By Lisa Lambert

WASHINGTON (Reuters) - BancorpSouth Inc has agreed to pay $10.6 million to settle civil charges that it discriminated against African-American prospective home buyers in the Memphis area as well as in parts of neighboring Mississippi and Arkansas, the U.S. government said on Wednesday.

The U.S. Justice Department and Consumer Financial Protection Bureau said in a court filing that the Mississippi-based bank turned down black home buyers applying for mortgages more often than similar white applicants, or charged them higher rates to borrow under a policy the government described as "explicitly discriminatory."

The bank also allegedly engaged in redlining in Memphis, a practice to deny service because of an area's racial demographics, by placing its branches outside of minority neighborhoods, the agencies said.

“BancorpSouth’s discrimination throughout the mortgage lending process harmed the people who were overcharged or denied their dream of homeownership based on their race, and it harmed the Memphis minority neighborhoods that were redlined and denied equal access to affordable credit,” CFPB Director Richard Cordray said in a statement.

Under the agreement, to be approved by the court, BancorpSouth will pay $4 million in direct loan subsidies in certain Memphis neighborhoods, $2.78 million to black consumers unlawfully denied or overcharged for loans, and $800,000 for community programs and credit repair. It will also pay a $3 million penalty.

A bank spokesman said the bank disagrees with the allegations and "the decision to settle was to avoid prolonged and distracting litigation." The bank has not admitted to the allegations or to any liability.

"We believe this settlement is a positive development for the bank, and is in the best long-term interest of our customers, employees, and shareholders,” James D. Rollins III, chairman and chief executive of BancorpSouth, said in a statement. “BancorpSouth is fully committed to fair and responsible lending practices in all communities throughout our footprint. Our settlement is a testament to that commitment."

Part of the filing relies on a recording of a meeting of all white BancorpSouth managers and loan officers, where they discussed turning down applications from African-Americans more quickly than those from whites. They also reviewed not providing credit assistance to black applicants considered "borderline."

The recording included "derisive comments," according to the filing.

When one person noted that all the meeting participants were white, another said, "I'm sure I'll hear about that soon, too. I'm looking. I don't know where I'll put one, but I'm looking," according to the filing.

(Reporting by Lisa Lambert; Editing by Richard Chang and Leslie Adler)