Second of two parts

After a two-year shakeout, the independent subprime lenders that did not get shaken out are spending more on technology to reduce paperwork and better analyze consumers with impaired credit so that fewer problem loans are made and end up in securitized pools.

The results have been mixed, but one company that seems to be using technology effectively in the cherry-picking process is Irwin Home Equity of San Ramon, Calif., a subsidiary of Columbus, Ind.-based Irwin Financial Corp.

Irwin Home Equity was founded in 1995 and has never operated independently, but observers say the independents would do well to copy some of its systems practices.

It "has been particularly effective in the technology arena not simply because they buy big computers, but because they have done a lot of studies and incorporated math in such a way that they can identify less-risky borrowers from a mix," said a ratings agency executive speaking on condition of anonymity. "They're looking at criteria that others don't, so their loans are performing better."

Irwin's achievements are not just a result of analyzing more criteria, however.

"Since our inception, we've been able to significantly leverage database management technology to the point where we've developed a competitive advantage," said president and chief executive officer Elena Delgado, who says the company's originations will increase to somewhere between $800 million and $1 billion this year, or roughly twice 1999's volume.

Irwin has developed a credit scoring and grading system that builds on that of the credit-scoring agency Fair Isaac & Co.

"We're constantly analyzing and refining our credit risk management models," Ms. Delgado said. "Now we can select the better credits among those with lower to medium Fico scores, for example."

She said Irwin spends about half as much as its competitors in direct-mail prospecting and reaches better-quality prospects.

"Some of our competitors use title documentation as the source for their mailings, but we're using a methodology that has enabled us to control our solicitation costs," she said.

In risk-based pricing, Irwin prices each loan individually. It varies points, prepayment penalties, and fees in a way that maximizes income, minimizes the impact of default, and helps the company avoid the bane of the industry - early payments, Ms. Delgado said.

"Borrowers can buy down the rates on their loans, and that has really helped us reduce our exposure to prepayments," she said.

Mark Adelson, managing director at Moody's Investors Service, cautions that technology is no panacea.

Subprime loans "require hands-on human labor to get it right," he said.

Mr. Quinn is a freelance writer in Arlington, Va.

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