Only months after the Federal Reserve Board rejected the use of "testers" to weed out loan discrimination by banks, the Department of Housing and Urban Development is launching a major initiative using the technique to assess the objectivity of mortage lenders.

The housing department is offering up to $1 million to non-profit housing groups and private companies interested in performing bias tests, according to a plan outlined in the Federal Register.

Riots Raise Concerns

The initiative comes amid heightened concerns about racial bias in mortgage lending, an area that has taken on new importance since the race riots in Los Angeles.

However, the method that HUD is using is bound to generate controversy of its own.

"Testing" typically calls for people of different races but with similar credit histories and income levels to go under cover and apply for mortgages at the same lending offices. The sponsors of the testers then compare the lender's treatment of the applicants and their loan requests.

After months of debate, the Federal Reserve Board last fall rejected a proposal to dispatch testers. Fed Chairman Alan Greenspan said at the time that he was wary of "sponsoring deception."

Reliability Questioned

The Fed also determined that the program would be too expensive and prove unreliable.

The HUD plan, outlined in the May 18 edition of the Federal Register, calls for tests to be carried out in three cities over a period of about one year. A HUD spokesman said that Philadelphia and St. Louis are two of the cities, while the third has yet to be determined.

"The data from this testing project should provide [HUD] with clear, reliable, and credible evidence of the extent and forms of lending disparities by race and national origin for the three testing locations," according to the notice.

HUD also said that its program should produce improved methods for testing.

A study released by the Federal Reserve last fall found that members of minority groups were rejected for mortgages more than twice as often as whites.

Bankers, for their part, pointed out that the Fed data did not take into consideration the creditworthiness of mortgage applicants.

However, the American Bankers Association last week acknowledged patterns of discrimination in mortgage lending when it launched a campaign to help banks make more loans to minorities.

ABA Stands Its Ground

On the issue of testing, however, the ABA remains unbowed.

"As the Fed has said, the difficulties in doing mortgage loan testing validly are enormous," said Virginia Stafford, a spokeswoman for the trade group.

But research papers presented at a housing conference last week suggested that testing is "effective and should be expanded," according to the Federal National Mortgage Association, the conference's sponsor.

The ABA has acknowledged patterns of bias in mortgage lending.

Some private companies that stand to benefit from the HUD initiative lauded the program.

The $1 million outlay represents "a very serious commitment," said Steve Roth, the president of Barry Leeds & Associates, a New York firm that specializes in sending "mystery shoppers" to banks and other companies to evaluate customer service.

The Barry Leeds group conducted a study last year that found "subtle" discrimination in the preapplication stage when it sent testers to 50 branches of client banks. Minority applicants had to wait longer for service and received less detailed explanations of loans.

Ellen Braitman contributed to this story.

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