Home equity lender Contifinancial Corp. has entered the growing business of wringing profits from defaulted credit cards.

New York-based Contifinancial said Thursday it has bought Pacific Advisory Services LLC, a San Diego firm that specializes in buying charged- off consumer debt, and formed an alliance with Arrow Service Bureau, a Chicago servicer of consumer receivables.

Contifinancial plans to form a new division, ContiAsset Receivables Management LLC, which would buy about $1 billion of charged-off credit card debt this year for $25 million to $30 million.

Chief executive James Moore said this move may eventually offer opportunities to cross-sell Contifinancial's other loan products to former cardholders, but he emphasized that cross-selling potential had not motivated the deal.

"We think the opportunities are very significant," Mr. Moore said. The pool of charged-off credit card debt is "very large, and growing," he said. Card companies' willingness to stretch credit guidelines in recent years is feeding this growth.

At the end of the third quarter of 1997, charged-off credit card debt totaled $3.06 billion, according to Veribanc Inc. This was up significantly from $2.31 billion a year earlier.

The market for charged-off credit card debt is still in its very early days, Mr. Moore said. Not all credit card issuers sell their charged-off debt, but he said he expects more will as buyers emerge.

Contifinancial faces one major competitor-Commercial Financial Services, a Tulsa, Okla., firm that has dominated the charged-off card debt business for years-but analysts think Contifinancial may have what it takes.

"Few companies could challenge Commercial Financial Services, based on the enormous intellectual capacity that they have in the industry," said E. Reilly Tierney, a Fox-Pitt, Kelton analyst. He said Contifinancial is one of the few.

Contifinancial does face a few obstacles, he added. Commercial Financial chief executive William Bartman has many of the biggest players tied up in exclusive purchase contracts, Mr. Tierney said.

The move makes good business sense for Contifinancial, said Piper Jaffray analyst Jeffrey Evanson, in part because the company could offer its home equity product to credit card defaulters to help them pay off their accounts.

Mr. Moore said Contifinancial is going to concentrate first on building the technology needed to select portfolios. "After we've learned more about the consumers, then there are potential opportunities," he said, "but that's not why we got into the business."

The unit will operate separately from Contifinancial's home equity business, Mr. Moore said.

Contifinancial's plans are not spur-of-the-moment, Mr. Moore said. The company searched for a year before finding the right fit with Pacific Advisory Services, he said. Pacific Advisory managed the acquisition of more than $1.8 billion of charged-off consumer receivables in 1997 and more than $4 billion in its lifetime.

Contifinancial plans to securitize its credit card portfolios this year after it has proved itself to the rating agencies, Mr. Moore said.

The new business line has another positive, he said: It is cash-flow positive. "Commercial Financial has been able to securitize at a significant premium to its cost," Mr. Moore said, "unlike most home equity securitizations where you receive a spread over time."

Specialty finance companies have been frantically scrambling to become cash-flow positive in recent months after several took massive writedowns when securities did not pay out as expected.

Contifinancial plans to accelerate its debt purchases after a year, Mr. Moore said. "Once we have data on performance, then we'll be prepared to fund more aggressively. Before we ramp up the numbers, we want to make sure we have these answers."

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