The current loan bias investigation by the Justice Department and banking regulators underscores that lending discrimination has become a high-profile policy matter.

Despite considerable criticism of the methodology and conclusions of some of the studies based on the Home Mortgage Disclosure Act and other data, the pressure on lending institutions has been growing more intense. For example:

* After a three-year investigation of Decatur Federal Savings and Loan in Atlanta, the Justice Department last year settled its first suit alleging violations of fair housing and equal credit-opportunity laws.

Among other charges, the government alleged that the lender helped white applicants with deficient applications to qualify, but failed to do so for blacks.

* In March 1992, the Federal Financial Institutions Examination Council published a guide to equal treatment in mortgage lending. Lenders were urged to take a closer look at long-accepted practices in loan origination, underwriting appraisal, and marketing that can have discriminatory effects.

* In a joint statement last October, regulators urged lenders to ensure equal access to credit.

* In December, the Office of the Comptroller of the Currency issued a circular strongly encouraging banks to examine their standards and procedures, to determine reasons for disparities, and to take action.

Meanwhile, the Comptroller's office is conducting separate fair-lending exams this year using existing guidelines to discover discriminatory practices.

* Just to make it perfectly clear, in speaking on the Justice Department-bank regulator project, Federal Reserve Governor John P. LaWare recently said it is intended to send a message to the industry to clean up its act.

Conduct Self-Assessments

In the light of all this, how should bankers respond?

First, conduct a self-assessment of lending patterns, practices, and procedures, analyzing denial rates by race and income and probing the reasons for any significant disparities.

A review of lending guidelines and practices should scrutinize appraisal standards, comparables, adjustments in terms of neighborhood housing stock. A review of underwriting policies should determine whether standards are vague, nonspecific, subjective, rigid, or unduly conservative.

Other questions a bank should ask itself: What's the policy in offering assistance and counseling to applicants? Are the bank's products responsive to community needs? How do community demographics compare with customer characteristics?

Marketing and advertising procedures and incentive programs for loan officers need review. Finally, training programs should be assessed in terms of fair lending content.

Bankers who have completed a self-assessment should be able to pinpoint problem areas. Those that exist in the underwriting stage can be addressed through the review process. But problems at the preapplication stage are more difficult.

What's the next step? Regulators recommend sensitivity training and testing. But so far, few institutions seem to have instituted either of these programs and even the large ones lack the resources or expertise to carry them out in-house.

The goal of sensitivity training is to help bankers respond more consistently to people and to be mindful of cultural, racial, and gender differences.

It does not aim to reprogram people, but to encourage them to examine their behavior for unconscious biases and to motivate them to be more aware of the consequences of their actions and behavior. Such training may be necessary at various levels, including senior management, lending officers, and branch managers.

Evaluating attitudes, Service

Mortgage-bias testing is difficult, since so many factors influence a mortgage-lending decision. But many institutions routinely send in testers to evaluate service. Branch personnel are rated on such elements as the level of courtesy and service, attitude, and positive behavior.

In mortgage-bias testing, teams of whites and minorities also rate levels of courtesy and service. They compare such factors as the length of wait for service and the level of assistance and information offered.

Setting up a testing program can be very complex. It must be tailored to needs, size, branch locations, and operations of the individual institution. Typically, the community reinvestment staff, the underwriter, and the legal department help design the project. Accurate feedback and evaluation of the results is vital if the test is to be useful in identifying weaknesses.

Train First or Test First?

One question that arises is whether to train first or test first. Most bankers whom I have talked to feel that it is more useful to test first and train on the basis of the results.

In any case, the handwriting is on the wall. It's time to take a long, hard look at lending patterns and practices and to put some antidiscrimination initiatives in place.

Do it before the regulator comes in. You'll be ahead of the game and you might find that it pays in terms of your institution's reputation and public relations.

Ms. Lewis heads CR Services, New York, a community reinvestment consulting firm.

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