MIS Improvements - Systems Upgrades

Office of the Comptroller of the Currency
Federal Deposit Insurance Corporation
Board of Governors of the Federal Reserve System
Office of Thrift Supervision
INTERAGENCY GUIDANCE ON ASSET SECURITIZATION ACTIVITIES

BACKGROUND AND PURPOSE
Recent examinations have disclosed significant weaknesses in the asset securitization practices of some
insured depository institutions. These weaknesses raise concerns about the general level of
understanding and controls among institutions that engage in such activities. The most frequently
encountered problems stem from: (1) the failure to recognize and hold sufficient capital against explicit
and implicit recourse obligations that frequently accompany securitizations, (2) the excessive or
inadequately supported valuation of “retained interests,”1 (3) the liquidity risk associated with over
reliance on asset securitization as a funding source, and (4) the absence of adequate independent risk
management and audit functions.
The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Board
of Governors of the Federal Reserve System, and the Office of Thrift Supervision, hereafter referred to
as “the Agencies,” are jointly issuing this statement to remind financial institution managers and
examiners of the importance of fundamental risk management practices governing asset securitization
activities. This guidance supplements existing policy statements and examination procedures issued by
the Agencies and emphasizes the specific expectation that any securitization-related retained interest
claimed by a financial institution will be supported by documentation of the interest’s fair value, utilizing
reasonable, conservative valuation assumptions that can be objectively verified. Retained interests that
lack such objectively verifiable support or that fail to meet the supervisory standards set forth in this
document will be classified as loss and disallowed as assets of the institution for regulatory capital
purposes.
The Agencies are reviewing institutions' valuation of retained interests and the concentration of these
assets relative to capital. Consistent with existing supervisory authority, the Agencies may, on a case1

In securitizations, a seller typically retains one or more interests in the assets sold. Retained interests represent
the right to cash flows and other assets not used to extinguish bondholder obligations and pay credit losses,
servicing fees and other trust related fees. For the purposes of this statement, retained interests include overcollateralization, spread accounts, cash collateral accounts, and interest only strips (IO strips). Although servicing
assets and liabilities also represent a retained interest of the seller, they are cu rren tly determined based on different
criteria and have different accounting an d ris k-b as ed cap ital requirements. See applicable comments in Statement of
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (FAS 125), for additional information about these interests and associated accounting
requirements.

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by-case basis, require institutions that have high concentrations of these assets relative to their capital, or
are otherwise at risk from impairment of these assets, to hold additional capital commensurate with their
risk exposures. Furthermore, given the risks presented by these activities, the Agencies are actively
considering the establishment of regulatory restrictions that would limit or eliminate the amount of certain
retained interests that may be recognized in determining the adequacy of regulatory capital. An
excessive dependence on securitizations for day-to-day core funding can also present significant liquidity
problems - either during times of market turbulence or if there are difficulties specific to the institution
itself. As applicable, the Agencies will provide further guidance on the liquidity risk associated with
over reliance on asset securitizations as a funding source and on implicit recourse obligations.
CONTENTS

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Description of Activity ...................................................................................................2
Independent Risk Management Function ........................................................................4
Valuation and Modeling Process ....................................................................................6
Use of Outside Parties ...................................................................................................7
Internal Controls ............................................................................................................7
Audit Function or Internal Review ..................................................................................7
Regulatory Reporting .....................................................................................................8
Market Discipline and Disclosures ..................................................................................9
Risk-Based Capital for Recourse and Low Level Recourse Transactions ........................9
Institution Imposed Concentration Limits on Retained Interests .......................................10
Summary ......................................................................................................................11
DESCRIPTION OF ACTIVITY
Asset securitization typically involves the transfer of on-balance sheet assets to a third party or trust. In
turn the third party or trust issues certificates or notes to investors. The cash flow from the transferred
assets supports repayment of the certificates or notes. For several years, large financial institutions, and
a growing number of regional and community institutions, have been using asset securitization to access
alternative funding sources, manage concentrations, improve financial performance ratios, and more
efficiently meet customer needs. In many cases, the discipline imposed by investors who buy assets at
their fair value has sharpened selling institutions’ credit risk selection, underwriting, and pricing practices.
Assets typically securitized by institutions include credit card receivables, automobile receivable paper,
commercial and residential first mortgages, commercial loans, home equity loans, and student loans.
While the Agencies continue to view the use of securitization as an efficient means of financial
intermediation, we are concerned about events and trends uncovered at recent examinations. Of
particular concern are institutions that are relatively new users of securitization techniques and institutions
whose senior management and directors do not have the requisite knowledge of the effect of
securitization on the risk profile of the institution or are not fully aware of the accounting, legal and riskbased capital nuances of this activity. Similarly, the Agencies are concerned that some institutions have
not fully and accurately distinguished and measured the risks that have been transferred versus those
retained, and accordingly are not adequately managing the retained portion. It is essential that
institutions engaging in securitization activities have appropriate front and back office staffing, internal

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and external accounting and legal support, audit or independent review coverage, information systems
capacity, and oversight mechanisms to execute, record, and administer these transactions correctly.
Additionally, we are concerned about the use of inappropriate valuation and modeling methodologies to
determine the initial and ongoing value of retained interests. Accounting rules provide a method to
recognize an immediate gain (or loss) on the sale through booking a “retained interest;” however, the
carrying value of that interest must be fully documented, based on reasonable assumptions, and regularly
analyzed for any subsequent value impairment. The best evidence of fair value is a quoted market price
in an active market. In circumstances where quoted market prices are not available, accounting rules
allow fair value to be estimated. This estimate must be based on the "best information available in the
circumstances."2 An estimate of fair value must be supported by reasonable and current assumptions. If
a best estimate of fair value is not practicable, the asset is to be recorded at zero in financial and
regulatory reports.
History shows that unforeseen market events that affect the discount rate or performance of receivables
supporting a retained interest can swiftly and dramatically alter its value. Without appropriate internal
controls and independent oversight, an institution that securitizes assets may inappropriately generate
“paper profits” or mask actual losses through flawed loss assumptions, inaccurate prepayment rates,
and inappropriate discount rates. Liberal and unsubstantiated assumptions can result in material
inaccuracies in financial statements, substantial write-downs of retained interests, and, if interests
represent an excessive concentration of the institution’s capital, the demise of the sponsoring institution.
Recent examinations point to the need for institution managers and directors to ensure that:
•

Independent risk management processes are in place to monitor securitization pool performance on
an aggregate and individual transaction level. An effective risk management function includes
appropriate information systems to monitor securitization activities.

•

Conservative valuation assumptions and modeling methodologies are used to establish, evaluate and
adjust the carrying value of retained interests on a regular and timely basis.

•

Audit or internal review staffs periodically review data integrity, model algorithms, key underlying
assumptions, and the appropriateness of the valuation and modeling process for the securitized
assets retained by the institution. The findings of such reviews should be reported directly to the
board or an appropriate board committee.

•

Accurate and timely risk-based capital calculations are maintained, including recognition and
reporting of any recourse obligation resulting from securitization activity.

•

Internal limits are in place to govern the maximum amount of retained interests as a percentage of
total equity capital.

•

The institution has a realistic liquidity plan in place in case of market disruptions.

2

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FAS 125, at par. 43

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The following sections provide additional guidance relating to these and other critical areas of concern.
Institutions that lack effective risk management programs or that maintain exposures in retained interests
that warrant supervisory concern may be subject to more frequent supervisory review, more stringent
capital requirements, or other supervisory action.

INDEPENDENT RISK MANAGEMENT FUNCTION
Institutions engaged in securitizations should have an independent risk management function
commensurate with the complexity and volume of their securitizations and their overall risk exposures.
The risk management function should ensure that securitization policies and operating procedures,
including clearly articulated risk limits, are in place and appropriate for the institution’s circumstances. A
sound asset securitization policy should include or address, at a minimum:
•

A written and consistently applied accounting methodology;

•

Regulatory reporting requirements;

•

Valuation methods, including FAS 125 residual value assumptions, and procedures to formally
approve changes to those assumptions;

•

Management reporting process; and

•

Exposure limits and requirements for both aggregate and individual transaction monitoring.

It is essential that the risk management function monitor origination, collection, and default management
practices. This includes regular evaluations of the quality of underwriting, soundness of the appraisal
process, effectiveness of collections activities, ability of the default management staff to resolve severely
delinquent loans in a timely and efficient manner, and the appropriateness of loss recognition practices.
Because the securitization of assets can result in the current recognition of anticipated income, the risk
management function should pay particular attention to the types, volumes, and risks of assets being
originated, transferred and serviced. Both senior management and the risk management staff must be
alert to any pressures on line managers to originate abnormally large volumes or higher risk assets in
order to sustain ongoing income needs. Such pressures can lead to a compromise of credit underwriting
standards. This may accelerate credit losses in future periods, impair the value of retained interests and
potentially lead to funding problems.
The risk management function should also ensure that appropriate management information systems
(MIS) exist to monitor securitization activities. Reporting and documentation methods must support the
initial valuation of retained interests and ongoing impairment analyses of these assets. Pool performance
information has helped well-managed institutions to ensure, on a qualitative basis, that a sufficient
amount of economic capital is being held to cover the various risks inherent in securitization transactions.
The absence of quality MIS hinders management’s ability to monitor specific pool performance and
securitization activities more broadly. At a minimum, MIS reports should address the following:

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Securitization summaries for each transaction - The summary should include relevant
transaction terms such as collateral type, facility amount, maturity, credit enhancement and
subordination features, financial covenants (termination events and spread account capture
“triggers”), right of repurchase, and counterparty exposures. Management should ensure that the
summaries are distributed to all personnel associated with securitization activities.
Performance reports by portfolio and specific product type - Performance factors include
gross portfolio yield, default rates and loss severity, delinquencies, prepayments or payments, and
excess spread amounts. The reports should reflect performance of assets, both on an individual
pool basis and total managed assets. These reports should segregate specific products and different
marketing campaigns.
Vintage analysis for each pool using monthly data - Vintage analysis helps management
understand historical performance trends and their implications for future default rates, prepayments,
and delinquencies, and therefore retained interest values. Management can use these reports to
compare historical performance trends to underwriting standards, including the use of a validated
credit scoring model, to ensure loan pricing is consistent with risk levels. Vintage analysis also helps
in the comparison of deal performance at periodic intervals and validates retained interest valuation
assumptions.
Static pool cash collection analysis - This analysis entails reviewing monthly cash receipts
relative to the principal balance of the pool to determine the cash yield on the portfolio, comparing
the cash yield to the accrual yield, and tracking monthly changes. Management should compare the
timing and amount of cash flows received from the trust with those projected as part of the FAS
125 retained interest valuation analysis on a monthly basis. Some master trust structures allow
excess cash flow to be shared between series or pools. For revolving asset trusts with this master
trust structure, management should perform a cash collection analysis for each master trust structure.
These analyses are essential in assessing the actual performance of the portfolio in terms of default
and prepayment rates. If cash receipts are less than those assumed in the original valuation of the
retained interest, this analysis will provide management and the board with an early warning of
possible problems with collections or extension practices, and impairment of the retained interest.
Sensitivity analysis - Measuring the effect of changes in default rates, prepayment or payment
rates, and discount rates will assist management in establishing and validating the carrying value of
the retained interest. Stress tests should be performed at least quarterly. Analyses should consider
potential adverse trends and determine “best,” “probable,” and “worst case” scenarios for each
event. Other factors to consider are the impact of increased defaults on collections staffing, the
timing of cash flows, “spread account” capture triggers, over-collateralization triggers, and early
amortization triggers. An increase in defaults can result in higher than expected costs and a delay in
cash flows, decreasing the value of the retained interests. Management should periodically quantify
and document the potential impact to both earnings and capital, and report the results to the board
of directors. Management should incorporate this analysis into their overall interest rate risk

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measurement system.3 Examiners will review the analysis conducted by the institution and the
volatility associated with retained interests when assessing the Sensitivity to Market Risk component
rating.
Statement of covenant compliance - Ongoing compliance with deal performance triggers as
defined by the pooling and servicing agreements should be affirmed at least monthly. Performance
triggers include early amortization, spread capture, changes to over-collateralization requirements,
and events that would result in servicer removal.

VALUATION AND MODELING PROCESSES
The method and key assumptions used to value the retained interests and servicing assets or liabilities
must be reasonable and fully documented. The key assumptions in all valuation analyses include
prepayment or payment rates, default rates, loss severity factors, and discount rates. The Agencies
expect institutions to take a logical and conservative approach when developing securitization
assumptions and capitalizing future income flows. It is important that management quantifies the
assumptions on a pool-by-pool basis and maintains supporting documentation for all changes to the
assumptions as part of the valuation process, which should be done no less than quarterly. Policies
should define the acceptable reasons for changing assumptions and require appropriate management
approval.
An exception to this pool-by-pool valuation analysis may be applied to revolving asset trusts if the
master trust structure allows excess cash flows to be shared between series. In a master trust, each
certificate of each series represents an undivided interest in all of the receivables in the trust. Therefore,
valuations are appropriate at the master trust level.
In order to determine the value of the retained interest at inception, and make appropriate adjustments
going forward, the institution must implement a reasonable modeling process to comply with FAS 125.
The Agencies expect management to employ reasonable and conservative valuation assumptions and
projections, and to maintain verifiable objective documentation of the fair value of the retained interest.
Senior management is responsible for ensuring the valuation model accurately reflects the cash flows
according to the terms of the securitization’s structure. For example, the model should account for any
cash collateral or over-collateralization triggers, trust fees, and insurance payments if appropriate. The
board and management are accountable for the “model builders” possessing the necessary expertise
and technical proficiency to perform the modeling process. Senior management should ensure that
internal controls are in place to provide for the ongoing integrity of MIS associated with securitization
activities.
As part of the modeling process, the risk management function should ensure that periodic validations
are performed in order to reduce vulnerability to model risk. Validation of the model includes testing the
3

Under the Joint Agency Policy Statement on Interest Rate Risk, institutions with a high level of exposure to
interest rate risk relative to capital will be directed to take corrective action. Savings associations can find OTS
guidance on interest rate risk in Thrift Bulletin 13a - Management of Interest Rate Risk, Investment Securities, and
Derivative Activities.

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internal logic, ensuring empirical support for the model assumptions, and back-testing the models with
actual cash flows on a pool-by-pool basis. The validation process should be documented to support
conclusions. Senior management should ensure the validation process is independent from line
management as well as the modeling process. The audit scope should include procedures to ensure that
the modeling process and validation mechanisms are both appropriate for the institution’s circumstances
and executed consistent with the institution's asset securitization policy.

USE OF OUTSIDE PARTIES
Third parties are often engaged to provide professional guidance and support regarding an institution's
securitization activities, transactions, and valuing of retained interests. The use of outside resources does
not relieve directors of their oversight responsibility, or senior management of its responsibilities to
provide supervision, monitoring, and oversight of securitization activities, and the management of the
risks associated with retained interests in particular. Management is expected to have the experience,
knowledge, and abilities to discharge its duties and understand the nature and extent of the risks
presented by retained interests and the policies and procedures necessary to implement an effective risk
management system to control such risks. Management must have a full understanding of the valuation
techniques employed, including the basis and reasonableness of underlying assumptions and projections.

INTERNAL CONTROLS
Effective internal controls are essential to an institution’s management of the risks associated with
securitization. When properly designed and consistently enforced, a sound system of internal controls
will help management safeguard the institution’s resources, ensure that financial information and reports
are reliable, and comply with contractual obligations, including securitization covenants. It will also
reduce the possibility of significant errors and irregularities, as well as assist in their timely detection
when they do occur. Internal controls typically: (1) limit authorities, (2) safeguard access to and use of
records, (3) separate and rotate duties, and (4) ensure both regular and unscheduled reviews, including
testing.
The Agencies have established operational and managerial standards for internal control and information
systems.4 An institution should maintain a system of internal controls appropriate to its size and the
nature, scope, and risk of its activities. Institutions that are subject to the requirements of FDIC
regulation 12 CFR Part 363 should include an assessment of the effectiveness of internal controls over
their asset securitization activities as part of management’s report on the overall effectiveness of the
system of internal controls over financial reporting. This assessment implicitly includes the internal
controls over financial information that is included in regulatory reports.

AUDIT FUNCTION OR INTERNAL REVIEW

4

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Safety and Soundness Standards 12 CFR Part 30 (OCC), 12 CFR Part 570 (OTS).

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It is the responsibility of an institution’s board of directors to ensure that its audit staff or independent
review function is competent regarding securitization activities. The audit function should perform
periodic reviews of securitization activities, including transaction testing and verification, and report all
findings to the board or appropriate board committee. The audit function also may be useful to senior
management in identifying and measuring risk related to securitization activities. Principal audit targets
should include compliance with securitization policies, operating and accounting procedures (FAS 125),
and deal covenants, and accuracy of MIS and regulatory reports. The audit function should also confirm
that the institution’s regulatory reporting process is designed and managed in such a way to facilitate
timely and accurate report filing. Furthermore, when a third party services loans, the auditors should
perform an independent verification of the existence of the loans to ensure balances reconcile to internal
records.

REGULATORY REPORTING
The securitization and subsequent removal of assets from an institution’s balance sheet requires
additional reporting as part of the regulatory reporting process. Common regulatory reporting errors
stemming from securitization activities include:
•

Failure to include off-balance sheet assets subject to recourse treatment when calculating risk-based
capital ratios;

•

Failure to recognize retained interests and retained subordinate security interests as a form of credit
enhancement;

•

Failure to report loans sold with recourse in the appropriate section of the regulatory report; and

•

Over-valuing retained interests.

An institution’s directors and senior management are responsible for the accuracy of its regulatory
reports. Because of the complexities associated with securitization accounting and risk-based capital
treatment, attention should be directed to ensuring that personnel who prepare these reports maintain
current knowledge of reporting rules and associated interpretations. This often will require ongoing
support by qualified accounting and legal personnel.
Institutions that file the Report of Condition and Income (Call Report) should pay particular attention to
the following schedules on the Call Report when institutions are involved in securitization activities:
Schedule RC-F: Other Assets; Schedule RC-L: Off Balance Sheet Items; and Schedule RC-R:
Regulatory Capital. Institutions that file the Thrift Financial Report (TFR) should pay particular
attention to the following TFR schedules: Schedule CC: Consolidated Commitments and
Contingencies, Schedule CCR: Consolidated Capital Requirement, and Schedule CMR:
Consolidated Maturity and Rate.
Under current regulatory report instructions, when an institution’s supervisory agency’s interpretation of

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how generally accepted accounting principles (GAAP) should be applied to a specified event or
transaction differs from the institution’s interpretation, the supervisory agency may require the institution
to reflect the event or transaction in its regulatory reports in accordance with the agency’s interpretation
and amend previously submitted reports.

MARKET DISCIPLINE AND DISCLOSURES
Transparency through public disclosure is crucial to effective market discipline and can reinforce
supervisory efforts to promote high standards in risk management. Timely and adequate information on
the institution’s asset securitization activities should be disclosed. The information contained in the
disclosures should be comprehensive; however, the amount of disclosure that is appropriate will depend
on the volume of securitizations and complexity of the institution. Well-informed investors, depositors,
creditors and other bank counterparties can provide a bank with strong incentives to maintain sound risk
management systems and internal controls. Adequate disclosure allows market participants to better
understand the financial condition of the institution and apply market discipline, creating incentives to
reduce inappropriate risk taking or inadequate risk management practices. Examples of sound
disclosures include:
•

Accounting policies for measuring retained interests, including a discussion of the impact of key
assumptions on the recorded value;

•

Process and methodology used to adjust the value of retained interests for changes in key
assumptions;

•

Risk characteristics, both quantitative and qualitative, of the underlying securitized assets;

•

Role of retained interests as credit enhancements to special purpose entities and other securitization
vehicles, including a discussion of techniques used for measuring credit risk; and

•

Sensitivity analyses or stress testing conducted by the institution showing the effect of changes in key
assumptions on the fair value of retained interests.

RISK-BASED CAPITAL FOR RECOURSE AND LOW LEVEL RECOURSE
TRANSACTIONS
For regulatory purposes, recourse is generally defined as an arrangement in which an institution retains
the risk of credit loss in connection with an asset transfer, if the risk of credit loss exceeds a pro rata
share of the institution’s claim on the assets.5 In addition to broad contractual language that may require
the selling institution to support a securitization, recourse can also arise from retained interests, retained
subordinated security interests, the funding of cash collateral accounts, or other forms of credit
5

The risk-based capital treatment for sales with recourse can be found at 12 CFR Part 3 Appendix A, Section
(3)(b)(1)(iii) {OCC}, 12 CFR Part 567.6(a)(2)(i)(c) {OTS}. For a further explanation of recourse see the glossary entry
"Sales of Assets for Risk-Based Capital Purposes" in the instructions for the Call Report.

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enhancements that place an institution’s earnings and capital at risk. These enhancements should
generally be aggregated to determine the extent of an institution’s support of securitized assets.
Although an asset securitization qualifies for sales treatment under GAAP, the underlying assets may still
be subject to regulatory risk-based capital requirements. Assets sold with recourse should generally be
risk-weighted as if they had not been sold.
Securitization transactions involving recourse may be eligible for “low level recourse” treatment.6 The
Agencies’ risk-based capital standards provide that the dollar amount of risk-based capital required for
assets transferred with recourse should not exceed the maximum dollar amount for which an institution is
contractually liable. The “low level recourse” treatment applies to transactions accounted for as sales
under GAAP in which an institution contractually limits its recourse exposure to less than the full riskbased capital requirements for the assets transferred. Under the low level recourse principle, the
institution holds capital on approximately a dollar-for-dollar basis up to the amount of the aggregate
credit enhancements.
Low level recourse transactions should be reported in Schedule RC-R of the Call Report or Schedule
CCR of the TFR using either the “direct reduction method” or the “gross-up method” in accordance
with the regulatory report instructions.
If an institution does not contractually limit the maximum amount of its recourse obligation, or if the
amount of credit enhancement is greater than the risk-based capital requirement that would exist if the
assets were not sold, the low level recourse treatment does not apply. Instead, the institution must hold
risk-based capital against the securitized assets as if those assets had not been sold.
Finally, as noted earlier, retained interests that lack objectively verifiable support or that fail to meet the
supervisory standards set for in this document will be classified as loss and disallowed as assets of the
institution for regulatory capital purposes.

INSTITUTION IMPOSED CONCENTRATION LIMITS ON RETAINED INTERESTS
The creation of a retained interest (the debit) typically also results in an offsetting “gain on sale” (the
credit) and thus generation of an asset. Institutions that securitize high yielding assets with long durations
may create a retained interest asset value that exceeds the risk-based capital charge that would be in
place if the institution had not sold the assets (under the existing risk-based capital guidelines, capital is
not required for the amount over eight percent of the securitized assets). Serious problems can arise for
institutions that distribute contrived earnings only later to be faced with a downward valuation and
charge-off of part or all of the retained interests.
As a basic example, an institution could sell $100 in subprime home equity loans and book a retained
6

The banking agencies’ low level recourse treatment is described in the Federal Register in the following locations:
60 Fed. Reg. 17986 (April 10, 1995) (OCC); 60 Fed. Reg. 8177 (February 13, 1995)(FRB); 60 Fed. Reg. 15858 (March
28,1995)(FDIC). OTS has had a low level recourse rule in 12 CFR Part 567.6(a)(2)(i)(c) since 1989. A brief explanation
is also contained in the instructions for regulatory reporting in section RC-R for the Call Report or schedule CCR for
the TFR.

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interest of $20 using liberal “gain on sale” assumptions. Under the current capital rules, the institution is
required to hold approximately $8 in capital. This $8 is the current capital requirement if the loans were
never removed from the balance sheet (eight percent of $100 = $8). However, the institution is still
exposed to substantially all of the credit risk, plus the additional risk to earnings and capital from the
volatility of the retained interest. If the value of the retained interest decreases to $10 due to inaccurate
assumptions or changes in market conditions, the $8 in capital is insufficient to cover the entire loss.
Normally, the sponsoring institution will eventually receive any excess cash flow remaining from
securitizations after investor interests have been met. However, recent experience has shown that
retained interests are vulnerable to sudden and sizeable write-downs that can hinder an institution’s
access to the capital markets, damage its reputation in the market place, and in some cases, threaten its
solvency. Accordingly, the Agencies expect an institution's board of directors and management to
develop and implement policies that limit the amount of retained interests that may be carried as a
percentage of total equity capital, based on the results of their valuation and modeling processes. Well
constructed internal limits also serve to lessen the incentive of institution personnel to engage in activities
designed to generate near term “paper profits” that may be at the expense of the institution’s long term
financial position and reputation.

SUMMARY
Asset securitization has proven to be an effective means for institutions to access new and diverse
funding sources, manage concentrations, improve financial performance ratios, and effectively serve
borrowing customers. However, securitization activities also present unique and sometimes complex
risks that require board and senior management attention. Specifically, the initial and ongoing valuation
of retained interests associated with securitization, and the limitation of exposure to the volatility
represented by these assets, warrant immediate attention by management.
Moreover, as mentioned earlier in this statement, the Agencies are studying various issues relating to
securitization practices, including whether restrictions should be imposed that would limit or eliminate the
amount of retained interests that qualify as regulatory capital. In the interim, the Agencies will review
affected institutions on a case-by-case basis and may require, in appropriate circumstances, that
institutions hold additional capital commensurate with their risk exposure. In addition, the Agencies will
study, and issue further guidance on, institutions' exposure to implicit recourse obligations and the
liquidity risk associated with over reliance on asset securitization as a funding source.

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