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.

But is that fear really justified? "Several subprime lenders have experienced problems and, to the best of my knowledge, they weren't using scorecards or risk lending techniques," says Steve Endicott, manager of integrated services for credit scoring pioneer Fair, Isaac & Co., based in San Rafael, CA. "The subprime market is still attractive, and there are many possibilities for serving it well if you have the right tools."

Fair, Isaac has developed what it argues is the first credit scorecard designed to meet the special needs of the subprime auto lending market. Called ASPIRE, the scorecard can be used with or without supporting software. The company also has a system called TRIAD to help nonprime lenders manage accounts after applications are approved.

Endicott says subprime lenders should not use scorecards for prime loans which don't reflect the population that they are lending to. "ASPIRE is built on data specific to the subprime auto market, such as auto repossessions," he says. "It looks at applications and determines which ones are going to perform and which ones are not going to perform."

TRIAD is a combination of account management software and scorecards that help a lender make appropriate management decisions. When an account is delinquent, TRIAD can tell users whether to send a friendly letter, make a telephone call or even repossess the car.


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