WASHINGTON -- Sears Mortgage Corp. is planning to hire a civil rights group to help stamp out any racial bias in its huge lending operation.

The pending deal between Sears, the nation's seventh largest mortgage originator, and the National Fair Housing Alliance, a Washington-based nonprofit organization, is a potent example of the growing cooperation between lending institutions and their former adversaries.

The alliance's members have filed lending discrimination suits against a number of banks.

Recently, it won a contract worth around $1 million from the Department of Housing and Urban Development to look for lending bias by mortgage lenders in three undisclosed cities.

8 Months of Negotiations

The program being discussed would include a review of Sears' underwriting guidelines and application procedures, lengthy training of loan officers and others that come into contact with the application, and testing.

Sears and the alliance have been negotiating the contract for about eight months. All that remains is for it to be signed, said Shanna Smith, director of programs at the civil rights group.

Sears spokesman Larry A. Costello confirmed that the two groups are negotiating, but declined to comment on specifics.

|High Credibility'

Sears chose to work with alliance, he said, "because they are known for their high credibility and professionals approach."

Sears Mortgage Corp., headed by Walker Klein Jr., was the seventh largest mortgage originator in 1992. The Vernon-Hills, Ill.-based company funded $5 billion in residential mortgages in the first half of the year. PNC Bank Corp. announced in May that it plans to buy the company and close the deal by yearend.

The National Fair Housing Alliance, a network of about 60 grass-roots fair housing groups around the country, is the only national advocacy group that focuses exclusively on education and enforcement of fair-housing laws.

Based in Washington, the three-year old network has worked closely with the Department of Housing and Urban Development in its efforts to deter discrimination in all aspects of housing, including lending.

Works Closely with HUD

The alliance investigated homeowners insurance companies for HUD. It also has worked closely with HUD as the department develops a specialized unit that will focus exclusively on lending discrimination.

Ms. Smith said the group sees no conflict of interest in contracting with both the government and the industry to test lenders for discrimination. In fact, the group hopes to use the Sears program as a prototype for training and testing with other mortgage companies and banks.

"We intend to develop a good nationwide program for mortgage-lending training," she said.

Already, the group is talking with a major mortgage lender in the South about a similar contract, Ms. Smith said. And several other banks have contacted the alliance for advice on fair lending, she added, although the group has note entered formal contracts with any of them.

"Our goal is to eliminate housing discrimination, and you do it two ways: education and litigation," Ms. Smith said. While the alliance's members will continue to bring lawsuits against lenders that they believe have discriminated, she said, the testing program will protect lenders to some extent.

"Our goal is not to file as many lawsuits as we can," Ms. Smith said. "It makes more sense to have a working relationship between the fair housing centers and the lenders."

Will Scrutinize Guidelines

Ms. Smith said she hopes the Sears program will be completed by year-end. It will begin by scrutinizing Sears' underwriting guidelines, training manuals, advertising and outreach.

Sears will pay the group $300 per hour for this analysis, which will be conducted by a Toledo, Ohio-based expert in fair-lending litigation.

"What we try to explain to the lender is all the points where they are at risk," Ms. Smith said.

The alliance will hold a two-day training session for Sears' loan officers, underwriters and appraisers. NFHA will charge $3,000 per day, plus expenses, for the training sessions.

Testers

The alliance will hire individual to pose as mortgage applicants to see whether blacks and whites are treated differently. This phase will demonstrate whether or not the revised policies and training have been effective, Ms. Smith said.

Beyond the training program, the two groups hope to establish a close, ongoing relationship, Ms. Smith said.

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