Shawmut, U.S. Agree to Settle Loan Bias Case : Banking: Lender’s quick response is praised, but other institutions are warned to re-examine their policies.

Saying she wants to “send a message” to all lenders, U.S. Atty. Gen. Janet Reno on Monday announced a settlement of nearly $1 million with Shawmut National Corp., accused of discriminating against black and Latino applicants for home mortgages.

“Don’t wait for the Justice Department to come knocking,” Reno said at a news conference. Denial of a home mortgage “can have a devastating impact on the person denied, their families and whole neighborhoods,” Reno said, adding that equal treatment for all borrowers is “one of the most important civil rights issues facing this country.”

The banking industry has long argued that there is little, if any, intentional lending discrimination. Those rejected for loans generally have unsatisfactory credit histories, bankers say.

Federal officials believe that actual redlining--outright discrimination in which lenders put an entire neighborhood off limits--is rare today. Instead, the problem commonly involves the reluctance of local loan officers to give members of minority groups the same help, advice and encouragement they would give to white applicants for mortgages.

Even when the chief executives of banks have a firm policy of ordering equal treatment for all customers, discrimination “can creep in through the actions of low-ranking officials” at the lending firms, said Paul Hancock, who directs the housing section in the civil rights division of the Justice Department.

Reno advised lenders to follow the example of Shawmut, which used “mystery shoppers” to investigate the treatment of minorities at its branch offices. It also opened a new branch in Roxbury, a largely black neighborhood in Boston.

Shawmut’s application to buy a New Hampshire bank was rejected last month by the Federal Reserve Board because of the Justice Department investigation requested by the Fed. The Fed had no immediate comment on Monday’s settlement, but Shawmut Chairman Joel Alvord said he is hopeful the agency will now approve the proposed acquisition.

The government and Shawmut agreed on a settlement under which the lender denied that it discriminated but promised to pay $10,000 each to black and Latino applicants who were unfairly rejected for loans between 1990 and 1992.

The money will come from a fund of $960,000 created by Shawmut, a major New England banking firm with 300 branches and dual headquarters in Hartford, Conn., and Boston.

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Shawmut is reviewing the files of all 700 black and Latino applicants rejected for mortgages over the two-year period to determine whether they would qualify under the company’s revised lending policies. The bank will add to the $960,000 fund depending on the number of cases involving unfair rejection of a mortgage application.

Reno was joined at the Justice Department news conference by Janet Steiger, head of the Federal Trade Commission, who declared that the settlement should alert lenders “to examine carefully . . . whether inadvertently or otherwise they may be engaging in discriminatory loan decisions.”

Reno’s message to the financial industry comes less than a week after federal regulators said they will insist that banks and thrifts aggressively expand their lending to small businesses and residents of low-income areas.

The high-profile announcements emphasize the Clinton Administration’s focus on fair availability of credit as a major issue.

Shawmut Chairman Alvord, who shared the podium with Reno and Steiger, said the settlement is “positive for both Shawmut and the banking industry. Fair lending is right, and it is good business.”

A Fed study two years ago showed that black and Latino borrowers in Boston were rejected for home loans at significantly higher rates than white applicants with the same level of income.

Shawmut immediately began corrective programs that reduced the rate of mortgage denial for minority applicants, Reno said in explaining why the government had not sought additional financial damages in the settlement.

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“The measures taken by Shawmut should serve as guidance to all others in the lending industry,” she said.

“The underwriting practices should be based on sound economic principles, not on unfounded fears based on racial stereotypes,” Reno told reporters.

The only other major case filed by federal officials against a lender involved Decatur Federal Savings in Atlanta, which paid $1 million to black mortgage applicants who were victims of discrimination.