Thursday, November 20, 1997

Banks find inventive ways to offer home equity loans

HOUSTON (AP) -- A new law designed to make it easier for Texans to borrow against the equity in their homes is creating competition among banks and causing concern among industry experts.

Lenders are actively seeking potential borrowers weeks before home equity loans become available Jan. 1, according to the Texas Journal of The Wall Street Journal. And they're offering some seriously competitive packages.

NationsBank Texas, the state's biggest bank, is offering its approved home-equity loan applicants an extra unsecured loan of up to $25,000, available immediately, with a lower interest rate.

Money Store Inc., a New Jersey mortgage company, is promising up to 125% of a borrower's equity, its customer-service agents say. But there's a catch -- the portion above 80% of equity would be unsecured.

The new law "is sure to be tested by people who are looking to gobble up as much of this business as possible," said Keith Gumbinger, a vice president of HSH Associates, a Butler, N.J., lending market research firm.

"It's going to be a wild and woolly world down there for a while."

That's exactly what industry watchdogs fear.

They're concerned banks are twisting the law as they fight for a piece of the projected $123 billion market. By extending incentives that lawmakers didn't plan, they argue, lenders could be encouraging Texans to get into credit trouble.

"I think this is just a real cautionary period ... before this thing becomes law," said Leslie Pettijohn, head of the Texas Credit Commission. With "no Texas experience" to fall back on, she said, it's hard even for her office to be certain what's legal and what's not.

The day after Texans passed the home equity measure by a 60-percent vote, state Attorney General Dan Morales issued a statement to banks, explaining when they can start taking applications from homeowners and when they can begin loaning money.

NationsBank says its $25,000 loan offer functions separately from its home equity loan, and therefore is legal.

"We are not going to do anything that goes against the spirit of the law," says Chuck Baynard, executive vice president for consumer banking for NationsBank Texas, a unit of NationsBank Corp., Charlotte, N.C.

Other lenders are offering to waive closing fees or to match competitors' lowest interest rates.

"They're giving something extra to the consumer in order to gain a market presence, and that's good for the consumer," said Len Blum, managing director and head of the asset-backed securities group for Prudential Securities, the nation's largest securer of home-equity loans.

Banks likely won't break the law because they'd risk losing the entire loan under state law, said Rob Norcross, president of the Texas Conference for Homeowners' Rights, which supported the law.

But Ms. Pettijohn and other observers say they expect to see ever more "inventive" pitches to consumers that seem better than they really are.