More sophisticated credit scoring can mean the difference between profit and bankruptcy for subprime lenders, mostly auto and home equity finance companies willing to take the chance on high-margin, credit-starved consumers.
Consider the market: After a slew of auto finance companies went public in 1994 and 1995, their stocks raced to record highs, mainly because subprime lenders can charge interest rates in excess of 20 percent. But the stocks fell after investors were frightened by reports of rising delinquencies and charge-offs at several companies. Then, earlier this year, Mercury Finance, of Lake Forest, IL, nearly went bankrupt following an accounting scandal, and Dallas-based Jayhawk Acceptance Corp. had to file Chapter 11 as a result of customer defaults. Many began to question the prudence of subprime lending.