As banks push into subprime mortgage lending, they are opting to run the programs as separate business units.
Barnett Banks Inc. and NationsBank Corp. both recently bought and built up separate operations to handle originations and servicing of loans to borrowers with blemished credit records.
Banks are allowing these operations to have their own identities as a way of preventing defections of seasoned staff. Additionally, in the case of subprime lenders, it isn't practical to mesh these units with mainstream mortgage programs because they deal with different kinds of borrowers, observers said.
Borrowers who receive subprime, or so-called B and C loans, are more likely to default and need much closer scrutiny - before and after the loan is made - than conventional, or A quality, borrowers, observers said.
"They are very different businesses," said Jason P. Bohrer, executive vice president at American Home Funding, Richmond, Va.
The separation also prevents questions of improprieties, including double-dipping, Mr. Bohrer said. "You want to have firewalls."
When entering the subprime field, banks are taking on giants like Money Store and United Companies Financial Corp., and scores of regional mortgage banks that have dominated the market for years.
"You're seeing a lot more interest from banks about getting into the business," said Tee Brown, a divisional president with Baton Rouge, La.- based United Companies. "They see the business out there."
Barnett Banks took the plunge earlier this year by purchasing Equicredit Corp. Although Equicredit's headquarters was just a stone's throw from Barnett's in Jacksonville, Fla., there was never a thought of consolidating operations, executives said.
Operations will run more smoothly with the separate structures, said John R. Marshall, executive vice president at Equicredit.
Industry observers added that there may be other practical reasons for the separation. Loans might require more reserves if held by the banking company, or be singled out for their higher rates by bank examiners, analysts said.
Whatever the reason, the independent structure is expected to allow Equicredit to blossom. Over the next four years, Equicredit sees originations and servicing doubling, to $2.25 billion and $5 billion, respectively.
Volume would probably skid under any other structure, veteran subprime lenders said.
"The processing, documentation, and due diligence needs are very different" from conventional loans, said Hugh Miller, president of Delta Funding Corp., Woodbury, N.Y.
Subprime lenders look more closely at the borrower's overall circumstances, he said, not just tax returns and bank balances.