Sovereign Offering Card Tied to Home Equity

Sovereign Bancorp is putting an old but unproven credit card marketing idea to the test.

The Wyomissing, Pa.-based thrift company is offering a card linked to a home equity line of credit.

The concept was spawned by the Tax Reform Act of 1986, which eliminated tax deduction of credit card and other consumer loan interest but left it intact for mortgage interest.

The card-access idea did not take off with the rest of home equity lending, however. According to the American Bankers Association, only 11.2% of the banks with the largest home equity businesses - at $100 million or more of receivables - offer credit card access.

Some bankers and consumers may have feared the implications of a credit card with which default could lead to foreclosure on a home. But other observers are puzzled by financial institutions' indifference.

"It became accepted wisdom that there would be problems with this product, despite a lack of evidence," said David Olson of David Olson Research Co., Columbia, Md., which specializes in mortgage research.

"We have designed a product that could earn us customers for life," said Jay Sidhu, president and chief executive officer of Sovereign. "The credit risk is lower because the market we have tapped into is mature. These people have been managing a credit card for a while."

For the past two months, the $7.5 billion-asset thrift has been targeting homeowners who run large credit card balances. Thousands of people have applied for or are using the new card, according to the bank.

First Utah Bank of Salt Lake City has been offering a similar product for three years. John Hanson, president of First Utah, boasted that none of his 273 accounts has ever defaulted or been delinquent.

"It surprises me that more banks aren't doing this," said Mr. Hanson. At least 300 banks have contacted him, seeking information about how to develop such programs, he said.

Sovereign's Tax-Deductible Credit Card is set up like a standard home equity loan. Instead of the checks borrowers typically use to draw down credit, Sovereign customers can use a gold MasterCard.

Sovereign also offers a rebate feature that allows cardholders to earn back up to 1% of their interest charges annually.

There is no annual fee and the interest rate is set at 7.49% for the first six months. After the introductory period, based on the amount of outstanding credit, the rate ranges from prime plus 1.49% to prime plus 3.49%.

Sovereign is upping the ante by offering customers a line of credit equal to 100% of the equity in their home, up to a maximum of $35,000.

While Mr. Hanson conceded that 100% credit lines are "great money makers," he also warned that they may not be "fair to the customer who is not a financial wizard. There needs to be some cushion so that the customer isn't thrown out of the home as soon as a payment is missed."

First Utah Bank limits its credit to 80% of equity.

Nevertheless, Mr. Sidhou said he does not expect the bank to make large amounts of money from the card.

"Our goal is to generate maybe 200,000 relationships in one year," he said. "We are sacrificing profitability. We won't be making the 3% after- tax return on assets that other (credit card) players are getting. We hope to get back 1% on a market that has a huge potential."

Sovereign is offering the product in its region - Delaware, New Jersey, and Pennsylvania - and does not plan to market it nationally.

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