During a luncheon in 1986, Attorney General Edwin Meese III told three men now under indictment in the Wedtech scandal that he wanted to refinance his mortgage to take advantage of lower interest rates.

According to an 814-page report issued this week by independent counsel James McKay, one of Meese's three lunch partners, longtime friend E. Robert Wallach, stepped in to help, contacting a Washington banker. That led to a $260,000 mortgage loan for Meese five months later from a financial institution in Washington.McKay examined the circumstances surrounding the Jan. 29, 1986, lunch between Meese, Wallach, Meese's financial manager W. Franklyn Chinn and Wedtech consultant R. Kent London in an attempt to determine whether Meese may have violated federal bribery or gratuity laws.

That same day, the report notes, London's company had been paid $1 million by Wedtech Corp. in compensation for services to the South Bronx, N.Y., defense contractor.

In his report, McKay concluded that no portion of the $1 million was passed on to Meese and that the subsequent mortgage loan was not made under preferential terms.

McKay did not find grounds to indict Meese, but the attorney general now faces an inquiry by the Justice Department's Office of Professional Responsibility. The OPR is expected to use McKay's report as a basis for determining whether Meese may have violated ethical standards for officials in the executive branch of government.

McKay's report found that Meese probably twice violated the conflict-of-interest law by participating as attorney general in matters affecting the telecommunications industry while he was holding regional Bell telephone stock.

A 1965 executive order setting out standards of ethical conduct for government officers directs that employees avoid any action that might create the appearance of giving preferential treatment to any organization or person, losing complete independence or impartiality of action or affecting adversely the confidence of the public in the integrity of the government.

That executive order also prohibits any action that might create the appearance of making a government decision outside official channels.

McKay found that Wallach engaged in a number of activities that were "of substantial benefit" to Meese, including representing Meese without charge in connection with his nomination and confirmation hearings to become attorney general.

McKay also said Wallach assisted in obtaining a paying job for Meese's wife, Ursula, and helped the Meeses get an $80,000 bank loan in 1983 as well as facilitating the 1986 loan of $260,000 to refinance Meese's mortgage.

McKay found that Meese helped Wallach by interceding on behalf of Wedtech Corp. in 1981 in a move that culminated in a $32 million engine-building contract for the company and also by assisting the attorney in connection with a $1 billion Iraqi oil pipeline project.