WASHINGTON - The Department of Justice on Monday ended a one-year investigation into lending discrimination at Shawmut National Corp., when the lender agreed to pay close to $1 million to minority applicants who have been unfairly denied loans.

The settlement was announced jointly by Attorney General Janet Reno, Federal Trade Commission Chairman Janet Steiger, and Shawmut chairman and chief executive Joel B. Alvord.

The attorney general praised Shawmut's cooperation and recent efforts to step up minority lending and warned that she would have insisted on a stiffer settlement if Shawmut had not acted more aggressively.

$960,000 Fund

"This should alert other lenders that if they closely examine their lending practices and make necessary changes to eliminate discrimination, they will fare better in this department's stepped-up enforcement effort than those who do not," she said.

The settlement calls for Shawmut to set up a fund of at least $960,000 to compensate black and Hispanic applicants for home mortgage loans that were unfairly rejected between January 1990 and October 1991.

It also calls on the lender to continue minority-lending programs that it has already implemented.

But the consent decree requires of Shawmut no money penalties and no new programs. Although the Justice Department alleged that Shawmut illegally discriminated, the lender admitted no wrongdoing as part of the agreement.

Quick Move Seen

The settlement comes just three weeks after the Federal Reserve denied an application by Shawmut to purchase New Dartmouth Bank of Manchester, N.H., in part because the Justice Department probe was continuing.

Sources say Shawmut wanted to settle as quickly as possible so it could continue its acquisition plans, which include purchasing Peoples Bank Corp. of Worcester. Mass., and Gateway Financial Corp. of Norwalk., Conn.

Mr. Alvord declined to speculate on whether the settlement would clear the way for Fed approval of the company's acquisition applications.

"We certainly think this is an important situation for us to get behind us," he said.

Not |Central Complaint'

But the Fed's rejection of the New Dartmouth application was based on more than the probe. According to a Fed statement, the board was also concerned that Shawmut was violating the Home Mortgage Disclosure Act by submitting inaccurate lending data.

"I'm glad they have settled, but if they read our statement, this was not the central complaint we made," said governor Lawrence B. Lindsey, who oversees the board's community affairs programs.

"I hope that when their 1993 HMDA data comes out in January, and we have had a chance to look at it and verify it, it shows improvement," he added. "Then I would think they would be in a strong position."

Second Bias Settlement

Shawmut need only convince one of three Fed governors who opposed the New Dartmouth application to gain majority support.

The company has until Friday to ask the Fed to reconsider its denial. Otherwise, it must reapply for approval, most likely early next year.

The 24-page consent decree - entered by Shawmut, the Justice Department, and the Federal Trade Commission, which regulates Shawmut's mortgage subsidiary - marks only the second Justice Department settlement with a lender to resolve loan bias allegations.

It is far less draconian than one reached with Decatur Federal Savings and Loan in Atlanta. That decree required punitive sanctions and new fair-lending programs, as well as compensation for victims.

The Shawmut probe was initiated when the Federal Reserve referred the case to the attorney general last December, after data the lender submitted for a Fed study on discrimination detailed possible bias against blacks and Hispanics.

Reviewing 700 Applications

Shawmut will now begin reviewing the 700 minority applicaions that were denied between January 1990 and October 1991.

Those whose applications would have been approved under the lender's new aggressive standards will receive between $10,000 and $15,000 each.

Shawmut will be required to add more money to the pool if the initial fund runs dry.

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