Keycorp Forms Unit Focusing on Consumer Finance

Keycorp, gearing up to become a bigger national force in consumer finance, has formed a subsidiary that will house all the lending businesses that are outside its branch system.

The unit, Key Bank USA, will have about $20 billion in assets and is expected to grow rapidly as it pushes into some new areas of lending. In particular, the company is planning a push into the high-margin business of making auto loans and home equity loans to people with blemished credit records.

Key Mortgage Services Corp., its mortgage originations unit, will also come under the Key Bank USA umbrella and will be the unit's only branch- based operation. Keycorp sold its $24 billion mortgage servicing portfolio to NationsBank early this year but continues to make home loans through the branches.

Robert W. Gillespie, Keycorp's president and chief executive, said there was "tremendous potential to meet the needs of an underserved market." He added that the new structure would position Keycorp to compete effectively in the markets it is targeting.

The formation of the new unit is part of a strategic planning exercise by Keycorp in which it has made decisions on where to focus its expansion efforts for the balance of the decade.

The jump into subprime lending - loans to people with spotty credit histories - has been on the drawing board for some time. Keycorp had hired R. Harold Owens away from Fleet Financial Corp.'s finance unit in April to lead the formation of a finance company.

Mr. Owens, a veteran of the subprime lending business, left after two months, apparently dismayed by what he perceived as the slow pace at which plans for the finance unit were developing.

A Keycorp spokesman said at the time that his departure "will not affect any of the national consumer finance initiatives now under way." And Mr. Owens, in parting, said he thought Keycorp had a bright future in home equity lending.

Subprime lending has been a hot and increasingly competitive area in the last year or so as mortgage companies and others have sought new products to prop up sagging volume and razor-thin margins.

While subprime loans have relatively high default rates, the high interest rates they carry usually more than make up for the credit losses. The secondary market for subprime loans has also been expanding because of investor demand as credit enhancement on pools of the loans improves.

The umbrella for the consumer finance operation, Key Bank USA, is a newly chartered national bank based in Cleveland. The bank will house the credit card business; student loans; auto, boat, and recreational vehicle lending through dealers; and nonbranch deposit gathering. Collections, credit underwriting, and credit portfolio management will also be conducted by the bank.

A major component will be AutoFinance Group, which Keycorp is in the process of acquiring. "The AFG acquisition positions Keycorp as a leading auto finance company for U.S. dealers," said A. Jay Meyerson, chief executive of Key Bank USA. He said the deal would "broaden the financing options that already include auto leasing, floor-plan financing, and prime- based lending."

Analysts generally welcomed the news that the consumer finance unit had finally been formed. Some said they had known for months that it was imminent.

James M. Schutz, a securities analyst with Chicago Corp., said, "The acquisition of the auto lending company put them into a new league in terms of being able to penetrate that market and meet the demand that's out there. Consumer finance is an area they really want to emphasize. It's a good area."

He had one small qualm: "I have questions about credit controls, but their credit quality is very good and I'm sure they can handle the issues involved."

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