Banks are coming under scrutiny by state governments that, following in the footsteps of federal agencies, are closely examining the fair lending practices of financial institutions in their states.

In fact, what has been called a precedent-setting mortgage lending reform agreement was reached March 4 between the massachusetts attorney general and the Massachusetts Bankers Association and 27 banking institutions and mortgage companies. In addition, a three-member loan review panel was created as part of the agreement.

And in Pennsylvania, the attorney general's office is following its own precedent-setting path by analyzing mortgage lending practices. "Basically we are on two tracks: one is actively being engaged in investigating the lending practices of a local Pittsburgh bank and trying to work out concerns without litigation," said Dan Clearfield, Pennsylvania executive deputy attorney general. "And the other is conducting a statewide survey of mortgage lending data."

Officials from both states said relying on the feds to focus on the needs of the state was unrealistic. "We wanted to look at middle-level and large banks that dominate here, but never would be the subject of a fed study," said Clearfield.

In Massachusetts, both sides said they were happy with the agreement. "We achieved exactly the results we were looking for," said Richard Cole, assistant attorney general who is chief of the civil rights division. "We came out with a credible process where everyone could feel confident."

As part of the three-year agreement, the Massachusetts bankers' group agreed to establish and encourage its 202 members to participate in a college-level program to train and recruit racial, ethnic and linguistic minorities for the mortgage lending industry. The state bankers association said it will use the Massachusetts Mortgage Bankers Association program as its model. It also includes the sponsorship of credit and homebuyer community educational programs, bank diversity training programs and educational materials, and reinsurance programs for nonconforming loans.

According to Bob Fichter, senior vice president of the bankers group, the agreement to promote self testing and comparative file review by lenders includes the attorney general's cooperation of finding ways to mitigate the legal dangers inherent in self testing. "It's a Catch-22," he said.

"This (agreement) is a pool of effort not a pool of money. We will have a variety of products. We want to present information in ways that are helpful to banks." Fichter said. He stressed that this voluntary agreement implies that both parties seek out and publicize the best efforts of fair lending by visiting banks.

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