Banks should originate internal programs to test for prejudice against ethnic and racial minorities and such tests should concentrate on the preapplication process, say regulators and compliance experts.

An institution's officers need to take immediate remedial action when they find bias or the potential for bias, the sources at the regulatory agencies and compliance specialists add.

"The preapplication phase, or what happens before the mortgage application is filled out, should be the initial testing ground for discrimination," said Barry Leeds, chairman of Barry Leeds & Associates, a market research firm specializing in financial compliance tests.

One sure way to trigger an investigation, especially the use of testers, is to present Home Mortgage Disclosure Act data that show few applications or a pattern of early rejections.

The Federal Deposit Insurance Corp. has indicated that banks' next exam cycle will incorporate a look for incongruities in the HMDA data. Disparities will be put to a rigorous test for compliance with consumer protection laws, specifically the Equal Credit Opportunity Act and Fair Housing Act.

The experts also say banks must notify their regulators immediately that they have found problems through their own review process and that they took prompt corrective actions.

Michael C. Rouse, manager of compliance examinations at the Federal Reserve, urges banks to report promptly and accurately when they discover a situation that may involve bias. Fail to report, Rouse said, and banks can "look for examiners to be with you for a very long time."

Regulators are required to refer cases of detected discrimination to the departments of Justice or Housing and Urban Development. But they are inclined to avoid enforcement action when an institution actively seeks out bias and takes remedial action, or willingly cooperates when examiners find problems.

"Regulators must refer findings of discrimination, but regulators also will be looking to find out what kind of correcttve action has been taken." said Lawrence Jackson, a review examiner in the FDIC's Chicago office.

Jackson says institutions should:

* determine if policies unintentionally discriminate;

* determine whether lending policies contain ambiguous language that might result in a discriminatory practice; and

* review lending terms to see how they also might restrict a certain consumer from getting a mortgage.

Stephen Cross, deputy comptroller for compliance management at the Office of the Comptroller of the Currency, said the OCC has issued new examination guidelines for discrimination and intends to begin preapplication testing using private contractors early in 1994.

Jackson encourages bank officers to follow the Federal Financial Institutions Examination Council pamphlet, "Home Mortgage Lending and Equal Treatment." The pamphlet makes these points:

* Does an institution treat all credit applicants equally, regardless of race and income bracket?

* Does an institution have a clear, written policy of providing the types of credit authorized by your board of directors to all qualified applicants, regardless of race?

* Does an institution underwrite and appraise homes as collateral on purely financial terms, without considering the color or nationality of neighbors or shifts in racial composition in the neighborhood?

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