This document discusses managing credit risk in asset-backed securities. It defines key terms like lock out periods and describes risks like prepayment risk, extension risk, and costs. It also covers credit enhancement strategies used to manage risks like over-collateralization, credit ratings, and senior/subordinate structures. Finally, it discusses managing sovereign risk when securitizing foreign assets and the role of rating agencies and credit insurers in analyzing deals.

1. Offering of Asset Backed
Securities- Managing Credit Risk
By
Arthur Mboue

2. 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
2

3. 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
3

4. 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)
4

5. 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
5

6. 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
6

7. ABS Managing the credit risks
Steps
• Identifying the risks
• The role of rating agencies
• Managing the credit risks
• Managing the sovereign risks
7

8. 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
8

9. Managing the risks Platform
Originator SVP Investorsservicer
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
Originalloan(orasset)
Paymentofincurredbut
notreceived
Liquiditysupport,
forex,interestrate
hedging
Ratingof
SVP
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
9

10. 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
10

11. 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
11

12. 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
12

13. 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 13

14. 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
14

15. 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
15

16. 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
16

17. 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
17

18. 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 18

19. 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
19

20. 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 20

21. Credit Rating Description
S & P Moodys
AAA 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
21

22. 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)
22

23. ABS: Managing the risks
• Cash collateral
• Letter Of Credit (LOC) and inputs
• Over-collaterization
• Senior/subordinate structure
• Recourse to originator
23

24. Over-collateralization/subordinated
tranche
SPV
Collateral Pool
Over-collateral
Senior -ABS
SUBORDINATED ABS
(may be owned by
the seller)
24

25. 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
25

26. Use of a cash reserve account
Borrower
Letter of Credit bank
Reserve Account
Originating Bank
Trustee
Investors
1
7
5
8
2 4
3
6
1. The payments are made to the bank, as before the sale
2. The bank passes the payments on to the trustee
3. The trustee pays investors their interest
4. The trustee pays the bank a fee for servicing the loan
5. The difference between the portfolio yield, the investor interest and the servicing fee is paid
to the reserve account
6. The reserve account is used to reimburse the letter of credit bank for
7. draws occasioned by defaults by borrowers on the loans
8. When the reserve account reaches its cap, excess funds flow back to the selling bank 26

27. Rating Analysis
Pres-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 27

28. 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
28

29. Causes of financial stress
Distressed 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
29

30. Distress corporation struggling paths
Distress
corporation
Private
Reorganization
(out of court)
Chapter 11
(Public
Reorganization)
Recovery
No chapter 11
filing
Pre-packaged
Chapter 11
Chapter 11
reorganization
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
30

31. 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)
31

32. 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
32

33. Managing the risks: Offshore purchase
agreement
YPF (Latin American
oil producer)
Oil Trading Co.
Cayman is SPV
Noteholders
Trust
Highly rated U.S.
oil buyer
US$
US$US$
Oil (under
purchase
agreement)
Fixed debt
payments
Notes
Oil (under sales
agreement)
33

34. 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
34

35. 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
35

36. 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
36

37. 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
37

38. 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
38

39. 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
39

40. Key Risks and potential roadblocks to ABS program
Risks 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. 40

41. 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 41

42. Managing the risks
Risks expectations
Reporting
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
42

43. 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
Increasingriskandcontroltransferredtoinvestors
43

44. 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 44

45. 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 3rd parties
(creditor, contractual parties, agents, investors,…)
45

46. 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
46

47. 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 47

48. Best Practices-Servicing
Step Best practices
1. notification As soon as possible you must notify your partners of your intention to implement a new program
2. Initial Planning Create an execution plan including
1) Communication plan with potential participants and debtors
2) Key contact information (bankers, underwriters,…)
3) Testing plan
4) Timeline with key milestones
5) Capacity plan
6) Escalation plan
Servicing 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

49. 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

50. Best Practices-Servicing
Step 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 Servicing
1. Execution of servicing
transfer
• Scheduling of joint meetings relating to transfer of servicing including status of the
transfer, data mapping and loan loss mitigation

51. 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

52. Best Practices-ServicingStep 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:

53. 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

54. Best practices-Servicing
Step 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