In separate actions, the Justice Department and the Federal Reserve Bank of Boston recently sent lenders what amounts to a single message about mortgage discrimination and how to prevent it.

The justice Department, after three years of analyzing 4,000 loan application files, in September settled its discrimination lawsuit against Decatur Federal Savings and Loan Association. The thrift, based in a suburb of Atlanta, set up a $1 million fund to provide relief to 48 blacks who had sought credit.

A month later, the Boston Fed issued a detailed study of application and loan files for 131 Boston-area lenders. The study found that one-third of the racial and ethnic disparity in their aggregate loan-denial rates was attributable not to economic factors but to the applicants' race or ethnicity.

Whites Got More Help

In the Georgia case, the Justice Department's civil complaint and consent decree alleged fair-lending violations. These included:

* "White applicants who failed to meet certain underwriting standards have been extended special considerations" not extended to black applicants.

* "The lender counseled white applicants about their deficiencies and reworked their applications in order to help them qualify under underwriting guidelines, but did not consistently supply comparable assistance to black applicants."

Along the same line, the Boston study hypothesized that lenders may be more willing to overlook flaws in credit qualifications for nonminorities than for minorities. The Boston Fed further reported that highly qualified applicants experienced comparable degrees of success, regardless of race.

A Matter of Assumptions

These perceptions focus attention on applicants who have marginal qualifications for a loan or have imperfections in their credit qualifications. Many such applicants can be qualified for credit if the lender acts diligently, creatively, and flexibly.

The question is: Do similarly qualified applicants of different racial or ethnic backgrounds benefit equally from such discretionary aspects of the lending process? Apparently not, at least from some lenders.

The Boston Fed suggests that differential treatment of credit applicants may originate with an assumption that nonminority applicants are creditworthy, while minority applicants must prove their creditworthiness.

The favorable assumption most nonminority applicants enjoy can serve to legitimize and justify many kinds of judgments, accommodations, and efforts that may help them applicants qualify for loans.

When customers from one racial or ethnic group get those tangible advantages and those of another group do not, discrimination laws are violated.

What does this imply for lenders and regulators?

Lenders' training programs particularly need to emphasize that all applicants must receive the same favorable presumptions and the customary degree of assistance, diligence, patience, and flexibility. Compliance programs must develop means to monitoring methods.

For example, the Atlanta decree requires an application checklist to ensure that everyone get a chance for consideration of compensating factors, unconventional documentation of creditworthiness, and explanations for derogatory information.

"The checklist technique ensures that information about this realm of qualifications - which typically operate to overcome deficiencies - is not solicited selectively.

(In contrast to many settlement documents, the civil complaint and consent decree filed in Atlanta are highly detailed and contain a good deal of worthwhile guidance to lenders.)

Lenders might also find it revealing to ascertain whether the rates at which loans are denied for "lack of verification" or "incomplete information" correlate to race or ethnic group. Their doing so might indicate that lending personnel are not working as diligently to qualify minority applicants.

Second Look

Another promising innovation is second review of rejected minority applications, to ensure that equal treatment was provided.

This procedure has powerful potential. For example, a lender recently reported that after instituting such a review it made loans to 35 percent of initially rejected applicants.

However, a clear lesson from Atlanta and Boston is that a second review will not be adequate if all it does is verify that denied minority applicants have deficiencies. To implement a meaningful review program, the lender must have a sense of how frequently nonminority applicants with shortcomings in fact get loans, and why.

The crucial questions for the second review are whether the shortcomings of the rejected minority applicants were worse than those of the successful nonminority ones, and whether the lender went to equal lengths to help all customers qualify.

Despite the many commendable existing efforts of lenders to use training, procedures, and accountability to prevent discrimination, it evidently is still occurring.

It may be that in some institutions the additional documentation, precision, and shock of the results of self-testing by "shoppers" is needed to dislodge subtle attitudes and practices. Lenders' self-testing for discrimination has recently been urged by the Mortgage Bankers Association.

Regulators Alerted

The Justice Department brought the lessons of Atlanta to regulators in a number of meetings during the past year.

As a result, the Office of the Comptroller of the Currency is reevaluating its examination procedures. The aim is to improve its ability to detect the specific forms of discrimination hypothesized in the Boston study and alleged by the Justice Department in its Atlanta complaint.

Also, given the difficulty of detecting subtle discrimination during examinations, it is critical that customers who believe they have been subjected to illegal discrimination bring their allegations to the attention of regulatory agencies. The regulators in turn must handle discrimination complaints seriously and expeditiously.

The Comptroller's office has contacted fair-lending organizations to solicit complaints.

It has also forwarded more than 30 discrimination complaints to the Department of Housing and Urban Development this year. One such complaint resulted in a $10,000 settlement; examiners from the Comptroller's office assisted in the investigation of that complaint.

However, if discrimination resides in subtle and subjective aspects of the interaction between customer and lender, eliminating it will depend chiefly on individual lending institutions' addressing the problem employee by employee, procedure by procedure, and standard by standard.

Mr. Riedman is a fair-lending specialist in Washington with the Office of the Comptroller of the Currency.

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