WASHINGTON -- By everyone's account, Long Island Savings Bank is a leader in home mortgage lending to low-income and minority areas.

The $2 billion thrift repeatedly receives "outstanding" Community Reinvestment Act ratings and the local fair-housing group calls it a model for other institutions to mimic.

Still, that record wasn't enough to save it from the Department of Housing and Urban Development. A HUD-sponsored organization filed a fair-lending complaint that threatens to mar the savings bank's otherwise unblemished reputation.

Although the two sides are expected to reach a settlement soon, the case provides a lesson to financial institutions that think they are home free just because they have eliminated discrimination from their mortgage departments.

The case began when the Long Island institution's mortgage department granted a $58,000 loan to a black couple, Ricardo and Janet Bermudez, to purchase a house in North Babylon, N.Y. But their relationship were downhill when the couple applied for a $10,000 home improvement loan a month later in November 1991.

The bank rejected the loan application on the grounds that the couple had a troubled credit history. The reason for the rejection angered the couple because they had explained the credit trouble to the bank's satisfaction several months earlier when they applied for the mortgage.

The couple grew angrier still several months later when a white contractor they hired to fix their roof managed to obtain financing for them for more money from the same thrift even though their financial situation had not changed, the complaint states.

After the couple brought this to the thrift's attention, the institution approved the couple's original loan request.

Still, to the couple, the savings bank's actions in this case shows that it discriminates, said David Berenbaum, executive director of Long Island Housing Services, the HUD-sponsored agency that is aiding the couple in their fight.

To the industry, the case should be a warning that they need to eliminate discrimination not only from their home mortgage business, but from all other departments as well, he said.

"Both are illegal," agreed Lucy Griffin of Compliance Management Services in Falls Church, Va. "Both can result in an action against an institution?

Mr. Berenbaum said the problem goes beyond a simple case of underwriters accepting a loan application when a white contractor is involved. He said the real problem here is that underwriters not involved in home mortgage lending are not as receptive to applications from low-income and minority borrowers.

A spokeswoman for Long Island Savings Bank declined to comment, saying the institution does not discuss lending complaints.

Richard Ritter, a fair-lending consultant to HUD and a former Justice Department prosecutor, said banks cannot afford to take a narrow view of fair-lending. "It is important that banks not overly focus on home mortgages," he said.

Most people forget that the Justice Department brought a complaint against First National Bank of Vicksburg, Miss., for charging higher interest rates on home improvement loans to minorities, Mr. Ritter said. "So, there is a case already focused on that," he said.

Despite the Vicksburg case, institutions still view home mortgage loans as the key to fair-lending, Ms. Griffin said.

"I don't think the message has gotten out there that the laws apply beyond mortgage lending," Ms. Griffin said.

Institutions need to recognize that they are exposed to Justice Department and HUD investigations for both home improvement and home mortgage loans, she said. The lesson from the Long Island Savings Bank case is that financial institutions need to call in outside experts to review their entire lending program, Mr. Berenbaum said.

"The bias and sensitivity training needs to be spread through all departments," he said. The solution might not be that easy, said David W. Roderer, a banking attorney at Winston & Strawn. The problem is that the board of directors and other top officials cannot see every person that comes into their institutions, he said.

So, it would have been impossible for them to know that a white contractor intervened on behalf of the couple, he said. "A law that cannot be policed is not meaningful," Mr. Roderer said.

He also said he doubts a case like this can have much impact.

"To nail someone for one individual instance does not fix the problem," Mr. Roderer said.

Long Island Savings should be free of this charge soon. Mr. Berenbaum said the two sides are meeting and expect to resolve the complaint.

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