Diversification is helping certain subprime lenders stand out from the crowd.

A case in point is American Business Financial Services Inc., Bala Cynwyd, Pa., which was rewarded for its diversified pool with a "buy" rating from Prudential Securities analyst Jennifer Scutti. American Business makes small-business and home equity loans and has an equipment leasing division and a bank partnership program.

Several subprime lenders have bought into new businesses in the past year. Contifinancial Corp., New York, last week announced it was taking public a real estate investment trust that will make commercial and multifamily loans. The company has already bought into the nonperforming credit card business.

American Business, though, has had a diverse loan mix for years. The company has come a long way from where it started in 1987, when chief executive Anthony Santilli and his wife Beverly were working from their kitchen. The two have parlayed $800,000 in private capital into a 600- employee company with a market capitalization of $80 million.

Retail originations are the "essence" of the company's strategy, said Mr. Santilli during an interview at the National Home Equity Mortgage Association conference in West Palm Beach, Fla., last week.

The company caters to small-businessmen and homeowners who need capital but are turned down by banks or turned off by the time that it takes to get a bank loan.

"We've closed a loan ... outside the operating room" for a surgeon who did not have time for the hassle of a bank loan, Mr. Santilli said.

American Business is securitizing about $100 million in subprime loans every quarter, and selling off conforming and high loan-to-value pools. The company does use the gain-on-sale accounting that has been controversial lately, Mr. Santilli said, but believes in full disclosure of its assumptions.

The company's losses and delinquencies are significantly lower than the industry average. As of December, 3.30% of American Business loans were delinquent, versus a an average in the home equity industry of 6.71%, according to Moody's Investors Service.

"My wife is a tough underwriter," Mr. Santilli said. Beverly Santilli heads American Business Credit Inc., the company's business loan unit.

American Business is also somewhat unusual in that it taps private investors for some of its funding costs. As of December, American Business had raised $80 million in capital from 3,800 investors. The investment carries an average return of 9.26%.

The "capital markets are very fickle," Mr. Santilli said. Several subprime mortgage companies placed themselves on the block recently when capital dried up. But he said he has seen nothing of the sort for American Business. "If anything, it's been going the other way. The past six months have been the best ever."

The company bought New Jersey Mortgage and Investment Corp. in October. New Jersey Mortgage and Investment has a home equity unit and an equipment leasing arm.

But rather than merge New Jersey Mortgage into Upland Mortgage, American Business' home equity division, Mr. Santilli opted to allow the units to go head-to-head in states where they both operate, saying he felt the competition would boost the company's slice of the market. "I like the market-share battling," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.