County’s Lenders Get on Bandwagon for Equity Loans

Local banks and savings institutions aren’t sitting still as the nation’s major money lenders inundate Southern California mailboxes with offers of low-interest credit cards and revolving credit lines.

Some of the tiniest banks and savings and loans in Orange County are putting out the word that they can beat the rate and fees advertised by their Goliath competitors.

“In the next month or two, residents with decent credit will see a lot more promotion from local institutions, and a lot more from East Coast banks,” said Kenneth Slezak, an industry marketing consultant with Tanguay & Associates in Huntington Beach.

The impetus for the heavy advertising of cut-rate loans and credit cards has come in part from consumer complaints over the widening gap between falling interest rates and stubbornly stagnant high credit card rates of the major banks.

But most of the push has been spurred by the new federal tax law, which will eliminate consumer interest as a deduction on income taxes but will allow deductions for mortgage interest.

Thus, the newest product for most banks and S&Ls; is the revolving line of credit, tied to the equity in homes and designed to let customers borrow as much or as little as they want, for just about any purpose, while continuing to be able to deduct interest payments.

Many of the financial institutions in the fray are pushing their low-interest credit cards and their new home-equity lines of credit to sign customers up for their other services.

The $61.6-billion Los Angeles-based Security Pacific National Bank, for example, is offering a sliding-scale interest rate on its credit cards--from 16% for customers who also have at least four accounts, loans or other services with the bank, to 20.4% for cards issued to people who have no accounts or loans at the bank.

And $175-million Eldorado Bank in Tustin advertises that it has the lowest credit card rate in the West--12% on its premier card.

But customers must have a minimum checking account balance of $2,000, or a loan of $10,000 or more with the bank, to qualify. And the more contacts with the bank, the more dollars get knocked off the $75 annual fee for the low-rate card.

Eldorado, the only Orange County-based bank that is running its own credit card operation, also dropped the rate on regular cards to 17.9% from 21%. All other Orange County banks and most of the county’s S&Ls; issue credit cards offered through such big institutions as Marine Midland Bank in New York.

Downey Savings’ Plan

At Downey Savings & Loan Assn. in Costa Mesa, the $2.5-billion S&L; is fighting high credit card rates with an unsecured revolving line of credit. Using a separate checking account that comes with the credit line, a Downey customer can pull out any amount--up to his approved limit--and pay it back at 4.5 percentage points over the S&L;’s prime rate. That amount now comes to 14%.

And members of the Industrial League of Orange County Credit Union can get a similar line of credit--secured by the equity in their homes and, therefore, deductible--at a fixed rate of 10.5%. The credit union is one of the few financial institutions offering fixed rates on revolving lines of credit.

Out-of-state banks are using reduced credit card and loan rates to build a local customer base as they await the start of interstate banking next year. And California bankers are using the new programs as a means of building up their customer bases to protect their market share, consultant Slezak said.

Competition in California, however, is less intense that it is elsewhere in the nation.

“In Atlanta, it’s home-equity war--no closing costs, no points, no appraisal fees, no annual fees,” said Atlanta-based S&L; consultant John Jedlicka. And in Connecticut, where the legislature recently lowered the credit card interest rate ceiling to 15%, a statewide rate war broke out as interest charges fell as low as 11.75% during the summer.

“It’s definitely worth it for Californians to shop around,” said Jedlicka, an industry consultant in Atlanta. With low-interest revolving line of credit tied to homeowner equity, he said, “residential real estate is still gold in California.”

Floating Interest Rate

The Industrial League credit union’s president, Virgil Grizzle, predicts that the “home-equity line of credit is going to become a very important lending tool for all institutions.”

Still, for home-equity lines of credit in California, nearly all financial institutions charge loan fees, application fees, closing costs or all three. And most use a floating interest rate, usually two or three percentage points above an index such as the bank’s prime rate or the rate it pays for $100,000 certificates of deposit.

What many consumers may not realize, bankers said, is that the prime rate itself--the interest supposedly charged to the bank’s best customers--usually varies from bank to bank. For some Orange County institutions, for instance, two percentage points over prime currently means a 9% rate, while other local banks with the same formula come up with a 10% rate.

The suddenness with which lending institutions are putting together home-equity lending programs has made some bankers and consultants cautious.

“If the institutions are not cautious in evaluating the risk factor, there could be substantial losses for financial institutions and customers,” consultant Slezak said. “Most economists predict another recession before 1990, and in those times, most consumers go first to readily available cash--savings, credit cards, lines of credit.”

Consumers who abuse their credit card privileges--by, for instance, continually charging up to the limits or paying only the interest each month--should not be allowed to abuse home-equity lines of credit in the same way, Slezak said. “It could wind up costing consumers their homes,” he said.

Some Caution

A few bankers, like Craig Collette, president of Landmark Bank in La Habra, and Richard Korsgaard, president of Mariners Bank in San Clemente, are leery of turning consumer debt into mortgage debt. They are limiting their banks’ unpublicized home-equity lines of credit to affluent customers and those with good credit histories.

“A lot of people think (home-equity lending) is the way people are going to borrow all consumer debt in the future,” Korsgaard said. “But I think people will think twice because their homes are a little bit more sacred to them, and they’re not going to take money out just to go on a vacation, even if there are tax benefits to them.”

And while many institutions allow customers to pay off only the monthly interest on amounts borrowed from their lines of credit, some banks--like Liberty National Bank in Huntington Beach--require interest and partial principal payments each month, said Philip Inglee, Liberty’s president.

“It protects people who mistreat their credit cards,” he said about the policy. His bank, however, is one of a few local institutions that are eliminating loan fees for a short period to encourage customers to take out home-equity lines of credit.

THE COST OF CREDIT

Institution Intere Credit Unsecured Banks Cards Line of Credit Bank of Westminster NA NA California City Bank 19.5% 14.5% Dana Niguel Bank 19.8% Prime + 2 points Eldorado Bank 12-17.9% Prime + 2.5 Liberty National Bank 19.8% NA Marine National Bank 19.8% Prime + 2 to 3 Mariners Bank 19.8% NA Mission Valley Nat’l Bank 19.8% NA Monarch Bank 19.23% NA National Bank of So. Cal. 19.8% NA Orange National Bank NA NA SAVINGS & LOANS American S&L; 15% NA Beverly Hills S&L; 15.9% NA Butterfield S&L; 18% 16.9% Downey S&L; 19.8% Prime + 4.5 Far West S&L; NA 6-mo. CD rate + 4.5 4.5 or 19% fixed Household Bank 19.8% Prime + 5.75 Western Financial Savings Bank 19.8% NA CREDIT UNIONS Industrial League of O.C. 16.92% NA O.C. Federal 18% 18% O.C. Teachers 14.25% 14.25% MAJOR BANKS Bank of America 19.8% 3-mo. Jumbo CD rate + 7.5* First Interstate 21% NA Wells Fargo 17-20% 1-mo. Jumbo CD rate + 4.25 Security Pacific 16%-20.4% 1-mo. jumbo CD rate + 4.25

Institution st Rates Secured Banks Line of Credit Bank of Westminster Prime + 2 points California City Bank NA Dana Niguel Bank Prime + 2 Eldorado Bank Prime + 1.5 Liberty National Bank Prime + 1.95 Marine National Bank Prime + 3* Mariners Bank Prime + 3* Mission Valley Nat’l Bank Prime + 2.5* Monarch Bank Prime + 3* or 12% fixed National Bank of So. Cal. Prime + 2.5 Orange National Bank Prime + 2.5* SAVINGS & LOANS American S&L; NA Beverly Hills S&L; NA Butterfield S&L; NA Downey S&L; 11th Dist. Cost of Funds + 3 Far West S&L; 6-mo. CD rate + 4.5 Household Bank Prime + 2.5* Western Financial Savings Bank Prime + 3.75* CREDIT UNIONS Industrial League of O.C. 10.5% fixed O.C. Federal NA O.C. Teachers Cost of funds + 3* MAJOR BANKS Bank of America 3-mo. Jumbo CD rate + 3.75* First Interstate NA Wells Fargo 1-mo. Jumbo CD rate + 3.5 Security Pacific 1-mo. jumbo CD rate + 3.25

* Maximum points charged. Some programs offer lower points. NA-not available or not offered to the general public.