Narex Ltd. is using mathematical modeling technology for a new purpose: to rate the agencies that collect on bad loans.
Though Narex, a three-year-old company in Lakewood, Colo., is not alone in applying data models to delinquent and written-off loan accounts, it claims to be the only one rating debt collectors at a time when lenders are frustrated at the rising tide of arrears.
"We found that people were faced with increasing delinquencies, declining recoveries, and a pressure to reduce collections costs," said Bernhard Nann, president of Narex.
The American Collectors Association reported that recovery rates declined to 16.7% in 1996, the latest figure available, from 22% in 1995.
Narex aims to pinpoint collectors' weaknesses and strengths. One agency, for example, "may be good at collecting loans under $500 from people who have low incomes and live in the greater Chicago area," said Mr. Nann.
The same agency, he said, might have performed poorly on credit card debt over $1,000 from higher-income people in the Los Angeles area.
With Narex's findings, Mr. Nann said, a lender can place its receivables with the agencies best-suited to the given task.
Typically, lenders randomly distribute receivables among client agencies. Those that do best will tend to get more of a lender's business over time.
Narex contends collection agency performance changes because of staff turnover and other factors.
"Our models constantly refresh themselves," said Mr. Nann, a former executive at Experian. Narex continually monitors the behavior of consumers and collectors, and folds new patterns into its ratings, which are updated monthly.
Narex sells its agency evaluation service to lenders, and a similar one to collection agencies, to help them improve and monitor their performance.
Narex also provides other ratings to lenders. The company calculates the likelihood of successful collections, the expected recovery amount, and the expected profitability of an individual account.
Other companies offer similar systems, including the leader in credit- scoring systems, Fair, Isaac & Co. But Narex says few companies produce models for charged-off accounts that have gone through the collections process and are typically written off after 180 days.
According to a study by M. Kaulkin & Associates Inc. in Bethesda, Md., the likelihood of recovery is 58% when an account is 30 days delinquent, but only 16% when it is 180 days past due.
Narex produced its first models last year, and they are in pilots with several companies. One is American General Finance of Evansville, Ind., which had not been using models for charged-off accounts until it began working with Narex six months ago.
The ratings determine the strategy a collector might use. For example, a collector using several kinds of dunning letters can learn from Narex which type of letter is effective with which kind of debtor.
"Our models take into account the collection process that is in place, not just the consumer's characteristics," said Mr. Nann.