Seeking a way to resolve its image crisis after being sued for predatory lending two years ago, Delta Financial Corp. has forged a partnership with the least likely of allies: the Association of Community Organizations for Reform Now.

Under the partnership, Delta is to notify Acorn if any Delta borrower counseled by the association falls delinquent. Acorn is then to follow up with a workout aimed at keeping the borrower from defaulting.

Delta’s move illustrates what observers and public relations experts say is a growing challenge for the subprime industry: to fashion positive images despite an association with predatory lending.

In 1999 the New York Attorney General’s Office, the New York State Banking Department, and the U.S. Department of Justice accused Delta of inducing low-income homeowners to take out high-interest mortgages they could not afford, then foreclosing on properties when payments were not made. Delta has settled with all three, though company officials continue to rebut the charges.

“We fell victim as one of the first companies attacked” for predatory lending, said Hugh Miller, president and chief executive of Woodbury, N.Y.-based Delta. “We have had to make some efforts to shed the association,” he said.

In the wake of increased public scrutiny and awareness of abusive lending, subprime lenders not only have to pay more attention to the way they do business but also ensure they are burnishing their image through community outreach, said Dick Schmidt, managing director of the finance company group at Standard & Poor’s.

Mr. Schmidt said subprime lenders may not have to go so far as to enter into partnerships with groups like Acorn. Education programs might prove just as effective, he said.

Others say subprime lenders have their work cut out for them.

“Once the industry has been affected by such a negative term as predatory lending, anyone who is dealing with the image problem is trying to turn a lion into a pussycat,” said Levi Rabinowitz, a Baltimore image consultant. “That’s a tough job.”

That a lender such as Delta would have to make peace with a consumer group has some industry sources rattled.

“It’s almost like you’ve saddled with the devil,” said Bill Dallas, chief executive officer of San Jose, Calif.-based 1st Franklin Financial Corp. “I don’t need Acorn or any other group running my business. Our druthers would be to [prevent] a foreclosure if we could, and I don’t need a lot of pressure from community activists.”

J. Denis O’Toole, vice president of federal government relations at Household International Inc., said Delta’s alliance is not likely to have many imitators. “I don’t think what they’re doing with Acorn is a significant development one way or because they don’t have a big part of the market — they are a regional player.” he said.

Others argued that the Delta-Acorn partnership may not be the best way to solve Delta’s — or the industry’s — problems.

Mr. Rabinowitz said the partnership is good because it gives Delta “the patina of being community-oriented and consumer aware and sensitive.” He cautioned, however, that Delta is disarming itself by making Acorn the workout agency for bad loans — an arrangement that could produce conflicts.

1st Franklin’s Mr. Dallas criticized the partnership for similar reasons. “Laws and investors make rules telling us exactly how we can foreclose,” he said. Acorn’s workouts could interfere with the process and cause lenders to “run afoul” of investors, he said.

“A consumer group’s interest is the borrower’s interest,” said Ismene Speliotis, housing director for New York’s Acorn Housing Corp. “Mortgage bank after mortgage bank keeps telling the world, ‘We are not interested in foreclosure, we don’t make money on it.’ If that’s the truth, why wouldn’t you want to do a workout? If the consumer group can help facilitate the conversation, why wouldn’t you want them to be there?”

Mr. Dallas argued that the strain of outside intervention such as anti-predatory lending laws could force lenders not to lend in certain places.

Calabasas, Calif.-based Countrywide Credit Industries recently decided to abandon subprime lending in North Carolina after an anti-predatory lending law took effect there.

“If you apply too much pressure, then people don’t lend,” Mr. Dallas said.


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