Finance companies are trying a new tack to get subprime borrowers to pay on time: positive reinforcement.

Associates First Capital Corp., Dallas, announced a program Monday that grants moderate- to low-income borrowers lower interest rates once they pay on time for 12 months in a row.

And Money Store, a unit of First Union Corp., has had a similar program since July 1998.

Though lenders said adding such features to loans may be hard for brokers and loan investors to get used to, rewarding good behavior may be preferable in the long run to the traditional approach of hammering delinquent borrowers with late fees, said Jennifer Scutti, a Prudential Securities analyst.

She acknowledged that the lower rates might appear to cut into the profitability of the loans, but added, "If you are rewarding people for paying on time, you don't need as large of a reserve for loan losses.

"If people pay their bills on time, you do not need as many people in collections and have the ease of not going through the back-office end of it," she said.

But Robert Miles, the nonprime manager at National City Corp., Cleveland, said offers like Money Store's and Associates' are difficult to manage internally.

"These kinds of programs require a lot of servicing. And conversely, what do you do if a customer doesn't make good on the payments? Punish them instead of rewarding them?" Mr. Miles said.

By contrast, National City has a five-year renewal program where subprime borrowers are evaluated individually and extended a line of credit at a better rate the next time around if they have made timely payments, he said.

William Acheson, a managing director at GMAC-RFC, Minneapolis, the home equity arm of GMAC Mortgage, said the company offers incentives on its adjustable-rate mortgages, but brokers do not like to deal in loans that carry them.

He explained that brokers would rather see subprime borrowers build up their credit and refinance, resulting in a second fee to the broker. "But on the other hand, if you can pay your borrower to behave the way you want, that is good."

Mr. Acheson also said that it is tough to securitize these types of loan pools because rating agencies can't evaluate them as easily as conventional loans.

For these reasons, he said, such products work better with retail rather than wholesale lenders and if the loans are being held in portfolio.

Associates offers a rate reduction of one-half of 1 percentage point to its home-equity-loan customers paying 13% or more, once they have paid on time for 12 months.

After the second year of timely payments, the rate is cut by another three-quarters of a point, and by still another point after the third year if payments are made on time. That makes for a possible reduction of 2.25 points in three years.

"This improves customer retention, which is key in this competitive market," said David Sandor, a spokesman for Associates. "It helps improve credit quality, which reduces our operating expenses."

The soonest an Associates customer will be eligible for a rate reduction is August 2000. And Mr. Sandor said it will be holding the loans in portfolio.

Money Store offers a quarter-percentage-point rate cut after any 12 consecutive on-time payments during the first four years of the loan. After that, at any time during the life of the loan, borrowers can earn an additional half-percentage-point reduction with 12 more timely payments in a row, making it possible to cut the rate by 1.5 points.

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