated with more leniency. They will ask:

* Are the results of the lending process equal for qualified racially or ethnically different applicants and white applicants?

* Was the lender equally helpful. patient, creative and accommodating during the application and underwriting processes toward applicants from different racial or ethnic groups as it was with whites?

The first loan files that fair lending examiners will review are denials of applications by minority applicants. They will look for evidence of particularly strong or weak assistance by the bank in dealing with whether underwriting guidelines were made more flexible for applicants, whether applicants were offered credit counseling and whether applicants were offered special payment plans or lower interest rates.

Examiners will search loan files for evidence of the quality of assistance a bank provides to applicants it ultimately rejects. They will look for:

* disclosure in the application and credit report of correctable deficiencies for which the lender's responses can be tracked;

* evidence of customer correspondence, notes of phone calls, logs of the sequence of events in a transaction and annotations on loan documents that may disclose how patiently or vigorously the lender dealt with problems;

* accounts of dealings with third parties essential to the transaction that might also reveal the level of patience of the loan officer in working to get an applicant approved; and

* underwriting worksheets, which, when considered with application data, can reveal whether sources of income, debts and assets were characterized favorably.

At the least, banks with unchanged or lower figures will face grueling fair lending examinations. Worse, they may be investigated by the Department of Justice and Department of Housing and Urban Development.

Financial institutions already under investigation for suspected discriminatory lending and whose 1992 HMDA data haven't improved will be vulnerable to the mounting political pressures to be used as examples.

Consequently, any of these institutions could become the next Decatur Federal Savings & Loan, an Atlanta thrift that U.S. prosecutors took to court late last summer for allegedly discriminating against 48 black applicants between 1988 and 1992. The bank settled out of court for $1 million.

Interagency fair lending exam guidelines issued last spring reveal that regulators are operating on the premise that during the "less formal aspects of the loan process--such as the bank's soliciting of information or informing the applicant of problems and how to address them--the lender's consciousness of potential bias may be low and the subtle influence of stereotyped perceptions, interracial influence of stereotyped perceptions. interracial unease, [et cetera], high.

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