Not long ago, bankers would demonstrate their commitment to minority lending by saying "It takes one loan officer to accept a mortgage application and two to turn it down."

Now at some banks, it takes three, four, and sometimes even reviews before a can be denied especially if the application comes from a minority.

An Involved Process

Chemical Banking Corp.'s internal review policy demonstrates the lengths some banks have gone to make sure they are treating minority applications fairly.

Any mortgage loan that a Chemical underwriter wants to deny must be screened by a senior loan officer. If this second look confirms the denial and it's a minority or low-income application, it is sent to a special fordable-lending team that look for a way to make the loan.

Once a month, a fair-lending committee of senior bank officials meets to review every application that has received third turndown.

Finally, if Chemical still can't make the loan, the application is often bumped to an interbank mortgage review board, where it is examined by representative of a dozen banks to see if one o them can approve it.

"We have really covered our bases," said Michael J. Burke, vice president of Chemical's affordable-mortgage program. "We have an absolute safety net, so if you are declined it is for perfectly good reasons."

While few lenders have internal reviews as extensive as Chemical's, a vast number have set up some sort of "second look" program for minority loans.

Senior bank officers or a committee made up of loan officers, compliance personnel, and, sometimes, even community members, meet to consider the proposed denials.

These internal groups examine applicants' credit histories and look for ways to make exceptions to their underwriting criteria.

Perhaps most importantly, they scrutinize the decision making process to make sure they are not inadvertently treating minorities differently than whites.

The Human Element

In many ways, this second look turns the traditional loan review process on its head. Instead of looking for reasons to deny a loan. the second review process is about finding ways to approve it.

"We try to incorporate good sound lending practices but we try lo add a human element to the process." said Regina G. Livers, community affairs officer for Fifth Third Bank in Cincinnati.

Officers at banks with internal review programs say that typically the programs allow them to make 10% to 50% of the loans they would have denied at first glance. And many say that so far, these loans have performed just about as well as their conventional loans.

Half of Turndowns Salvaged

At Chemical, about 50% of the loans initially denied are approved, according to Mr. Burke. And in the year the bank has tracked a special pool of these loans - totaling about $18 million - they have performed almost perfectly, he added.

Many banks like Chemical supplement their internal programs with interbank review boards.

The granddaddy of these consortia, the Delaware Valley Mortgage Plan in Philadelphia, has been in existence since 1975 and includes eight lenders. Last year. the plan made $43.2 million in mortgage loans to 1,295 low-income and moderate-income families.

Model Program

The Delaware Valley plan has become a model for about a dozen other consortia around the country.

"Lenders benefit from that collaboration," said Mary Davis, director of corporate community initiatives for Delaware Valley.

While most review boards focus on mortgages, some bank are applying the idea to business loans as well.

And Seafirst Seattle doesn't just review denied small-business applications. The bank's "credit advocates" program consists of three outsiders who work with borrowers to improve loan applications.

'Free Business Consulting'

"There is absolutely no charge [to applicants] so what you have is free business consulting," said Grant Pavolka, a vice president who runs the BankAmerica Corp. subsidiary's community business center. In just over a year, Seafirst referred 78 customers to the credit advocates and made 15 loans totaling $860 million, he said.

Bank regulators cheer second-look programs. In a letter sent to all banks this spring, bank and thrift regulators urged lenders to adopt internal second review systems for consumer. mortgage, and small-business loan applications.

"It's a fabulous idea," said Federal Reserve Board Governor Lawrence B. Lindsey. "I would urge all banks to begin some sort of internal review board."

Progress Seen

He points to the growth in second-look boards as a sign of the turnaround in the industry's attitude toward fair-lending issues.

"Think about what a change that is," Mr. Lindsey said. "People say nothing is being done. But just look at the internal reviews and how much that has changed in a year."

But public advocates remain somewhat skeptical.

"They represent some level of self-regulation in the industry, and that is a good idea," said Deepak Bhargava, legislative director for the Association o Community Organizations for Reform Now, or Acorn. "But my fear is that they are a tremendous diversion of resources."

Are Exceptions Uniform?

Even industry leaders concede that if not done properly, second-review plans have limited impact. For example, studies have shown that the vast majority of all mortgage applications have some problems.

This means that if internal reviews are limited to confirming that there is a good reason for denial, they will likely be able to find one.

Instead, many suggest, review boards need to focus on whether they are making exceptions uniformly.

Fed Recommendations

The Federal Reserve Bank of Boston, in its minority-lending guide, recommends including in all internal review plans accepted applications that do not meet stated loan policies. This way, lenders can make sure that they are making the same exceptions for both minorities and whites.

The Boston Fed also recommends reviewing even withdrawn applications, to make sure the applicants were not unequally counseled to withdraw.

In a talk to bankers last month, Deputy Comptroller of the Currency Steve Cross echoed this concern. In the past, he said, both examiners and bankers have overlooked some important comparisons.

Now examiners will more carefully compare not just minority and white denials, but minority denials and white approvals, he said.

"Before the examiner comes in, you should be doing the same kinds of things yourself," Mr. Cross said.

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