Entering a market many banks deem too risky, at least two bank card issuers have begun buying charged-off card debt from their peers.

The buyers-Capital One Financial Corp. and Providian Financial Corp.-are applying their expertise in working with subprime cardholders.

The so-called bad debt market gained notoriety late last year when the industry leader, Commercial Financial Services Inc. of Tulsa, Okla., filed for bankruptcy. That led to the ouster of the company's charismatic chief executive officer, William Bartmann, and others.

The demise of CFS raised hopes among smaller companies-most of them CFS copycats-that specialize in buying charged-off debt and trying to collect on it. Until recently there was little evidence of interest among established lenders.

"A bank buying chargeoffs from another bank bucks the tradition of acting as strictly a seller of chargeoffs," said Harold Gartner, vice president of Daiwa Securities America Inc., which sold such a portfolio to Capital One.

According to industry experts, a handful of other large card lenders are preparing to follow in the footsteps of Capital One and Providian.

Providian, which bought its first charged-off portfolio last July from Wells Fargo & Co., has gone so far as to form a subsidiary, First Select, to handle this business.

"We are investing in it heavily this year, and we think it can contribute to earnings by 2001," said David Petrini, chief financial officer of Providian.

Mr. Petrini said the San Francisco company got the idea to plunge into the market after evaluating the "forward flow" contracts of some portfolios it had bought. These are agreements between lenders and buyers of receivables that are charged off after about 180 days. This so-called fresh paper becomes available to debt buyers every month as lenders rid themselves of nonpaying accounts.

Since July, Providian has signed two other forward-flow contracts, with a combined $500 million of receivables. Providian is trying to collect on these debts and, as an incentive, sometimes offers the cardholders secured or unsecured cards with low credit lines.

Providian thinks First Select "could be its own stand-alone strategic business," one that supplies "us with leads for our own unbanked business," Mr. Petrini said.

Providian was never a client of Commercial Financial Services, and it has always collected its own debt, Mr. Petrini said.

Diana Don, a spokeswoman for Capital One in Falls Church, Va., confirmed her company's activity in this area but declined to elaborate. She said buying charged-off credit card receivables from other lenders is one of Capital One's customer acquisition strategies but supplies a very small portion of prospects.

Others in the industry said Capital One has been stepping up efforts after testing the waters for several years.

"I have heard that (Capital One) is out there being more aggressive in buying portfolios," said Scott Matte, president of MKM Acquisitions, a New York firm that buys this type of debt.

Nonbank debt buyers say they are not worried about lenders taking away their business. Instead, the banks' incursions are "further validation that this is a real industry with real returns," said Joseph Rensin, chief executive officer of Creditrust, a debt-buying company in Baltimore.

"I think it is a good idea" for Providian and Capital One, "even though they are competition," said Mitchell J. Bonilla, vice president of Contiasset Receivables Management, a debt buyer in San Diego that is a unit of Contifinancial Corp. Capital One and Providian "are both set up nicely to identify the good customers in that arena."

Mr. Rensin said Providian's contracts have probably boosted it into third or fourth place among bad-debt buyers. Hard numbers are difficult to obtain because many transactions-and the companies involved-are private.

Publicly held Creditrust bought $2.5 billion of charged-off debt in 1998.

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