[Collections & Credit Risk - Table of Contents] June 2001

Porfolio Grooming Heats Up As Economy Cools

Lower cost and greater access boost the popularity of tools that help determine which loans to hold, which to place, which to sell - and how soon.

By Kate Gibson

For the first time in its six-year history, Narex Inc., a Golden, Colo.-based scoring consulting firm, has a client looking for help in accelerating chargeoffs. The creditor is considering axing by a third the time for writing off certain accounts.

There's a strong business case to be made for taking such drastic action, says Bernhard Nann, Narex president and chief executive. With credit quality deteriorating in some quarters and a shaky economic climate overall, credit and collections professionals are exploring various defensive strategies. "The best defense against an economic downturn is the constant monitoring and tracking of your portfolio," says Janice Horan, director, global financial services group, San Rafael, Calif.-based Fair, Isaac & Co. Inc.

Vendors are attempting to address the heightened concerns with software products and services to help credit risk managers more intelligently manage their portfolios - identifying which accounts to work, place, or sell. "They know they have to be smarter about this. It's a very competitive marketplace, and the accounts being sold are liquidating at lower rates," says Timothy J. Olzer, principal, Sigma Analytics and Consulting Inc., Atlanta.

"Forecasting continues to evolve," says Dann Adams, Atlanta-based-Equifax Inc.'s senior vice president of sales, North American Information Services. In contrast to three or four years ago when huge mainframes were required to perform the calculations, the ability to crunch millions of numbers now resides in smaller servers and desktop computers, Adams points out. The lower costs and increased access mean a growing number of entities are turning to predictive technology. These days, Adams says, "you see a lot of midsize banks and collections agencies scoring collectability."

John Theuer, collections manager at Hughes Aircraft Employees Federal Credit Union, Manhattan Beach, Calif., disagrees. "Unfortunately, in most [smaller] institutions collections is still the stepchild," he says. Management is more willing to invest in marketing technology, for instance, to bring in money, he says.

Still, the uncertain economy has creditors looking for help in identifying which accounts to place or sell early, some in the pre-chargeoff period.

At Hughes, Theuer credits pro-active senior management for investing in a new collections software system with automated decisioning capabilities furnished by Experian Inc., Orange, Calif. With more than 200,000 members, the credit union handles in excess of $100 million in credit card receivables. The new system is used to score and then call past-due accounts most likely to pay. Within the next year, Theuer expects the system will be reconfigured to determine the best treatment, for instance indicating which accounts to send out to third-party collectors.

In September, Experian released Portfolio Management Package, a customized collections tool for creditors. A post-chargeoff solution now in development is aimed at collections agencies. Future releases will focus on the telecommunications and revolving credit industries. All offer scoring, portfolio segmentation, and decisioning technology.

"Time is of the essence. Rather than calling at random, you want to know who is more likely to pay," says Amar Bougrab, a market segment manager for Experian Information Solutions. The idea, says Bougrab, "is to put some intelligence behind the process." That intelligence has moved beyond traditional scoring models and automatically prioritizing recovery steps to adaptive control systems, which bring consumer behavior and other attributes into play.

Behavior Counts
Perhaps longest on the adaptive control scene is Fair, Isaac's Triad system, in use for more than 10 years. The system, which counts Bell Atlantic among its more than 100 users worldwide, calculates behavior scores and strategies that are routinely monitored and adjusted according to their ability to reduce the cost of debt. Bell Atlantic, for instance, saved an estimated $70 million in collections costs and reduced its net bad debt by 25% in 1996, its first year using the Triad system, according to Fair, Isaac. While most large players in the financial services arena use Triad or a similar system, smaller players often lack the capital or the infrastructure to implement such a process. Fair, Isaac is exploring the use of application service provider, or ASP, technology to bring its capabilities to smaller shops.

If it can be determined in advance that there is not much chance that a segment of a portfolio's delinquent accounts will pay any part of the outstanding balance after 120 days, says Narex's Nann, why continue the pre-chargeoff period for the standard 180 days? While accounting and other issues may keep Nann's card-issuing client from going ahead with its idea of charging off a segment of its portfolio earlier than usual, Narex is actively looking into developing the decision technology needed to successfully implement the concept. The difference in payment behavior among various segments of delinquent accounts is dramatic. The top 15% of accounts delinquent at 120 days, Nann says, are more likely to pay during the following 60 days than the bottom 15%, by a ratio of 40-to-1.

Stockholders and federal regulators concerned about credit quality are helping fuel a move toward more careful and frequent reviews of loan portfolios. Executives at banks and other lending institutions are on the lookout for predictive tools, says Equifax's Adams. They want to be able to explain what will happen if the economy continues to deteriorate, he says.

While Equifax portfolio-monitoring software typically updates portfolios on a monthly or quarterly basis, a handful of clients with more robust systems get nightly updates. "The lender sets the criteria of what they want [to have happened] to be notified," says Adams. "It is an electronic setup with a nightly batch feed," he explains, with the lender automatically notified if a significant event, such as an account holder declaring personal bankruptcy, occurs.

Commercial Side
On the commercial side, Equifax expects to go live this month with its Small Business Financial Exchange, a data repository that has the nation's 20 largest small-business lenders sharing information. The first phase of the member-owned exchange involves underwriting information on millions of small companies. A second phase, involving portfolio monitoring, is due to begin in the third or fourth quarter.

Sigma Analytics' DecisionMiner software, which became commercially available at the end of 1999, is already installed at five different client sites. One collections recovery client, Olzer says, wanted the system customized for predicting portfolio liquidation rates. Using credit scores and other factors, the software reviews past-due accounts, weighing in with the likely outcomes of keeping the paper or selling it. Olzer likens the process to a computer chess strategy, where the computer knows a piece can go in several directions, and determines the possible outcomes of various moves several turns ahead.

On the post-chargeoff side, portfolio grooming is active, says Nann. Customized models can project the anticipated cash flow from segments of portfolios, helping clients determine the value of keeping or selling accounts.

Narex is going live this month with PlacementsPlus, a service that simulates the likely outcome of several possible steps as accounts charge off. Five major issuers - including telephone, private-label, and bank cards companies - are on board to use the service, which considers more than 100 factors in predicting the amounts clients can expect to recover, on an account-by-account basis. Narex predicts users will see between 8% to 20% improvement in net recoveries.

Clearly, vendors are focusing on providing portfolio-grooming tools for a wider array of clients - an appropriate strategy in shaky economic times.

Who's Who in Portfolio Grooming (Partial List)
Company Location Website Services
American Management Systems Inc. Fairfax, Va. http://www.ams.com Strata Enterprise, a multi-faceted, one-stop decision management application, supports the credit life cycle, including collections and recovery.
Equifax Inc. Atlanta http://www.equifax.com Offers solutions to assist in improving recovery rates, assessing collectability of accounts, and prioritizing portfolios to maximize productivity.
Experian Inc. Orange, Calif. http://www.experian.com Portfolio Management Package, a predictive tool with advanced behavioral scoring techniques.
Fair Isaac & Co. Inc. San Rafael, Calif. http://www.fairisaac.com TRIAD, an automated strategic account/customer management system, with behavior scoring, adaptive control software, and strategy consulting.
London Bridge Group Norcross, Ga. http://www.london-bridge.com Debt Manager features flexible, client definable and maintainable workflow processes and strategies for automated decisioning.
Narex Inc. Golden, Colo. http://www.narex.com Provides tools for accurately predicting the amount that can be collected and the optimal method of collecting past-due accounts.
Sigma Analytics Atlanta http://www.sigmaanalytics.com Consulting firm specializing in applied data mining and modeling for the credit industry. Products include DecisionMiner.
Sources: The companies

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