First Finance, a fast-growing subprime home equity lender, is stepping into uncharted territory with the introduction of a secured credit card.
The card, due out Nov. 1, will offer borrowers with impaired credit history a MasterCard backed by the equity in their home.
First Finance, Bloomfield Hills, Mich., may be the first to offer such a card to subprime borrowers but certainly won't be the last, credit card experts said. In fact, some predict the product will revolutionize the secured card market and give already cash-flush home equity lenders yet another high-return revenue stream.
Subprime mortgage lending and secured credit cards are a "marriage made in heaven," said Michele Turkel, president of Spectrum International Consulting Corp., Scarsdale, N.Y. "I'm surprised more people haven't tried it."
Finding the right target population and helping them come up with a deposit are the two biggest hurdles secured card issuers face, Ms. Turkel said. The First Finance venture eliminates both problems, she said.
Borrowers who take out a First Finance home equity loan can get a credit card by rolling their deposit into their loan amount. "Folks who know they have bad credit can use the funding from their mortgage-they don't have to come up with the cash for a balance," Ms. Turkel said.
First Finance will originate the accounts and then send the information to Cardholder Management Services, a Plainville, N.Y., credit card servicer.
Merrick Bancorp, Salt Lake City, will issue the card. Randall Sage, chief executive of First Finance, is predicting that about 80% of his customers who are already taking out a home equity loan will want a card- for a total of about 14,000 accounts in 1998.
"These borrowers need a fresh start," Mr. Sage said. "Everyone is offering a fresh start through" a home equity loan, he said, "but how does that help the borrower's credit?"
The card is more of an affinity product, Mr. Sage said, much like the term life insurance that First Finance offers in conjunction with Fidelity Security Life in Kansas.
Selling credit cards to home loan borrowers is "something other subprime mortgage lenders have thought about" but have not done yet, said John Costas, senior vice president at Cardholder Management Services. In fact, other home lenders have approached Cardholder Management to develop a similar product.
Delta Financial Corp., Woodbury, N.Y., is one subprime lender that considered the product. But borrowers didn't respond well enough to make it worthwhile, Delta said.
But First Finance's direct marketing approach-the company advertises mainly through television ads-is suited to credit card originations, Mr. Costas said.
He said he is hoping that the First Finance borrowers, who often need to take out a home equity loan to pay off massive credit card debt, will treat this card with extra care because they have learned a lesson from their mistakes.
The home-secured card is less risky for issuers than a traditional secured card, he added.
Borrower fraud is one of the biggest problems that secured card issuers face, Mr. Costas said. But potential First Finance borrowers are less likely to commit fraud, he said.
"These people have already qualified for a home equity loan with First Finance; it's a higher standard of underwriting than most secured card lenders'," Mr. Costas said. "There is a real address, not a post office box."
In addition, the cards are backed 100% by the borrower's home, not by a partial bank deposit, added Ms. Turkel. "It'll give bankers a more secure feeling. This may be the start of a real trend."