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Offering of asset backed securities managing credit risk


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Asset Backed Securities, Risk management, securities regulation

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Offering of asset backed securities managing credit risk

  1. 1. Offering of Asset Backed Securities- Managing Credit Risk By Arthur Mboue
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 23. ABS: Managing the risks • Cash collateral • Letter Of Credit (LOC) and inputs • Over-collaterization • Senior/subordinate structure • Recourse to originator 23
  24. 24. Over-collateralization/subordinated tranche SPV Collateral Pool Over-collateral Senior -ABS SUBORDINATED ABS (may be owned by the seller) 24
  25. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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