As lenders brace for more losses from bankruptcies, companies that help flag risky customers are having a field day.

Demand from banks for more accurate predictors is higher than ever, these companies say. Rising bankruptcies and talk of an economic downturn have forced lenders-particularly in the credit card business-to modify and update their risk management practices.

"The feeling is that the bankruptcy problem will get worse in the next two to three years," said Don McNelley, marketing manager of bankruptcy solutions at Fair, Isaac and Co. in San Rafael, Calif.

The last two years have seen a spate of products to help pinpoint problem customers. And each of the six leading companies in this area of predictive software is always trying to increase the sophistication of its tools.

Traditional scoring products assign numbers based on a customer's payment and credit histories. When a risky customer was identified, a lender would pull a credit report to get a complete picture of the person's financial situation before taking an adverse action, such as closing an account or reducing a credit limit.

Newer products size up customers by the transactions they make and by changes in patterns. Someone who suddenly starts using a credit card for grocery shopping or cash advances-or who pays the minimum monthly amount billed-could be viewed as a higher risk.

Companies at the forefront of this technological approach are HNC Software Inc. of San Diego, which sells a transaction-based model called ProfitMax, and Nestor Inc. of Providence, R.I., which offers Prism Bankruptcy.

Nestor said Prism Bankruptcy can identify, up to six months in advance, accounts that will go bankrupt. It also said it is on the verge of testing the system with two major credit card issuers.

"One transacts in a certain fashion," said John McKenna, Nestor's director of business development. So when a cardholder goes from convenience use to subsistence use, he said, it raises red flags.

Mr. McKenna contended that lenders need models for both transaction and payment histories to "provide the full wallet picture." Transaction models spot trouble only on one account.

ProfitMax and Prism Bankruptcy look for so-called surprise bankruptcies - borrowers who reveal few signs of trouble before they file.

According to Visa U.S.A., 40% of bankruptcies result from medical crises, unemployment, or divorces. About 10% of filers were delinquent only five to 29 days before bankruptcy.

Bankruptcy losses make up about 3% of lenders' outstanding debt, according to Jerry D. Craft, president of Inficorp, an Atlanta consulting firm. Bankruptcies filed in 1998 set another one-year record, totaling 1,350,118. This was 95% higher than in 1990, according to the Administrative Office of the U.S. Courts.

In February, Equifax Inc. of Atlanta, a credit bureau that also sells portfolio management services, began touting Bankruptcy Navigator Index 99, a second version of a two-year-old predictive system.

Version three is in development, and Equifax is offering a new transaction-based model in partnership with HNC.

"The speed at which we develop new products is increasing because consumers' behavior is changing so rapidly," said Thomas J. Blischok, executive vice president of Equifax's knowledge engineering unit. "People are getting to the edge of the cliff much quicker. They have more cards, and as a result they have more credit."

Equifax's competition includes Trans Union Corp., Experian Corp., HNC, Nestor, and Fair, Isaac. The companies have philosophical differences about how to evaluate customers-or whether there even is a right way to do it.

"There is a lot of excitement generated about the use of transaction data," said Mr. McNelley of Fair, Isaac, "but I don't think it is meant to be a replacement for historical behavior scores."

His company, the pioneer and leader in the credit scoring business, offers transaction-based models on a limited basis. But, with Visa U.S.A., it is rolling out a large pilot test of a product called Bankruptcy Prediction, which is to combine transaction and payment history data.

Given lenders' worries about the economy and how it might affect consumer spending, Equifax is marketing Recession Navigator, which it introduced in the United Kingdom.

"Not that we believe there will be a recession" in the United States, Mr. Blischok said.

Equifax also has a new business unit, risk sciences, that focuses on advanced modeling techniques and neural networks. Mr. Blischok is its supervisor.

Banks and their software vendors seem to be bracing for bad times.

Though evidence is scant, it is a popular belief that people who filed for bankruptcy about five years ago may do so again within the next few years, Mr. McNelley said. If the economy turns south, he said, the industry could see a wave of second-time filers.

U.S. Rep. George W. Gekas, R-Pa., a champion of bankruptcy reform, recently predicted that the House of Representatives would soon pass legislation aimed at making bankruptcy filers who can afford to do so pay off more of their outstanding debt. The credit card associations have been lobbying for such a law.

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