Offering of Asset Backed Securities- Managing Credit Risk

ByArthur Mboue

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Terms• Lock out period-is when investors do not receive their principal

payments• Window period- when principal repayments are expected to occur• Call risk-if interest rates fall and prepayment speeds accelerate,

investors will get their principal back sooner than expected and have to reinvest at lower interests rates

• Extension risk-if interest rates rise and payment speeds are slower, investors may find the principal committed for a longer period of time causing them to miss the opportunity to earn a higher rate of interest

• Costs:– Transaction costs: registration fees, attorney fees, rating fees, – Abusive transactions: Enron 3000 SPE– Cost of borrowing (subprime is not secured)– Regulatory cost: new regulation costs time and money

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Pre-payment doctrine• Debtor can prepay his/her loan by

– Selling his/her assets– Refinancing his/her loan– Pay off the loan in part or in whole– Defaulting in their loan (voluntary bankruptcy)

• Pre-payment assumptions or forecasting:– Review of historic pre-payment rates for each type of loan– Review of various economic conditions– Review of geographical locations of the debtors– And other factors (experience of the collection agency,..)

• Prepayment Speed Assumption (PSA) dictates that:– If pre-payment speeds are faster than expected, the average life of the securities will be

shorter than the original estimate; and reduce the opportunity earning for investors – if the pre-payment speeds are slower, the security’s average life will be extended, that

means increase gain for investors– Faster pre-payment will increase the yield to maturity

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The Risks

• Political rule related to collection (Fair Debt collection practices Act)

• Resource & input• Technical • Construction (completion delays, % of completion,

…)• Legal• M&A (premium, poison pill,…)• Economic ( costs, break-even)

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Risks and Remedies (example case of a national project)category nature remedy

Political Nationalization, Gov’t interference, taxes monopoly, etc

Legal, negotiation, treaty ratified or new

Technical Process, effect on completion, reparability Use existing technology (quick, cheap, reliable and up to date)

Construction Delays, overruns, reparability Use top experts, performance bonds

Legal Access to control in default, fire, injury, jurisdiction rules of review, liability, etc

Security interests, Default definition

Economic Price completion, break even Good Market studies

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Other Risks associated to high write offs • State laws can impede the issuing entity efforts to recover the full

amount due on the receivables– Fair debt collection practices act

• Protect addiction (shopping,…) and fraud• Lack of cost-benefit analysis• Lack of break-even analysis• Increase layoff

• Failure to perfect the assignment of recovery to the right collection• The costs associated to the repossession, liens, maintenance and

storage can result to reduced or delayed payments of securities after acceptance of modification or repossession

• Insolvency of an obligor may reduce payments on your securities before distribution (liquidation)

• Possible liability for 3rd party claims may cause payment delays or losses• Transfer of servicing may delay payments• Commingling of payments and default on the receivables may delay

payments

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ABS Managing the credit risks

Steps• Identifying the risks• The role of rating agencies• Managing the credit risks• Managing the sovereign risks

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Identifying the risks

• Credit risks• Liquidity risks• Servicer performance risks• Swap counterparty risk• Guarantor risk• Legal risk• Sovereign risk• Interest rate and currency risks• Prepayment risks

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Managing the risks Platform

Originator SVP Investors servicer

Credit Enhancement

Credit Rating

Investment Bank

Debtor (obligor)

Business trust area

Issue of security

Dividend, principal and/or interests

Proceeds: principal

Forward collection

Principal-agent relationship for structuring work

Orig

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loan

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Transfer of asset pool

Swap counter

party

Pool performance

guarantor

Permitted investment Special

insurer

Subordinated investors

Interest and principal

guarantor

First loss provider

Cap or collar

provider

Reserve fundLiquidity

fund facility

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Form of credit enhancement

Pre-securitization risk reduction

Credit risk reduction of the asset

Credit risk reduction at the trust level

Legal structure based credit risk reduction

Selecting the assets to be included in the portfolio

Diversification of the portfolio

Issuer provided enhancement

3rd party credit guaranty

Pool credit guaranty

Senior/subordinated ABS

Repackaging of cash flows

Legal isolation from the originator default

Legal isolation from servicer default

Replacement of sub-standard assets

Direct recourse

Over-collaterization

3rd party partial enhancement

3rd party full enhancement

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Different types of credit enhancement

• External credit– Portfolio pool Insurance– Third party guarantees – Letter of credit

• Internal credit– Credit Tranching (senior/sub-ordinate structure)– Over collateralization (liquidity often created up front in the form of a

subordinated loan by the originator)– Cash collateral at SPV level– Excess Spread account retention (that is, excess returns generated from

the underlying assets after payment of senior expenses are collected in a reserve account only to be used when SPV’s expenses exceed its income)

– Triggered amortization

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Rating agencies

World recognized rating agencies for this purpose• Standard and Poor’s• Moody’s Investors Services• Fitch’s rating Service• Duff & Phelps Credit rating Co

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Rating agencies• Use of rating (for the company):

– Use to compare peer companies in the same industry categories– Use as an independent indicator for the market valuation of the company

viability and its corporate projects– Use to improve corporate image– Use to lower cost of borrowing with an independent measure of credit risk– Use to wider audience for potential investors– Use as a marketing tool to potential investors– Use for fundraising therefore growth, expansion and competitive hedge of the

company• For investors

– Use to save investor money, time and effort based on opportunity earning– Use to recognize risk in the company before to invest– Use as a credibility tool of the issuer– Use to understand the company investment plan– Use to help made independent investment decision– Use to make independent choice of investment targets

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Targets of the rating agencies

• Asset portfolio (credit rating agencies provide their opinion on the like hood of the issuing SPV ability to pay both principal and interest on the securities when due)

• Legal structure of the transaction• Credit quality of the originator• The trustee• The cash flow structure• The counterparties

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Key factors of the rating agency's examination

• The quality of the pool of assets, evaluated as a portfolio– Type of assets underlying the securitization– Transaction structure– Waterfall of payments (in particular)

• The credit quality of all the parties to the deal• Operational support for servicing, transfer, recognizing, follow-up,…• Credit enhancement• Legal structure• Sovereign risks• Market price risks• Payment timing risks

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Aspects of the company reviewed by the rating agencies and credit enhancer

• Organization plan • Management structure and board involvement

(independent director)• Financial performance• Company strategy and planning processes• Controls and procedures• Asset origination and credit assessment procedures• Quality of its loan documentation• Credit administration and debt recovery procedures

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Role of originator as a facilitator of the rating review

• Produce historical information on the assets to be securitized

• Initiate the securitization by contracting w/ banks, law firm and credit rating

• Identify and segregate the securitizable assets and track their cash flows

• Report on the performance of the securitized assets to the regulator and the investing public

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Rating agency requirement -1• Legal structure

– Information on parties involved in the ABS issuance• originator• servicer• merchant bank• Lawyers• Auditors• Trustees• credit enhancer• liquidity banks

– Proposed legal structure and documentation • type of assets to be securitized• senior/subordination features• Pass through/pay through• Any recourse provisions• corporation/trust/LLC• Over-collateralizations, other risks and claims structure, etc

– Legal and accounting opinions on characterization of the transferred assets • true sale or pledge• sales tax• liability to duty

– Tax opinions on how the SPV would be taxed and whether investors investment in the ABS represent debt or security to the SPV for tax purpose

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Rating agency requirements 2• 10 years industry statistics/analysis on the assets to be securitized

– yield statistics of assets– non performing loans– aging/delinquencies– customer demographics and – repossession rate

• Summarized 10 year historical data/statistics on the originator’s portfolio, focusing on portfolio performance and characteristics including the following:– Growth– Yield– Dealership (sub-contractual agreement)– Underwriting standards and loan terms/maturity– Recourse provisions– Aging/delinquencies rate– Collection and recovery procedures (repossession rate)– Customer profile/demographics– New versus used equipment valuation– Prepayment history

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Rating agency requirement -3• Information on the intended pool selection process

including the following– Maturity period– Seasoning– Whether insured, types of policy, insured amount– Delinquency factor (percentage)– Any previous extension and rewrites– Interest rate

• Cash flow structure– Cash flow mechanics/control– Timing of receipts and payments– Liquidity support and fault

Credit Rating Description S & P MoodysAAA Aaa Best quality bonds with least investment

risk

AA Aa High quality bonds by all standards

A A Upper Medium grade obligations

BBB Baa Medium grade obligations

BB Ba Bonds which have speculative elements

B B Generally lack characteristics of desirable investment

CCC Caa Poor standing, issue may be in default

CC Ca Speculative in high degree, issue often in default C C Lowest rated class of bonds with poor prospects

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Managing the credit risk• The assets are chosen based on the legal structure.

It is designed to get an investment grade rating– Internal credit improvement: e.g the SPV’ debt is ‘over-

collaterized, or the parent agrees to replenish the asset pool if its value falls, or the SPV has a subordinated debt tranche

– External credit improvement, e.g a guarantee or letter of credit is purchased from a 3rd party

• PS: in many transactions a downgrading may trigger early repayment of the security and early termination for some or all investors (pre-payment risk)

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ABS: Managing the risks

• Cash collateral• Letter Of Credit (LOC) and inputs• Over-collaterization• Senior/subordinate structure• Recourse to originator

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Over-collateralization/subordinated tranche

SPV

Collateral Pool

Over-collateral

Senior -ABS

SUBORDINATED ABS (may be owned by

the seller)

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Senior/subordinated structure w/ cash reserve account

LOC credit enhancement

Subordinated investor interest Grantor Trust Senior investor

interest

Seller/servicer

Cash collateral account

proceeds

receivables

proceeds

Residual interest

Senior certificates

Subordinated certificates

Principal and interest

Principal and interest

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Use of a cash reserve accountBorrower

Letter of Credit bank

Reserve Account

Originating Bank

Trustee

Investors

1

7

5

8

2 4

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1. The payments are made to the bank, as before the sale 2. The bank passes the payments on to the trustee3. The trustee pays investors their interest4. The trustee pays the bank a fee for servicing the loan5. The difference between the portfolio yield, the investor interest and the servicing fee is paid to the reserve account6. The reserve account is used to reimburse the letter of credit bank for7. draws occasioned by defaults by borrowers on the loans8. When the reserve account reaches its cap, excess funds flow back to the selling bank

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Rating AnalysisPres-securitization

risk reduction

Legal structure based credit risk

reduction

Credit quality of deal participants

Integrity of cash flow structure

Credit enhancement

RATING

Originator’s credit underwriting standards

Screening of assets to be included into the portfolio

Diversification of the portfolio

Legal isolation from the originator’s default

Legal isolation from servicer default

Originator/seller/servicer

Trustee, swap counterparties

Guarantors

Cash, flow sufficiency and mismatches

Safeguards and agreements such as swaps and caps

Internal credit enhancement

3rd party credit enhancement

Direct resource

Senior/subordinated or over-collateralized

Reserve or spread account

Cash collateralized accounts

Financial guarantees

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Credit ratings• Junk Bond (non investment grade) or High Yield bond

– Corporation that were once good but are now bad– Financed by LBO– Corporation moved from bank loans to public debt with un-

proved bond credit record– Corporation changes capital structure by increasing debt,

leverage and risk without any change in corporate performance score card

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Causes of financial stressDistressed corporation can not meet its debt payments obligations

• Bad Luck – Economic conditions– Competitive position eroded– Corporation specific factors

• Bad strategy– Forgone opportunities to obtain and/or pursue new projects or

ventures• Mismanagement

– Overused of management time and energy in resolving financial difficulties

• Fraud• Overleveraged the corporation

– Bad control strategy

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Distress corporation struggling paths

Distress corporation

PrivateReorganization(out of court)

Chapter 11(Public

Reorganization)

RecoveryNo chapter 11

filing

Pre-packagedChapter 11

Chapter 11reorganization

Auction or sale

Chapter 7(liquidation)

Out of court

court

Other Harmed satellite interested groups• Corporation’s suppliers• Local communities (including internal

customers, neighborhood, local tax agent…)• Aggrieved employees• Dependent small business shops

DELIVERY ROAD TO FULL DISSOLUTION OF THE ENTITY (case of a corporation), RECEIVERS FOCUS

BONDHOLDER(effects of senior/subordinated rights)

Trade Creditor

Unsecured Creditors

Convertible bondholder

preferred shareholder

Convertible Preferred shareholders

Common Shareholders (effect of participation and class)

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Managing the Sovereign Risks

• Secure sovereign guarantees • Employ offshore jurisdictions• Securitize foreign source assets or cash flows• Obtain a guarantee from a foreign financial

institution• Track the country currency, inflation and

political changes and performances

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Managing the risks: Offshore purchase agreement

YPF (Latin American oil producer)

Oil Trading Co. Cayman is SPV

Noteholders

TrustHighly rated U.S. oil buyer

US$

US$US$

Oil (under purchase agreement)

Fixed debt payments

NotesOil (under sales agreement)

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Financial guarantee Function • Guarantors:

– banks, – General property/casualty companies providing ‘pool’ insurance– Specialized financial guaranty companies

• Service– Full principal and interests guarantee– Partial guarantees

• Standard rules– Regulatory control– Rating the guarantors– Role of reinsurance

• Practical aspects – Getting a guarantee– Cost of a guarantee– Ongoing monitoring by the guarantee companies

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Learning Objectives• After JP Morgan and Bank of America, will you

take these transactions seriously? Document them with care not just to monitor its evolution but also as a work product to win potential lawsuits

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Document retention• Law:

– 18 U.S.C. § 1519: “ Whoever knowingly alters, destroys,…with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any U.S department or agency… or in relation to or contemplation of any such matter or case…”

– Interpretation • There is a need to develop a list of documents with legal significance

including all documents that could be used for investigations, subpoenas, court and business dealings.

• These documents should be exempt from destruction• These documents retention policies must include e–mail policy since

software, hardware and network are always subjected to court subpoenas and exhibits

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Documents• Asset purchase and sale

agreement or loan (consignment) agreement

• Servicing and administration agreement

• Liquidity and credit enhancement agreements

• Security trustee agreement

• Offering document• Prepetition agreement

• Legal counsel Opinion• Form 10-D and other SEC

reporting forms (S-3, 424,…)

• Auditor opinion• Investment bank

structuring document

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Why monitoring is important?• Inherent risk

– Complexity– Decentralization- will give way to accountability doctrine– Repeat problems– Unresponsive to prior weaknesses

• Exposures– Changes- regulatory environment– Personnel changes– System and process changes– Rapid growth management– New programs, services and staff

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Types of Controls

• Preventive Controls– Only minimize errors and thereby avoid the cost of

correction– Discourage fraud

• Detective Controls– Measure the effectiveness of preventive and

deterring controls– Uncover errors and misappropriations– Provide the means to establish accountability

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Key Risks and potential roadblocks to ABS programRisks explanations

Lack of transparency The SPV is too complex to explain to investors (Standardized procedures)

Originator risk In revolving structure, it will be granted more involvement with the sale of additional assets.In the transaction involving future receivable only, contractual agreements give the originator right for equity interest and other participating interests

Signaling effect It does not matter that they are legally separated, SPV bad performance will have side effect on its former parent or initiator, that means the originator. Historical performance can help

Document and legal risk

There is a need for a clear, valid and arm length contractual document between parties (in plain English language)

Liquidity and funding risk

The low performance of one ABS program can reduce the originator access to capital.

Insolvency risk Waiver of prepetition right for voluntary bankruptcy and set up right reduce any early termination with related consequences (loss) or reduced target profit

Mark to market risk An early termination can reduce the whole program’s target goal and increase related default foreclosures.

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Key Risks and potential roadblocks to ABS program

Risks explanations

Reputational risk

A reasonable investor does not believe in any separation between the originator and the SPV if the originator was the parent or initiator of the vehicle. It is the interplay between the debtor, investors and lenders. It is also about asymmetric of information

Taxation risk Fear net taxable income on early periods (phantom income). Taxation is related to the structure of the program

Foreign exchange risk

foreign tax can create a dual taxation in some cases. Foreign exchange rates provisions and highly inflational host of the program can create trouble

Franchise risk

If one ABS program does not perform well, the whole series from the originator can be affected

Equity risk Any attempt to save one ABS program will require capital, at the end, it will reduce equity

Custodian risk

During repos time, there is a risk when the custodian has the right to lend the repos assets to 3rd parties

Regulatory risk

Too expensive and time consuming from discussion, exposure draft to the adoption. In addition congressional hearing can create more problems

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Managing the risksRisks expectationsReporting capability

It must be up to date system to track and monitor the development of the program in order to prevent errors and fix them as soon as possible

Oversight A good monitoring system to enable a regular oversight and monitoring of the SPV activities. Participants must be able to access and manage their risks

Consolidation When there is no sale of the transferred assets, that means SPV and the originator have some types of the relationships (parent-subsidiary,…). Another types of involvement of the originator include retention right of an equity or subordinate tranche ownership, repurchase right and obligation to absorb losses

Simplification A clear and simple design of the program will make it easy to interpret and explain to investors. A list of required documents for the program should be required. Investors should be encouraged to seek help in order to avoid misinterpretation

Regulation The incoming AB regulation is a good start to the right direction

Motivation Participants should be encouraged to minimize or shift risk in order to maximize a good return of the program.

External ratings Rating of securitized asset pool must focus on due diligence of the credit policy of the originator and set up right of the debtors (percentage of assets with warranties- 10 years warranty no hassle money back guarantee, return right-24 months, 100% satisfaction money back guarantee,...)

Governance It must fit with the vehicle environment and the program’s target goal in term of profit, regulatory compliance and taxation

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Transfer of Risk and Control leading to accounting treatment

Situation Transferor’s Accounting

Substantially all risks and control transferred De-recognition:Recognize any new assets/ liabilities (Transferred some

risk and control) Transferred and retained risks/rewards are both less than substantially all

Control of assets passed from transferor to transferee, transferee can unilaterally sell or pledge entire asset or pledge it Control of assets retained

Recognize assets & liabilities up to continuing involvement level plus any retained interest

Substantially all risk and control retained No de-recognition: Recognize all assets, proceeds are liability

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Reviewers focus• Adequacy, timeliness and accuracy of the fair value methodology & compliance

with ASC 820• Process used to evaluate individual securities in accordance with ASC 320-10-35

and ASC 325• Management’s policies and procedures to identify securities with potential OTTI• Documentation supporting temporary or OTTI determinations (7% or more for 2

consecutive quarters)– Internal

• Analysis of the securities basis and fair value• Severity and duration of the impairment• Percentages of impaired of assets• Key components in the securities terms and structures• Internal auditors OTTI review

– External• Financial performance of the issuer• Financial performance of the underlying assets classes• Securities issuer credit rating• Trends in the issuers industry• External auditor OTTI review

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Best Practices –General• Clarifications and segregations of duties for team members• Count, review and analyze all documents and key provisions for compliance• If the sponsor opts for in house servicing services, segregate its computing system,

operation, financial statements and offices from the rest of the originator’s office• Train staff and update them about new regulatory compliance or/and newly adopted

internal policies• Interview external auditors and legal advisors and access their track records and readiness

for newly adopted rules and regulations• Prepare and design supporting documents and computer databases for the programs

helping you to track, test and monitor compliances• Track all alerts of non compliances, timely notify and discuss it with responsible staff• Establish also milestones for external auditor and other external consultants and then

regularly discuss expectation (target goal, target lead time,…) and errors or mistake alerts (if any) with them

• Make sure that SPV manage its own liabilities and control its own assets• Make sure that SPV has its own decision making team• All transactions between the SPV and the originator must be at arms length and disclose

to the investing public and regulators• Clarify, separate and disclose the relationship between the SPV and 3 rd parties (creditor,

contractual parties, agents, investors,…)

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Best practices for systems and control• Implementing systems that identify financing agreements (lending and

borrowing)• Enhance flow of data from the front office systems to inventory systems and

stock records (buys versus sells versus financings and collateral movements)• Identify obligations and rights involving securities• Make sure that accounting systems recognize

– Trading gains versus losses – Interest income and expense, for income statement classification

• Make sure that financial transactions are posted properly and are accurately presented

• Identify and review the rules of sales transactions that had previously been treated as financings

• Identify and review the rules for contemporaneous initial transfers with related repurchase agreements

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Best Practices• Use supported assumptions in valuation models• Pay close attention to the reliability of assumptions you use when

estimating servicing income including retention benefits, deferred tax benefits, captive reinsurance premiums, cross-sell opportunities and adequate compensation for performing the servicing (ASC 860-50-30-3,…)

• Always use comparable market data while reviewing peer group disclosure

• Use the same assumptions from period to period• Be consistent with the assumptions in valuation, bidding, pricing

and hedging activities• Segregate duties among the valuation hedging and accounting

functions• Assess actual cash flow performance compared to those modelled,

validate models, or update the models for new information

Best Practices-ServicingStep Best practices1. notification As soon as possible you must notify your partners of your intention to implement a new program2. Initial Planning Create an execution plan including

1) Communication plan with potential participants and debtors2) Key contact information (bankers, underwriters,…)3) Testing plan 4) Timeline with key milestones5) Capacity plan6) Escalation planServicing fee must be market standard or you will report servicing asset or liability (ASC 860-50)

3. Creation of the SPV

Conduct a joint portfolio review of the plan about the asset pool being transferred and its nature

4. Discussion about servicing strategy

Discussion about the servicing strategy should identify if the transferred asset pool will be:• Serviced under an existing servicer (originator)• Serviced under multi-seller servicing• Serviced using a servicing agent (outsourced as sub-servicing or contractor)

5.Analysis of servicing provisions

If the transferred portfolio will be subserviced by a servicing agent, discuss delegation of duties and mandatory servicing provisions that could be applied to the newly transferred portfolio

6. Requesting system provisions

Use of the checklists designed by the originator or external agents (transfer of servicing, contact customer support guidance if required by the company policy,…)

7. Resolution of issue

Schedule and execute meetings to ensure issues are tracked and resolved properly before they become problems

8. Approval All matters must be approved before being implemented. It may not necessarily be the same day as the sale date identified in a servicing agreement

Best practices-ServicingStep Best Practices

9. Pre-effective date activities

• Some originations require originator to send good-bye letters to customers and inform them about the impending changes in servicing (potential change of address,…)

• Originator should provide servicers with complete records and information relating to each asset/loan being transferred including

• Loan term• Current unpaid principal balance (UPB) as of specified date• Escrow balances• Payment histories• Payment terms of any alternatives to default that was offered to customers or any

alternative to default under which the customer is performing (rate retention, principal forgiveness, change of extension, etc)

• Final modifications terms for which the customer will be eligible• All outstanding arrearages as of specified date including principal payment

acceleration• List of accounts subject to resale restriction• List of account with deed in lieu of foreclosure

• Data should identify any loans in default, debts subject to modification reporting requirements, active foreclosures and bankruptcies (chapters)

• Transferor should provide the servicer with loan loss mitigation activities for each loan, including status and notes pertaining to the loan loss mitigation action.

• Transferor data should show the receivable/loan product type for each loan/receivable being transferred (fixed rate, floating rate, ARM,…)

• Appropriate 3rd party should be notified• Both parties should meet to resolve any data mapping errors that occurred during the

transfer process • Custodial accounts and document custody arrangements should be in place to secure notes

as well as funds

Best Practices-ServicingStep Best practices

• Transferor should complete the year end reporting to cover the time period in which it serviced the loan or receivable.

• Transferor should provide list of customers who have electronic payment system• Transferor must confirm that the transferee servicer functions aware of its duties and

obligations related to the servicing of complex accounts subject to resale restrictions,…

10.Loan/Loss Mitigation • Transferor and transferee should have policies and procedures governing and dedicating resources to:

• Confirm loans or receivables are in active loan loss mitigation, the type of workout for that loan or receivable and its workout stage (resolution of TDR)

• Identify, count, review and analyze all needed documents and any escalation of missing documents to the transferee (forbearance qualification for lack of proper documents)

• Evaluate each counterparty’s processes to accurately transfer and transferred active loss mitigation loan/receivable population

• Determine the progression of how loans or receivables pending loss mitigation applications, whether complete or incomplete, as well as approved alternatives to foreclosure or bankruptcy from the transferor

• Determine what documentation can be shared pre-transfer to ensure normal servicing activity resumes immediately post-transfer

• Identify loans/receivables that have partial or incomplete customer response packages and determine what documentation is missing and whether applicable notices under Reg X have been sent (e.g. acknowledgement of receipt, notice of incompleteness, transferee servicer early intervention notices, etc.)

During Transfer Servicing1. Execution of servicing transfer

• Scheduling of joint meetings relating to transfer of servicing including status of the transfer, data mapping and loan loss mitigation

Best Practices-Servicing Step Best Practices

• Review of transferred files and reports• Access to the state of the art call center with advanced routing option and computer telephony

integration for staff to observe and listen to welcome calls, inbound customer inquiries and outbound marketing support messages

Post Transfer Servicing

1. back-out period • There is a possibility of black out period to deal with the transfer to a new system• The transferor and transferee must be certain actions to ensure that all servicing functions that

involve 3rd parties will continue uninterrupted after the implementation of the transferred servicing.

2. Updating contact • Be sure that new contacts are listed, sent and posted for customers and for a good management focus

3. Notification of 3rd parties

• Notify 3rd parties with the new servicing’s name in the clause and change the premium billing address

• Fulfill all the required change of names and address to ensure continuation of insurance, guaranty if applicable

• Send appropriate notices of the transferee’s servicer’s name and address to taxing authorities, holders of certificate, holders of leaseholds and other liens holders

• Notify any law firms involved in the foreclosure and other legal action in connection with the loans/debt or transferred assets

• Notify any others stakeholders of the transferred assets or loans

4. Internal Reporting • The new servicing account manager must provide daily, weekly and monthly reports• He must track and report issue related to transfer, delinquency, call center metrics,…

5. Monitoring for compliance

• Schedule a post transfer review or de-brief joint meeting to determine effectiveness of execution plan and procedures while identifying areas that need improvement for future activity

Best Practices-Servicing

Step Best Practices

6. Operational execution • Customers should begin sending payments to the servicer after the effective date• The servicer should send customer ‘welcome’ letters if required by the company policies• Transferor and transferee should resolve any data mapping errors that occurred during data

transfer process• Transferee servicer should complete the year end reporting ( also used to file IRS Form

1098) to cover the time period in which it serviced the receivable• Transferee servicer should set up customer electronic payments (automatic clearing house-

ACH,…)• Make sure that there is no increase in confusion including too many customer data edits or

late remittances as a result of the transfer

7. Loan/loss Mitigation Be ready to• Confirm the expected number of active loss mitigation loans were transferred and saved• Track missing or inaccurate documentation by counting, reviewing and analyzing all

documentation to ensure that the status of customers response package remains unchanged (either complete or missing the same documents, before and after transfer)

• Confirm receipt of all required documents and enter the customers accounts data into the servicer’s loan loss mitigation tracking system

• Schedule regular post transfer meetings to escalate issues or to track, find and confirm missing documents

• Track and monitor customers complaints/escalate issues through recurring new call center or complaint logs

• Confirm that you can identify loans or receivables that have unapplied, consistent with any alternative to foreclosure or bankruptcy

• Track loan/debt loss mitigation status by utilizing the servicer’s open item tracking report

Post Transfer Servicing Monitoring and Review for Compliance

1. Operational performance reviews

Servicer must be able to track and report daily, weekly and monthly• Call center performance:

Best Practices-Servicing

Step Best Practices

• Call volume (total number of calls received)• Average speed to answer• Abandonment rate• Average taped talk time and the quality of the tapings• Customer complaints/escalations

• Operation Performance• Fully staff and experienced• Customer solicitation packages received• Customer response packages received • Customer survey (web post, email and results)• Qualified right party contact• Loss mitigation activity• Foreclosure/collection referrals• Missing documents tracking

2.On going monitoring and testing

• Work site visit of the servicer must be conducted to review separation, isolation, segregation of duties, performance scorecard, portfolio, legal and regulatory risk and size of the transfer

3. Conducting post transfer servicing review

A post transfer servicing review• Promotes active member participants• Discuss lesson learned to improve performance• Allows for an open forum to share information and suggestion (maximizing on creativities and

new ideas)• Initiates gathering of objective performance indicators to gain insights into strengths,

weaknesses, opportunities and threats from various perspectives in the servicing or its transfer

4.Review of Portfolio file

• Documentation evidencing each loan, insurer and guaranty• List of all investors

Best practices-ServicingStep Best Practices

• List of the expiration dates and premium payment• List of ownership interest and participation percentage• List of payment histories• List of accounts with resale restrictions• List of automatic drafting of the monthly payments accounts• List of delinquencies, foreclosures, bankruptcies (in progress or process and acquired assets)• List of transfers of ownership, payoffs, modifications related transactions and temporary interest

rate buydown plans• List of escrow balances, escrow advances, curtailments, unapplied funds and loss drafts• Copies of all investor accounting reports that were filed• A copy of the custodial bank reconciliation for each custodial bank account maintained as of the

cutoff date• Copies of all customers, policies, correspondences, complaints, agreements, titles of assets and

all contacts names and telephone numbers• All information related to delinquency management and default prevention