Home Equity: Home Equity Pioneers Invade Business Lending

Specialty finance companies that blazed trails for banks in the home equity sector are now carving a new niche in commercial lending.

The latest American Banker statistical tables on the specialty finance sector (see page 8) show strong growth for home equity lenders in 1997,partly offset by divestitures.

There are indications that commercial lending was becoming a hot business as well.

Finance companies have been pursuing commercial finance assets. At Associates First Capital Corp., Dallas, a more than 30% rise in commercial finance receivables last year helped boost assets almost 20%, to $57.23 billion.

Competition for commercial finance accounts is "pretty fierce" right now, said Stephen Ban, senior vice president and director of investor relations for Heller Financial Inc., Chicago. "As the economy gets better, you see competition from banks and local markets increase," he said.

Nonetheless, Heller managed to increase its assets by 29.6% in 1997, in part because of an international acquisition but predominantly due to the growth in the company's commercial lending, factoring and equipment financing businesses.

"These industries are all so big" that increased competition need not put a stranglehold on growth, Mr. Ban said. "The equipment financing industry is a $200 billion-a-year business," he noted. "Small business lending is a $350 billion-a-year business."

Players that are committed through the up cycles and down cycles can "grow by focusing on what they want to do," Mr. Ban said.

In fact, commercial finance companies "look forward to a bit of a recession," he said. "Not only do banks pull out of the business then, they pull out precisely at the time that cash flows begin to tighten" for business customers.

Over the years, the specialty finance firms have proved themselves more nimble than banks, leading the charge most recently into unsecured consumer lending and then into home equity.

"The whole consumer finance industry has always carved a niche out for itself in markets that banks didn't compete in, or didn't compete in well," said Robert B. Willumstad, chief executive of Baltimore-based Commercial Credit Co., a credit card and home equity subsidiary of Travelers Group whose home equity originations grew 50% in 1997.

Banks' following the lead of consumer finance companies in the home equity sector has precipitated a rash of home-equity-related acquisitions.

The next step for consumer finance companies may very well be small- ticket commercial finance-making small business loans, leasing heavy machinery, and factoring, the business of buying receivables.

Finance companies with commercial concentrations are poised to do even better in the years ahead, analysts say.

"Commercial finance companies tend to perform during a recession," said William Ryan, analyst with Salomon Smith Barney, New York. "Typically they gain market share as commercial banks pull out."

Additionally, commercial lending carries the same level of risk as consumer lending, Mr. Ryan said, but chargeoff levels are lower.

The tables show 9.8% growth in assets and 7.8% growth in income for the top 25 finance companies in total capital funds-and spectacular performances by the industry leaders.

Assets of Commercial Credit Co. grew nearly 40%. Net income of FirstPlus Financial Group, Dallas, a specialist in high-loan-to-value home equity loans, soared 306%. And capital funds of Household International Inc., which represent its ability to obtain financing, jumped 36%.

Sears Roebuck Acceptance Corp., Wilmington, Del., was the only company to rank among the top five gainers in income, assets and capital funds. The finance arm of Sears Roebuck, the second-largest retailer in the United States, increased assets and income almost 40% during 1997. Assets at yearend 1997-all receivables from the Sears brand credit card-came to $16.7 billion, which if Sears were a bank holding company would put it among the top 50.

"Over the past several years Sears Roebuck Acceptance has been very aggressive in signing up new accounts," said David Toung, an analyst with Argus Research Corp., New York. But the growth has not come without a downside, he noted. "They've had their share of credit card quality issues- they've had to take a charge against reserves, increase researves, and take writeoffs."

Many finance companies used acquisitions to substantially increase their assets. For example, assets of Commercial Credit Co. grew 39.3% last year partly because it bought Security Pacific's consumer finance unit from BankAmerica Corp.

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