Rules Against Lending Bias Toughened by Government : Banking: Federal agencies are expanding beyond a recent focus on mortgages and will now scrutinize other loans.

In a rare display of cooperation, 10 federal agencies, led by the Justice Department, on Tuesday announced tough new guidelines to fight discrimination in loans to consumers and small businesses.

All lenders--from banks and savings and loans to finance companies, credit unions and credit card companies--will now be scrutinized to see if their overall lending patterns contain evidence of bias, federal officials said.

In effect, the federal agencies are expanding their aggressive approach far beyond a recent focus on fighting bias in home mortgages.

“Ending discrimination in lending is one of the most important civil rights issues facing this country,” Atty. Gen. Janet Reno told a news conference.

The interagency program unveiled Tuesday will focus on the so-called disparate treatment of borrowers, in which there may be no overt prejudicial policies and no intent to discriminate, but the outcome is the same.

For example, if the rejection rate for blacks applying for credit is much higher than for whites in the same general income group, this could be a result of disparate treatment, officials say.

The differing rejection rates should “raise a red flag” and cause a lending institution to re-examine the way it does business, Comptroller of the Currency Eugene Ludwig said at a news conference.

The policy statement adopted by the federal agencies gave two examples of lending practices that will not be tolerated and which lead to disparate impact:

* Two minority borrowers asked about mortgage loans. They were given applications only for a fixed-rate mortgage and failed to qualify for the loan. Two non-minority borrowers with the same general income were told about both adjustable-rate and fixed-rate mortgages and were given help in filling out their ultimately successful application.

* A loan officer rejected a loan application by a woman with “flaws in her credit report” but approved applications by men with similar credit problems “after working with them to provide satisfactory explanations.”

Consumer and advocacy groups generally welcomed the policy. “It’s long overdue and we’re happy to see it,” said Michelle Meier, counsel for government affairs at Consumers Union.

“The Clinton Administration has shown a strong interest in aggressive enforcement of the civil rights laws,” she said. “Today’s statement was a breath of fresh air.”

Acorn, a coalition of neighborhood groups in 37 cities, was more cautious.

“It is about sending a message to industry,” said Deepak Bhargava, the group’s legislative director. “But the substance of their statement is not terribly radical about efforts to achieve compliance. It’s like smoke signals. It’s not clear about telling the banks what they should and shouldn’t do.”

*

Most hidden discrimination occurs in small-business lending because loans are not standardized, Bhargava said. Mortgage loans, on the other hand, are packaged for resale to investors, and federal laws require public disclosure of application and rejection rates among various ethnic groups.

Henry G. Cisneros, secretary of housing and urban development, who hosted the news conference, said the participating agencies formed “the most powerful team that can be assembled” for the goal of guaranteeing “fair lending to all Americans.”

Just by having the news conference, there will be ripples throughout the financial services industry, said Norman E. D’Amours, chairman of the National Credit Union Administration, one of the participants.

Reno has already met with bankers to discuss their concerns about the newly aggressive policies. “We are not asking people to make bad loans, but to be fair,” she said. Many times, “there is no racism involved,” merely lenders’ ways of doing business.

Beside the Justice Department and HUD, the federal agencies involved in the effort are the Federal Reserve Board, Federal Deposit Insurance Corp., Office of Thrift Supervision, National Credit Union Administration, Office of the Comptroller of the Currency, Federal Trade Commission, Federal Housing Finance Board and Office of Federal Housing Enterprise Oversight.