Continuing a program of quarterly issuance, American Business Financial Services Inc. (ABFI) will use the Internet to boost its loan originations, focusing on home equity and small business loans going forward.

"The Internet is a channel of business that can't be ignored anymore. We are very actively pursuing it and we want to be a leader in that particular channel," said Executive Vice President Jeffrey Ruben.

On February 1 the company plans to launch, a Web site that would allow small business owners to gain quick access to financing over the Internet.

ABFI also put up a Web site for its home equity business where it introduced the accelerated EasyLoan process, a system that purportedly decreases the time to get approval for loans from weeks to days.

Ruben is confident that giving ABFI's clients quicker access to loans won't affect the quality of the company's portfolio. "We view the Internet as just a different channel for loans. We will not underwrite or service them any differently. But now instead of the phone ringing, its now being clicked on the Internet."

Over the Home Equity Crisis

ABFI is one of the survivors of the 1998 crisis in the home equity arena. While competitors couldn't find financing, "the banks remained rock-solid behind us and there was never an issue about them renegotiating or pooling the line," Ruben said.

ABFI also has a financing scheme in place to enhance liquidity. The company sells subordinated debentures that it markets directly to the public. Individual investors have purchased the product for as low as $1000. ABFI promises to pay the buyer's personal bank at maturity plus a rate of return that varies from 6% to 8% to 12% depending on the maturity the buyer selects.

Currently, the company has more than 11,000 individual investors and holds $270 million outstanding in the product. "These investors are people like you and me and those who read the newspapers where we advertise," Ruben explained

Compared to the small business loan sector, the home equity arena is much more competitive, he stated. "But unfortunately the company has benefited from some of the fall-out that has occurred. We've been able to attract some very talented people and there's a bit less competition out there."

A Foolproof Strategy

Ruben points to the fact that ABFI is a retail originator of loans as a factor of the company's success. "We never were a wholesale purchaser so we have always felt that originating loans and actually processing, underwriting and collecting them creates real value."

As a retail originator, the company can assess prepayment fees on its loans that help retard prepayment rates. At present, ABFI has placed such fees on 90% of its loan portfolio, he explained.

"You also establish a rapport with the borrower. I think it's a psychological tool when you come to collect money for repayment," he said. These factors slow both the prepayment and delinquency rates.

"Our delinquency rate has been bouncing around 3% to under 4% on 30-day delinquencies. If you compare that to the home-equity industry, where the delinquency rate for the 30-day delinquency category ranges from 11% to 13%, its only about a quarter," Ruben said.

He attributes the low rate of delinquencies to the quality of ABFI clients. "When you start looking at the actual characteristics of our loans, you will see that over 60% are classified as A, and 20% is classified as B. We are not deep into the C-D market," Ruben said.

The company also has a small legal division. "It's basically a small law firm that works hand-in-hand with the collection department. Therefore we avoid any kind of downtime in transferring files to outside counsel."

"When an account reaches 61 days or sooner, in many cases, we will have started a foreclosure action. That generates a lot of activity on the side of the borrower. You decide to shake the tree quite a bit and the borrowers end up paying you."

The Heartbeat of America

ABFI has carved a unique niche in the small business loan market. The company originates what is called business-purpose loans. These are not loans secured by big warehouses, factories or apartment buildings, but by small- to middle-sized companies, Ruben said.

"If you walk down the street of any small town you see the pizza parlor, the hairdresser, the funeral director, the hot-dog stand, and the restaurant. These are the type of borrowers we are making these loans out to, sort of the heartbeat of America. These businesses are what make the country run.

"What we typically do is make the loans to a Joe's Pizza parlor and then we will ask for additional collateral in the form of personal guarantees. It's usually a husband and wife team running a small business. They'll personally guarantee that loan, and securing that guarantee will be a mortgage on their home. I think you can see where we end up. I personally classify it more like a home-equity loan in a business-loan wrapper. You end up with a mortgage of someone's home," Ruben explained

ABFI has been securitizing business loans, which was the first asset class that the company securitized, since early 1995. These loans made up about 10%-13% of the company's most recent deals, though they comprised a much larger percentage in ABFI's earlier transactions, Ruben said.

The small business loan market clearly isn't the size of the home equity market but it has proven to be a very profitable channel of business for the company, Ruben said. "The demand seems to be very consistent and steady. We've been able to grow these originations through geographic expansion. Three-fourths of the country still lies ahead that we haven't even touched. We have expanded the program into states like Ohio and Illinois and it has been well-received and welcome.

"There's virtually no competition for the business-purpose loan that we're targeting which is a great and enviable position to be," Ruben added. "We find that the particular market we're targeting is under-served by traditional banks and finance companies and there's a real need for financing with that group."

A Look at What's Ahead

Though its business loan activity is flourishing, the company is saying goodbye to the securitization of equipment leases. "We had securitized equipment leasing in the past. We don't see that to be an asset type that we will securitize in the future. The competition in the market was just too aggressive and the pricing in the market wasn't attractive enough for us to continue to reach the levels necessary to securitize," Ruben stated.

Though ABFI actually did 125% loan-to-value loans in the past, Ruben said, "we may actually make those loans but we're not going to keep them in our portfolio."

No rocking the boat either for its securitization program: "As far as the securitization market goes and what we've always securitized, it's not a very exciting story.

"We've done a lot of fixed-rate paper and all subject to prepayment penalties. Nothing real fancy, no adjustable rates, no 125% LTV loans, not very exciting stuff. But they are the ones giving you the least amount of problems," he noted.

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