IT'S OPEN SEASON on any mortgage lending institution whose HMDA data don't stand up to close scrutiny.

America's mortgage lenders would be well advised to pay careful attention to what their HMDA numbers tell about their lending practices. Otherwise, they may get an unexpected -- but not unpredictable -- visit from Attorney General Janet Reno's Raiders and their federal banking agency associates.

The federal Fair Housing and Equal Credit Opportunity acts have long given the government a mandate to sniff out signs of illegal discrimination against potential homeowners.

But though the empowering legislation had been on the books for quite some time, there was no alarm system to alert the authorities and other concerned parties that offenses were being committed.

Investigative Tool

All that changed when the Home Mortgage Disclosure Act was amended in 1989 to require the collection and disclosure of demographic data on mortgage loan applicants and borrowers. Those data, which must be supplied by most mortgage lenders, are now a tool for the investigation of discrimination.

By manipulating this new wealth of numbers, the feds are now able to find the statistical smoking gun that signals discriminatory practices, whether intentional or not. These same data are also fueling the FDIC's sweeping probe of lending bias at instititions it regulates.

And recently, the White House asked HUD to join the hunt. Today, it's open season on any mortgage lending institution whose HMDA data don't stand up to close scrutiny.

Wake-Up Call

Shawmut Mortgage Co.'s recent $96,000 settlement with the Department of Justice sent a wake-up call to the entire lending community. And an even stronger call to action came from Washington in January: Small banks in Mississippi and North Dakota were slapped with significant penalties because they had not taken steps to end lending discrimination before the government stepped in.

The Mississippi and North Dakota settlements also clearly show that the pursuit and punishment of lending discrimination has expanded beyond differences in black-and-white denial rates.

According to the Justice Department, the Mississippi bank illegally charged blacks more than whites for certain home improvement loans. And the North Dakota black discriminated against American Indians, Attorney General Reno said, in part because it refused to make secured loans where the collateral was on a reservation.

'Rigorous Enforcement'

In announcing these settlements, Ms. Reno warned, "For those who thumb their noses at us, I promise rigorous enforcement." The trend is clear: All mortgage lenders -- banks, thrifts, mortgage lenders owned by insurers, and those that are unaffiliated -- are expected to implement and maintain comprehensive fair-lending and equal-credit policies, procedures, and oversight.

For those who don't answer this wake-up call, the future may be costly, especially if you sit back and wait until Justice or someone else equally vigilant comes knocking on your door.

The key to avoiding the real possibility that your organization may become bogged down in a quagmire of expensive, time-consuming scrutiny and litigation, which can also have a lethal effect on acquisition programs, is to take action before the watchdogs come nipping at your heels.

Self-review and assessment efforts today, followed by any necessary corrective action, can reduce both loss of money and tarnish on your reputation should damage control be necessary tomorrow.

Take a Cold, Hard Look

A first step in that direction is to do what the feds are doing. Take a cold, hard look at your HMDA numbers to see if a problem might exist. The one constant I have observed in institutions we have talked with about fair lending is a high level of self-denial -- they simply don't want to admit that a problem or potential problem exists.

Half the battle is getting beyond that stage of denial. It is incumbent on management and board of directors to ask two questions. Do we have even a hint of a problem? Are our people following our policies?

Problems may result from errors that are relatively easy to address, such as weak data collection and reporting procedures that result in a faulty loan application register. But, what if the analysis identifies lending patterns that don't square with the strictures of the Fair Housing and the Equal Credit Opportunity acts?

The Problem May Be Subtle

This is where an active stance can save the day, not to mention substantial dollars if your organization is forced into a legal face-off. Numbers, after all, do not exist in a vacuum; they represent the net result of all your policies, procedures, practices, and training programs. If your numbers don't portray a pattern of fair lending, it's essential that you evaluate your operations to see why.

No matter how benign your policies and procedures appear on the surface, they may have a discriminatory effect and negate your organization's commitment to equal-opportunity lending.

Even if your current numbers do past muster, prudence and good stewardship would suggest that a careful examination of your organization's infrastructure of policies, procedures, and practices may be helpful in ferreting out any potential problems before they surface. Compliance with nondiscrimination laws starts at the board level and works downward.

There are a number of measures that can be taken to ensure that your organization has a clean bill of compliance in the eyes of the regulators.

* Review your policies, procedures, underwriting standards and product line.

* Assess your management's attitude toward nondiscrimination in lending.

* Evaluate your training, internal controls, and monitoring.

* Review your advertising and marketing programs to identify discriminatory or exclusionary practices.

* Analyze consumer complaints.

* Stimulate regulatory agency procedures -- undertake a comparative analysis of minority and white applications.

* And you may want to consider employing "mystery shoppers" to flush out signs of discrimination. The Comptroller of the Currency's office has announced plans to deploy its own contingent of such shoppers to test for discrimination in lending.

Don't wait for the tap of the heavy hand of Justice before taking the necessary actions to get your lending house in order. As auto mechanics are fond of saying, "You can pay now or you can pay later. The choice is yours."

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