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.Itwas a publicly traded company that made small-balance consumer loansto millions of Americans.It wasn t a bank that took deposits (savingsand checking accounts) from the public.That was the point.When itwas founded in 1914 its business model was that it lent money to con-sumers who couldn t get loans from banks.Back then the loans wereused to buy durable goods such as appliances and furniture.The bor-rowers would then pay back Benefi cial in installments.Beneficial s firstoffice allowed consumers to borrow up to $300.By 1924 the lenderboasted 80 offices and was making $13 million in loans a year.Its aver-age loan size back then? A whopping $100.In 2007 the average size of The Repo Man Meets the Bald Granny 29a subprime mortgage was $180,000, according to Source Media, thepublisher of American Banker, National Mortgage News, and other tradeperiodicals.During the Great Depression, banks didn t exactly endear them-selves to the American public by foreclosing on thousands upon thou-sands of homes not to mention wide swaths of farmland.After thebank failures of the early 1930s, President Franklin Delano Rooseveltsigned into law the Federal Deposit Insurance Corporation, whichhelped the banking industry fi nancially but didn t totally alleviate itspublic image problem of being the bad guy that took away people shomes and personal property.Banks weren t to be trusted.In the yearsleading up to World War II, Beneficial thrived by paying close attentionto a middle-class customer base that still viewed banks (and even sav-ings and loans) with suspicion.Beneficial which had little in the wayof competition from other upstart consumer finance firms beat thebanks in the business of making personal loans by having its salespeopleoffer customers personalized service, getting to know the names andages of customers children and taking other steps that made customersfeel more comfortable than if they were applying for a loan at a bank. So said the International Directory of Company Histories.By the mid-1960s when Cugno joined as a management traineefresh out of the Army, Benefi cial had 1,200 retail consumer financeoffices in the United States and Canada.Its origination volume wasless than $900 million, its average loan size just $370.It was peanutsin the scheme of things.Cugno knew it and Beneficial knew it.Allthat changed just about the time Cugno started his career in subprime(even though it wasn t called subprime then). Beneficial, he said, wanted to make larger loans and more money. And that meant onething and one thing only: It needed to get into the business of lendingmoney to its base to Americans who were strapped for cash and who,for one reason or another, avoided their neighborhood bank or S&L.Beneficial needed to begin originating loans secured by residential realestate a borrower s home.And that s exactly what it did.But there were two very importantdistinctions between what Beneficial began doing in the 1960s andwhat banks and savings and loans (thrifts) had been doing for decades.Beneficial and its management trainees, Peter Cugno among them, 30 chai n of b l ameoriginated second liens or second deeds of trust. Oftentimes the firstlien was held in a portfolio by a bank or thrift.Back then there was noactive secondary market where banks and S&Ls could sell their mort-gages.They held on to them.The other distinction? Second mortgageswere made to Americans with, well, less than perfect credit.After all, ifthey had good credit they wouldn t need to take out another mortgageon top of their already existing first mortgage, or so the thinking went.In the 1960s most banks and savings and loans didn t make secondmortgages.It just wasn t done, because the business of making a sec-ond (but smaller) mortgage on top of a fi rst was considered risky.Andthat s where the Cugnos and the Beneficial Finances of the world camein: risk.Beneficial, as any business would, expected to be compensatedfor its risk in the form of charging the consumer a higher interestrate on these second deeds of trust.If the going rate for a first lienwas 9 percent, Beneficial would charge a rate fi ve or six percentagepoints higher for the second 14 percent, 15 percent.In short order,an industry was born.Benefi cial Finance, a publicly traded companywhose forte for 45 years had been making small $100 loans, was nowmaking loans of $1,000 or more.The collateral: a house.(By the timeCugno parted ways with Beneficial, its average loan size was $17,000.)When Beneficial made the decision to enter the residential loanarena, that meant different chores for Cugno and his fellow manage-ment trainees.Cugno admits that the term management trainee was justparlance for learning how to be a loan officer. It took two years, hesaid. Soup to nuts.You make the loan and you re the debt collector. As a loan officer, he did everything from taking the borrower s applica-tion to servicing the loan (making sure the payments were made ontime) and then foreclosing on the mortgage if that s what needed tobe done.Unlike subprime lenders of the modern era, Beneficial s loanofficers were a bit more cautious as to who they lent money to.When a loan application came in to Cugno s branch, the first thinghe would do was pull a credit report from one of the three nationalcredit reporting repositories Experian, TransUnion, or TRW. Thecost of pulling a credit report was $1.25 per lookup, per customer, he said. The principal issue for us was the credit history of the bor-rower. Other issues were how much the house was worth and how The Repo Man Meets the Bald Granny 31much equity there was.If a customer didn t have equity in the home,Beneficial wouldn t make a second mortgage on the property.Lenders like Beneficial were comfortable only if the mortgage theyheld on a house had an acceptable loan-to-value (LTV) ratio.If a housein Orange County was worth $100,000 and the home buyer had amortgage of $80,000 on it after having made a $20,000 down pay-ment, that meant the mortgage had an LTV of 80 percent.(Key to theprocess was obtaining an independent appraisal from a company thathad no ties to Benefi cial.) In the second lien consumer finance nichethat Beneficial trailblazed in the 1960s, the company would not extendcredit to a homeowner if the fi rst and second mortgages (combined)would have an LTV above 80 percent.Benefi cial did not originatefi rst mortgages for Californians and other consumers who were look-ing to buy a new or existing home [ Pobierz całość w formacie PDF ]
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.Itwas a publicly traded company that made small-balance consumer loansto millions of Americans.It wasn t a bank that took deposits (savingsand checking accounts) from the public.That was the point.When itwas founded in 1914 its business model was that it lent money to con-sumers who couldn t get loans from banks.Back then the loans wereused to buy durable goods such as appliances and furniture.The bor-rowers would then pay back Benefi cial in installments.Beneficial s firstoffice allowed consumers to borrow up to $300.By 1924 the lenderboasted 80 offices and was making $13 million in loans a year.Its aver-age loan size back then? A whopping $100.In 2007 the average size of The Repo Man Meets the Bald Granny 29a subprime mortgage was $180,000, according to Source Media, thepublisher of American Banker, National Mortgage News, and other tradeperiodicals.During the Great Depression, banks didn t exactly endear them-selves to the American public by foreclosing on thousands upon thou-sands of homes not to mention wide swaths of farmland.After thebank failures of the early 1930s, President Franklin Delano Rooseveltsigned into law the Federal Deposit Insurance Corporation, whichhelped the banking industry fi nancially but didn t totally alleviate itspublic image problem of being the bad guy that took away people shomes and personal property.Banks weren t to be trusted.In the yearsleading up to World War II, Beneficial thrived by paying close attentionto a middle-class customer base that still viewed banks (and even sav-ings and loans) with suspicion.Beneficial which had little in the wayof competition from other upstart consumer finance firms beat thebanks in the business of making personal loans by having its salespeopleoffer customers personalized service, getting to know the names andages of customers children and taking other steps that made customersfeel more comfortable than if they were applying for a loan at a bank. So said the International Directory of Company Histories.By the mid-1960s when Cugno joined as a management traineefresh out of the Army, Benefi cial had 1,200 retail consumer financeoffices in the United States and Canada.Its origination volume wasless than $900 million, its average loan size just $370.It was peanutsin the scheme of things.Cugno knew it and Beneficial knew it.Allthat changed just about the time Cugno started his career in subprime(even though it wasn t called subprime then). Beneficial, he said, wanted to make larger loans and more money. And that meant onething and one thing only: It needed to get into the business of lendingmoney to its base to Americans who were strapped for cash and who,for one reason or another, avoided their neighborhood bank or S&L.Beneficial needed to begin originating loans secured by residential realestate a borrower s home.And that s exactly what it did.But there were two very importantdistinctions between what Beneficial began doing in the 1960s andwhat banks and savings and loans (thrifts) had been doing for decades.Beneficial and its management trainees, Peter Cugno among them, 30 chai n of b l ameoriginated second liens or second deeds of trust. Oftentimes the firstlien was held in a portfolio by a bank or thrift.Back then there was noactive secondary market where banks and S&Ls could sell their mort-gages.They held on to them.The other distinction? Second mortgageswere made to Americans with, well, less than perfect credit.After all, ifthey had good credit they wouldn t need to take out another mortgageon top of their already existing first mortgage, or so the thinking went.In the 1960s most banks and savings and loans didn t make secondmortgages.It just wasn t done, because the business of making a sec-ond (but smaller) mortgage on top of a fi rst was considered risky.Andthat s where the Cugnos and the Beneficial Finances of the world camein: risk.Beneficial, as any business would, expected to be compensatedfor its risk in the form of charging the consumer a higher interestrate on these second deeds of trust.If the going rate for a first lienwas 9 percent, Beneficial would charge a rate fi ve or six percentagepoints higher for the second 14 percent, 15 percent.In short order,an industry was born.Benefi cial Finance, a publicly traded companywhose forte for 45 years had been making small $100 loans, was nowmaking loans of $1,000 or more.The collateral: a house.(By the timeCugno parted ways with Beneficial, its average loan size was $17,000.)When Beneficial made the decision to enter the residential loanarena, that meant different chores for Cugno and his fellow manage-ment trainees.Cugno admits that the term management trainee was justparlance for learning how to be a loan officer. It took two years, hesaid. Soup to nuts.You make the loan and you re the debt collector. As a loan officer, he did everything from taking the borrower s applica-tion to servicing the loan (making sure the payments were made ontime) and then foreclosing on the mortgage if that s what needed tobe done.Unlike subprime lenders of the modern era, Beneficial s loanofficers were a bit more cautious as to who they lent money to.When a loan application came in to Cugno s branch, the first thinghe would do was pull a credit report from one of the three nationalcredit reporting repositories Experian, TransUnion, or TRW. Thecost of pulling a credit report was $1.25 per lookup, per customer, he said. The principal issue for us was the credit history of the bor-rower. Other issues were how much the house was worth and how The Repo Man Meets the Bald Granny 31much equity there was.If a customer didn t have equity in the home,Beneficial wouldn t make a second mortgage on the property.Lenders like Beneficial were comfortable only if the mortgage theyheld on a house had an acceptable loan-to-value (LTV) ratio.If a housein Orange County was worth $100,000 and the home buyer had amortgage of $80,000 on it after having made a $20,000 down pay-ment, that meant the mortgage had an LTV of 80 percent.(Key to theprocess was obtaining an independent appraisal from a company thathad no ties to Benefi cial.) In the second lien consumer finance nichethat Beneficial trailblazed in the 1960s, the company would not extendcredit to a homeowner if the fi rst and second mortgages (combined)would have an LTV above 80 percent.Benefi cial did not originatefi rst mortgages for Californians and other consumers who were look-ing to buy a new or existing home [ Pobierz całość w formacie PDF ]