1. Healthcare

Methodology
Operational Risk Assessment for
U.S. ABS Originators
february 2015
CONTACT INFORMATION
Kathleen Tillwitz
Managing Director
U.S. Structured Finance - ABS/RMBS
Tel. +1 212 806 3265
[email protected]
Stephanie Whited
Senior Vice President
U.S. Structured Finance - ABS/RMBS
Tel. +1 347 226 1927
[email protected]
Brian Medwig
Vice President
U.S. Structured Finance - ABS/RMBS
Tel. +1 212 806 3290
[email protected]
Claire J. Mezzanotte
Group Managing Director
Global Structured Finance
Tel. +1 212 806 3272
[email protected]
DBRS is a full-service credit rating agency
established in 1976. Privately owned and operated
without affiliation to any financial institution,
DBRS is respected for its independent, third-party
evaluations of corporate and government issues,
spanning North America, Europe and Asia.
DBRS’s extensive coverage of securitizations
and structured finance transactions solidifies our
standing as a leading provider of comprehensive,
in-depth credit analysis.
All DBRS ratings and research are available in
hard-copy format and electronically on Bloomberg
and at DBRS.com, our lead delivery tool for
organized, Web-based, up-to-the-minute information. We remain committed to continuously
refining our expertise in the analysis of credit
quality and are dedicated to maintaining
objective and credible opinions within the global
financial marketplace.
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Operational Risk Assessment for U.S. ABS Originators
TABLE OF CONTENTS
Scope and Limitations
4
Operational Risk Assessment for U.S. ABS Originators
4
Introduction4
Originator Review Process
4
Company and Management
4
Financial Condition
4
Controls and Compliance
5
Origination and Sourcing
5
Underwriting Guidelines
5
Technology6
Servicer Review
6
Exhibit 1: Sample Operational Risk Questions for U.S. Auto Fleet Lease Originators
7
Exhibit 2: Sample Operational Risk Questions for U.S. Auto Lease Originators
8
Exhibit 3: Sample Operational Risk Questions for U.S. Auto Loan Originators
10
Exhibit 4: Sample Operational Risk Questions for U.S. Unsecured Consumer Loan Originators
11
Exhibit 5: Sample Operational Risk Questions for U.S. Credit Card Originators
13
Exhibit 6: Sample Operational Risk Questions for U.S. Equipment Lease Originators
14
Exhibit 7: Sample Operational Risk Questions for U.S. Insurance Premium Finance Originators
16
Exhibit 8: Sample Operational Risk Questions for U.S. Rental Car Originators
17
Exhibit 9: Sample Operational Risk Questions for U.S. Structured Settlement Originators
19
Exhibit 10: Sample Operational Risk Questions for U.S. Federal Family Education Loan Program
(FFELP) Originators
20
Exhibit 11: Sample Operational Risk Questions for U.S. Private Student Loan Originators
21
Exhibit 12: Sample Operational Risk Questions for U.S. Timeshare Loan Originators
22
Exhibit 13: Sample Operational Risk Questions for U.S. Wholesale Auto Loan Originators
24
Exhibit 14: Sample Operational Risk Questions for U.S. Healthcare Receivables Originators
25
Exhibit 15: Sample Operational Risk Questions for U.S. Asset-Based Loan Receivables and
Factoring Originators
27
Exhibit 16: Sample Operational Risk Questions for Container Originators
28
Exhibit 17: Sample Operational Risk Questions for U.S. Film Rights Securitizations
30
Exhibit 18: Sample Operational Risk Questions for U.S. TV Programming Licensing Rights
32
3
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Scope and Limitations
This report describes the DBRS approach to evaluating the quality of the parties that originate loans
(leases or receivables) that are about to be securitized in a transaction rated by DBRS. While DBRS does
not assign formal ratings to these processes, it does conduct operational risk reviews to determine if an
originator is acceptable and incorporates the results of the review into the rating process. It is important
to note that the methods described herein may not be applicable in all asset classes. Further, this methodology is meant to provide guidance regarding the DBRS methods used in the sector and should not be
interpreted as prescribing a rigid template, but understood in the context of the dynamic environment in
which it is intended to be applied.
Operational Risk Assessment for U.S. ABS Originators
INTRODUCTION
DBRS typically begins the initial originator review process by sending a questionnaire to the company
that outlines the topics to be covered during discussions with management and includes a list of documents to be provided such as organizational charts, financial statements and underwriting guidelines (see
attached exhibits). In instances where DBRS determines that the originator is below average, issuers may
incorporate certain structural enhancements into a proposed transaction such as additional credit support
or a third-party firm to provide the requisite representations and warranties in order for DBRS to be able
to rate the transaction. In the event that DBRS determines that an originator is unacceptable, it may refuse
to rate the deal.
ORIGINATOR REVIEW PROCESS
The originator review process typically involves a review and analysis of the following:
(1) Company and management.
(2) Financial condition.
(3) Controls and compliance.
(4) Origination and sourcing.
(5) Underwriting guidelines.
(6) Technology.
COMPANY AND MANAGEMENT
DBRS believes that a seasoned management team that possesses demonstrated expertise in the product(s)
they are originating is essential. As a result, DBRS views those originators whose management team
possesses greater than ten years of industry experience favorably. Additionally, DBRS believes that the
participation of the credit risk management, quality control (QC), legal and compliance departments in
the origination and underwriting process is important in order to identify and mitigate risk. Furthermore,
adequate capacity and resources to handle fluctuations in origination volume are of importance.
FINANCIAL CONDITION
DBRS typically reviews an originator’s financial condition or considers compensating factors. In its
analysis, DBRS generally classifies an originator as investment grade or non-investment grade. Review
of the originator may include an internal assessment consistent with DBRS policies (please see DBRS’s
“Internal Assessments Global Policy”). To the extent that no public rating is maintained on the originator
and no internal assessment is performed, DBRS generally assumes that the originator is non-investment
grade.
4
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Some items that are reviewed as part of this process may include:
• Company ownership structure.
• Business lines.
• Management experience.
• Corporate rating of any parent company (if applicable).
• Industry competitive landscape and company position.
• Internal and external audit results.
• Financial statements.
• Revenue sources and lines of credit.
• Costs to service.
• Litigation (past, present and expected).
• Existing business strategy and strategic initiatives.
• Recent or planned mergers or acquisitions.
• Recent or planned transfers.
• Securitization history and future plans.
CONTROLS AND COMPLIANCE
DBRS believes that internal assessments and QC reviews are important in recognizing procedural errors
that may not be easily detectable. These reviews can be used to identify trends, training opportunities
and exception practices. Frequent checks can assist management in quickly instituting changes to areas
needing improvement as well as benchmarking those results to performance. In addition to the aforementioned reviews, a monitoring process can assist originators in complying with all applicable laws, rules
and regulations as well as training programs for employees in customer-facing positions.
DBRS views favorably the participation of the credit risk management, QC, legal and compliance departments in the origination and underwriting process in order to identify and mitigate attendant risks. DBRS
also views favorably those originators that are not the subject of any regulatory or state investigation(s)
and have few borrower complaints filed with the Consumer Financial Protection Bureau (CFPB). Minimal
or no repurchases because of breaches of representations and warranties as well as procedures for vendor
selection and oversight are considered.
ORIGINATION AND SOURCING
DBRS reviews the origination and sourcing channels to determine if the originator has a clearly defined
strategy. Sales and marketing practices that include preapprovals are also typically reviewed to determine
the screening process. Origination practices that include regular performance tracking and QC reviews
are viewed favorably by DBRS. Furthermore, procedures that ensure new account setup accuracy and
data integrity are important to minimize errors. As a result, DBRS views favorably those originators with
a high level of automation and established procedures for compliance with regulatory guidelines and
industry best practices.
UNDERWRITING GUIDELINES
An originator’s appetite for risk and the underlying quality of its underwriting guidelines can have an
impact on deal performance; therefore, DBRS typically uses both a qualitative and quantitative approach
to conduct its originator reviews and make comparisons among originators.
DBRS views those originators that have established guidelines and use reliable means to accurately assess
a borrower’s income and employment favorably. An originator’s exception and override practices can help
to assess the quality of the originations, in addition to, historical performance and repurchase volume.
Furthermore, sophisticated technology and fraud detection procedures can help prevent early payment
defaults. DBRS believes this area is important to maintaining a successful program and would, therefore,
typically expect issuers to have formal processes surrounding fraud that are communicated regularly to
staff and to employ experts to continuously update prevention strategies.
5
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
TECHNOLOGY
Technology resources are an important component of the originator review process. While DBRS does not
subscribe to specific systems architecture, in reviewing the originator, DBRS considers whether adequate
systems controls, consumer privacy protection and backup procedures, including disaster recovery and
business continuity plans, are in place. Furthermore, originators must ensure that any offshore vendors
are monitored and a backup plan is in place to facilitate minimal downtime.
Over the past few years, leveraging the Internet has enabled many firms to operate effectively in the assetbacked securities (ABS) business. Originators have used the Internet for marketing, customer service and
the dissemination of pertinent information, such as applications and approvals. As a result, DBRS expects
originators to have the appropriate staff and controls in place to provide website availability, account
maintenance and enhancements. Sophisticated technology with comprehensive functionality is viewed
favorably by DBRS as it often brings large efficiencies to the origination operations and more predictability in terms of credit card performance.
SERVICER REVIEW
The servicer review process evaluates the quality of the parties that service or may conduct backup
servicing on the loans (leases or receivables) that are about to be securitized in a transaction rated by
DBRS. While DBRS does not assign formal ratings to these processes, it typically conducts operational
risk reviews to assess if a servicer is acceptable and incorporates the results of the review into the rating
process.
DBRS typically begins the initial servicer review process by sending a questionnaire to the company that
outlines the topics to be covered during the discussion with management and includes a list of documents
to be provided such as organizational charts, financial statements and performance statistics. In instances
where DBRS determines that the servicer is below average, issuers may incorporate certain structural
enhancements into a proposed transaction such as additional credit support, dynamic triggers or the
presence of a warm or hot backup servicer in order for DBRS to be able to rate the transaction.
The servicer review process typically involves an analysis of the following:
(1) Company and management.
(2) Financial condition.
(3) Controls and compliance.
(4) Loan administration.
(5) Customer service.
(6) Account maintenance.
(7) Default management.
• Collections
• Loss mitigation
• Bankruptcy
• Fraud
(8) Investor reporting.
(9) Technology.
For details on the servicing review process, please refer to the DBRS methodology Operational Risk
Assessment for U.S. ABS Servicers.
6
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Exhibit 1: Sample Operational Risk Questions for U.S.
Auto Fleet Lease Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Ability to provide representations and warranties.
• Fleet size, composition and age.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by origination channel.
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a regulatory or state investigation? If so, discuss any
findings.
• Have you ever been terminated or not in good standing with any federal or state regulatory body? If
so, please explain.
• Repurchases due to breaches of representations and warranties ($ and #).
• Litigation (past, present and expected).
• Controls for managing potential conflicts of interest associated with parties to a transaction.
• Procedures for vendor selection and oversight.
• Storage and updating of policies and procedures.
Origination and Sourcing
• Origination strategy and channels.
• Sales and marketing practices.
• Use of dealers and brokers.
• Approval and monitoring processes for lessees.
• Delegated underwriting practices and policies.
• Procedures for ensuring new loan setup accuracy and data integrity.
• Exception and trailing documentation management (i.e., title).
• Post-closing quality reviews.
Underwriting Guidelines
• Underwriting policies and procedures by product and lease type.
• Is underwriting centralized?
• Recent or planned changes to underwriting guidelines.
• Approval process for potential lessees.
• Qualifying rate and ratios.
• Documentation requirements.
7
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Insurance requirements and verifications.
• Use of credit scoring, automated underwriting and other technology.
• Underwriter compensation structure.
• Authority levels.
• Exception and override process/practices.
• Process for completing data integrity checks.
• Fraud detection procedures and systems.
• Closing and funding process.
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 2: Sample Operational Risk Questions for U.S.
Auto Lease Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Ability to provide representations and warranties.
• Portfolio size and composition.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by origination channel.
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a regulatory or state investigation? If so, discuss any
findings.
• Have you ever been terminated or not in good standing with any federal or state regulatory body? If
so, please explain.
• Process for interpreting and tracking state, local and federal regulatory compliance statutes, including
the use of counsel and compliance software.
• Repurchases due to breaches of representations and warranties ($ and #).
8
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Litigation (past, present and expected).
• Controls for managing potential conflicts of interest associated with parties to a transaction.
• Procedures for vendor selection and oversight.
• Storage and updating of policies and procedures.
Origination and Sourcing
• Origination strategy and channels.
• Itemize the programs, if any, used to originate leases.
• Sales and marketing practices.
• Use of dealers and brokers.
• Approval and monitoring processes for dealers and brokers.
• Procedures for ensuring new loan setup accuracy and data integrity.
• Title maintenance – where are titles kept and name of entity(ies) on title(s).
• Title processing with the Department of Motor Vehicles – is this done with states electronically or otherwise. Outline how this is done with new and used vehicles respectively.
• Exception and trailing documentation management (i.e., title).
• Post-closing quality reviews.
Residuals
• Describe the policy for determining residuals. What factors drive the ultimate determination of the
residual (i.e., maturity, manufacturer, credit of lessee)?
• Pull-ahead programs – are there any pull-ahead programs used to generate auto leases or renew auto
leases?
• Policy for use of residual subvention.
• Outline procedures auto lessee has to go through when returning vehicles.
• Use of dealers for returns or can lessee return vehicles at other points.
• When liquidated at auction, itemize how the finance company establishes a floor level to liquidate
vehicles.
• Once vehicles are sold at auction (or in other ways), describe how the finance company knows the sale
price.
• How often does the lessee return the vehicle early or at contract expiration?
• Outline the historical return rate.
• Provide historical residual realization experience.
Underwriting Guidelines
• Are underwriting practices and policies determined centrally or is there a portion of this determined on
a decentralized basis?
• Underwriting policies and procedures by product and loan type.
• Recent or planned changes to underwriting guidelines.
• Approach to verifying income and employment documentation.
• Qualifying rate and ratios.
• Documentation requirements.
• Insurance requirements and verifications.
• Use of non-traditional credit in underwriting.
• Non-U.S. citizen requirements/eligibility.
• Procedures for ensuring compliance with regulatory and predatory lending laws.
• Use of credit scoring, automated underwriting and other technology.
• Underwriter compensation structure.
• Authority levels.
• Exception and override process/practices.
• Process for completing data integrity checks.
• Fraud detection procedures and systems.
• Closing and funding process.
9
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 3: Sample Operational Risk Questions for U.S.
Auto Loan Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Ability to provide representations and warranties.
• Portfolio size and composition.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by origination channel.
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a regulatory or state investigation? If so, discuss any
findings.
• Have you ever been terminated or not in good standing with any federal or state regulatory body? If
so, please explain.
• Process for interpreting and tracking state, local and federal regulatory compliance statutes, including
the use of counsel and compliance software.
• Repurchases due to breaches of representations and warranties ($ and #).
• Litigation (past, present and expected).
• Controls for managing potential conflicts of interest associated with parties to a transaction.
• Procedures for vendor selection and oversight.
• Storage and updating of policies and procedures.
Origination and Sourcing
• Origination strategy and channels.
• Sales and marketing practices.
• Use of dealers and brokers.
10
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Approval and monitoring processes for dealers and brokers.
• Delegated underwriting practices and policies.
• Procedures for ensuring new loan setup accuracy and data integrity.
• Exception and trailing documentation management i.e. title.
• Post-closing quality reviews.
Underwriting Guidelines
• Underwriting policies and procedures by product and loan type.
• Is underwriting centralized?
• Recent or planned changes to underwriting guidelines.
• Approach to verifying income and employment documentation.
• Qualifying rate and ratios.
• Documentation requirements.
• Insurance requirements and verifications.
• Use of non-traditional credit in underwriting.
• Non-U.S. citizen requirements/eligibility.
• Procedures for ensuring compliance with regulatory and predatory lending laws.
• Use of credit scoring, automated underwriting and other technology.
• Underwriter compensation structure.
• Authority levels.
• Exception and override process/practices.
• Process for completing data integrity checks.
• Fraud detection procedures and systems.
• Closing and funding process.
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 4: Sample Operational Risk Questions for U.S.
Unsecured Consumer Loan Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Ability to provide representations and warranties.
• Portfolio size and composition.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
11
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by origination channel.
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a regulatory or state investigation? If so, discuss any
findings.
• Process for interpreting and tracking state, local and federal regulatory compliance statutes, including
the use of counsel and compliance software.
• Repurchases due to breaches of representations and warranties ($ and # last 12 months).
• Material litigation (past, present and expected).
• Procedures for vendor selection and oversight.
• Storage and updating of policies and procedures.
Origination and Sourcing
• Origination strategy, target market and channels.
• Sales and marketing practices.
• Criteria and use of prescreening and promotions.
• Response rates to preapprovals.
• Use of the Internet, direct mailings and third-party resources.
• Approval and monitoring processes for third-party originators/affiliates (if applicable).
• Procedures for ensuring new loan setup accuracy and data integrity.
• Post-origination quality reviews.
Underwriting Guidelines
• Underwriting policies and procedures by product type.
• Is underwriting centralized?
• Recent or planned changes to underwriting guidelines.
• Approach to verifying income, employment and assets.
• Credit limits extended.
• Documentation requirements.
• Use of non-traditional credit in underwriting (i.e. cancelled utility and rent checks).
• Use of credit scoring, automated underwriting and other technology.
• Percentage of portfolio approved through automated scoring.
• Procedures for ensuring compliance with regulatory and predatory lending laws.
• Interest rates and fee schedules (late fees, etc.).
• Underwriter compensation structure.
• Authority levels.
• Exception and override process/practices.
• Process for completing data integrity checks.
• Fraud detection procedures and systems.
• Process for delivering funds to the borrower (i.e., mail/in person).
12
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 5: Sample Operational Risk Questions for U.S.
Credit Card Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Ability to provide representations and warranties.
• Portfolio size and composition.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by origination channel.
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been, or are you now, the subject of a regulatory or state investigation? If so, discuss any
findings.
• Process for interpreting and tracking state, local and federal regulatory compliance statutes, including
the use of counsel and compliance software.
• Repurchases due to breaches of representations and warranties ($ and no., last 12 months).
• Litigation (past, present and expected).
• Procedures for vendor selection and oversight.
• Storage and updating of policies and procedures.
Origination and Sourcing
• Origination strategy and channels.
• Sales and marketing practices.
• Criteria and use of prescreening and promotions.
• Response rates to preapprovals.
• Use of the Internet, direct mailings and third-party resources.
• Approval and monitoring processes for third-party originators/affiliates (if applicable).
• Procedures for ensuring new account setup accuracy and data integrity.
• Post-origination quality reviews.
Underwriting Guidelines
• Underwriting policies and procedures by product.
• Is underwriting centralized?
13
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Recent or planned changes to underwriting guidelines.
• Approach to verifying employment and income.
• Credit limits/lines extended.
• Documentation requirements.
• Use of non-traditional credit in underwriting (i.e. cancelled utility and rent checks).
• Use of credit scoring, automated underwriting and other technology.
• Percentage of portfolio approved through automated scoring.
• Cash advances polices and criteria.
• Renewal criteria and underwriting.
• Procedures for ensuring compliance with regulatory and predatory lending laws.
• Annual percentage rates and fee schedules.
• Underwriter compensation structure.
• Authority levels.
• Exception and override process/practices.
• Process for completing data integrity checks.
• Fraud detection procedures and systems.
• Process for delivering/activating credit cards.
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 6: Sample Operational Risk Questions for U.S.
Equipment Lease Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Ability to provide representations and warranties.
• Portfolio size and composition.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by origination channel.
14
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a regulatory or state investigation? If so, discuss any
findings.
• Have you ever been terminated or not in good standing with any federal or state regulatory body? If
so, please explain.
• Repurchases due to breaches of representations and warranties ($ and #).
• Litigation (past, present and expected).
• Controls for managing potential conflicts of interest associated with parties to a transaction.
• Procedures for vendor selection and oversight.
• Storage and updating of policies and procedures.
Sales and Marketing
• Origination strategy and channels.
• Sales and marketing practices.
• Use of dealers and brokers.
• Approval and monitoring processes for lessees.
• Delegated underwriting practices and policies.
• Procedures for ensuring new loan setup accuracy and data integrity.
• Exception and trailing documentation management i.e. title.
• Post-closing quality reviews.
Underwriting Guidelines
• Underwriting policies and procedures by product and lease type.
• Is underwriting centralized?
• Recent or planned changes to underwriting guidelines.
• Approval process for potential lessees.
• Qualifying rate and ratios.
• Documentation requirements.
• Insurance requirements and verifications.
• Use of credit scoring, automated underwriting and other technology.
• Underwriter compensation structure.
• Authority levels.
• Exception and override process/practices.
• Process for completing data integrity checks.
• Fraud detection procedures and systems.
• Closing and funding process.
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
15
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Exhibit 7: Sample Operational Risk Questions for U.S.
Insurance Premium Finance Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Portfolio size and composition.
• Strategic initiatives.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Recent or planned mergers or acquisitions.
• Securitization history and future plans.
• Use of outsourcing, temporary staff and offshore resources.
• Historical performance by channel.
Controls and Compliance
• Risk management practices.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of any regulatory action? If so, discuss any findings.
• Litigation (past, present and expected).
Market Position
• Who do you consider to be your chief competition and why?
• How has your market position changed since your entry into the business?
• Why has it changed? How do you expect it will change in the future?
• What do you consider to be your competitive advantages/disadvantages?
• What distinguishes you from the competition?
• Discuss the future growth outlook for the company.
• How do you manage the relationship with manufacturers and clients?
• Cyclicality – cite the factors that affect the industry and your company (i.e., demand/utilization rates).
Target Markets
• Who is your primary target market?
• Why did you select this target market?
• How have sales trended? What is your expectation for growth?
Markets
• How large is the direct sales force?
• Are brokers or outside personnel used in the sales function?
• How is the sales force compensated (salary, commission, share profits and losses of company)?
• Does the sales force act as the first level of credit (i.e., pre-screening)?
• How much business is sourced through direct versus indirect sales?
• Describe how sales leads are obtained (vendor, broker, cold calling).
• Describe portfolio acquisitions that have occurred in the past.
16
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Origination and Sourcing
• Origination strategy and channels.
• Sales and marketing practices.
• Use of dealers and brokers.
• Approval and monitoring processes for lessees.
• Delegated underwriting practices and policies.
• Procedures for ensuring new loan setup accuracy and data integrity.
• Exception and trailing documentation management (i.e., title).
• Post-closing quality reviews.
Legal
• Under what jurisdiction are the contracts originated and executed?
• Has the enforceability of contracts been tested in a lessee bankruptcy?
• Does the company file Uniform Commercial Code (UCC) statements?
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 8: Sample Operational Risk Questions for U.S.
Rental Car Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Ability to provide representations and warranties.
• Fleet size and composition.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees.
• Staffing, training and retention rates.
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by manufacturer.
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a regulatory or state investigation? If so, discuss any
findings.
17
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Have you ever been terminated or not in good standing with any federal or state regulatory body? If
so, please explain.
• Repurchases due to breaches of representations and warranties ($ and #).
• Litigation (past, present and expected).
• Controls for managing potential conflicts of interest associated with parties to a transaction.
• Storage and updating of policies and procedures.
Origination and Sourcing
• Manufacturer approval and selection process.
• Strategy/process for determining optimal fleet mix (program/no-program, make, model).
• Approval and monitoring processes for lessees/sublessees.
• Procedures for ensuring new manufacturer repurchase agreement setup accuracy and data integrity.
• Valuation procedures for used vehicle acquisitions.
• Title management.
Rental Process
• Reservation systems and process.
• Customer pick-up.
• Customer drop-off.
• Tracking of vehicles and customer information.
• Types of rental agreements.
• Use of technology.
• Fraud detection procedures and systems.
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
18
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Exhibit 9: Sample Operational Risk Questions for U.S.
Structured Settlement Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Portfolio size and composition.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by origination channel.
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a CFPB, regulatory or state investigation? If so, discuss
any findings.
• Have you ever been terminated or not in good standing with any federal or state regulatory body? If
so, please explain.
• Process for interpreting and tracking state, local and federal regulatory compliance statues, including
the use of counsel and compliance software.
• Repurchases due to breaches of representations and warranties ($ and #).
• Litigation (past, present and expected).
• Controls for managing potential conflicts of interest associated with parties to a transaction.
• Procedures for vendor selection and oversight.
• Storage and updating of policies and procedures.
Origination and Sourcing
• Origination strategy and channels.
• Primary target market.
• Use of brokers or an outside sales function.
• Sales and marketing practices.
• How is the sales force compensated (salary, commission, etc.)?
• Does the salesforce act as the first level of credit (i.e., prescreening)?
• How are leads obtained (vendor, broker, cold calling, television (TV) advertisements, etc.)?
• How does the firm compete for business (i.e., fast turnaround)?
• Who is your competition?
Underwriting Guidelines
• How is the product underwritten?
• Is underwriting centralized?
• What are your documentation requirements?
• Who is responsible for ensuring the underwriting guidelines are followed?
• Are all credits underwritten in house?
19
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Discuss typical payment terms.
• Fraud detection procedures and systems.
• Closing and funding process.
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 10: Sample Operational Risk Questions for U.S.
Federal Family Education Loan Program (FFELP)
Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Management experience.
• Staffing, training and retention rates.
• Organizational charts.
• Portfolio size and composition (i.e., subsidized Stafford, unsubsidized Stafford, PLUS, Grad PLUS and
Consolidation loans).
• Strategic initiatives.
• Litigation (past, present and expected).
• Have you ever been terminated or not in good standing with any federal or state regulatory body? If
so, please explain.
• Recent or planned mergers or acquisitions.
• Recent or planned transfer of servicing (rights), if any.
• Runoff rates.
• Internal and external audit results (include any U.S. Department of Education findings).
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of any regulatory action? If so, discuss any findings.
• Securitization history and future plans.
• Third-party outsourcing/servicing arrangements, if applicable.
• Vintage loss performance and trends to date.
Loan Administration
• New loan boarding process.
• Procedures for boarding accuracy and data integrity.
• Management of borrower benefit programs.
• FFEL Lenders’ Interest & Special Allowance (LaRS) Remittance form processing and filing.
• Percentage of loans with third-party guarantees.
• Cash management procedures and controls.
• Payment processing methods and controls.
• Number of loans actively paying.
20
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Exception and suspense management.
• Account reconciliation and timing.
• Post-closing quality reviews.
Technology
• Core servicing system strengths and weaknesses.
• Capacity remaining in the servicing system.
• Website availability, usage and security.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 11: Sample Operational Risk Questions for U.S.
Private Student Loan Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Ability to provide representations and warranties.
• Portfolio size and composition.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by origination channel.
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a regulatory or state investigation? If so, discuss any
findings.
• Have you ever been terminated or not in good standing with Department of Education? If so, please
explain.
• Process for interpreting and tracking state, local and federal regulatory compliance statutes, including
the use of counsel and compliance software.
• Repurchases due to breaches of representations and warranties ($ and #).
• Litigation (past, present and expected).
• Controls for managing potential conflicts of interest associated with parties to a transaction.
• Procedures for vendor selection and oversight.
• Storage and updating of policies and procedures.
21
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Origination and Sourcing
• Origination strategy and channels.
• Sales and marketing practices.
• Use of TV, Internet, mail and direct school channel.
• Delegated underwriting practices and policies.
• Procedures for ensuring new loan setup accuracy and data integrity.
• Exception and trailing documentation management.
• Post-closing quality reviews.
Underwriting Guidelines
• Underwriting policies and procedures by product and loan type.
• Is underwriting centralized?
• Recent or planned changes to underwriting guidelines.
• Approach to verifying income and employment.
• Qualifying rate and ratios.
• Documentation requirements.
• Use of non-traditional credit in underwriting.
• Non-U.S. citizen requirements/eligibility.
• Procedures for ensuring compliance with regulatory and predatory lending laws.
• Use of credit scoring, automated underwriting and other technology.
• Underwriter compensation structure.
• Authority levels.
• Exception and override process/practices.
• Process for completing data integrity checks.
• Fraud detection procedures and systems.
• Closing and funding process.
• Trailing documentation follow-up.
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 12: Sample Operational Risk Questions for U.S.
Timeshare Loan Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Overview of existing resort properties.
• Capital improvement schedule and stages of development.
• Current levels of inventory.
• Current and projected occupancy status for current properties and projects.
• Ability to provide representations and warranties.
22
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Portfolio size and composition.
• Relationships with resort developers, property managers and homeowners’ associations.
• Marketing campaign (i.e., themed, short drive, destination resort).
• Growth and development strategy including target markets.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Use of outsourcing, temporary staff and offshore resources.
• Securitization history and future plans.
• Historical performance by origination channel and product.
Controls and Compliance
• QC and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a regulatory or state investigation? If so, discuss any
findings.
• Process for interpreting and tracking state, local and federal regulatory compliance statutes, including
the use of counsel and compliance software.
• Repurchases due to breaches of representations and warranties ($ and # last 12 months).
• Litigation (past, present and expected).
• Procedures for vendor selection and oversight.
• Storage and updating of policies and procedures.
Sales and Marketing
• Origination strategy and channels.
• Sales, marketing practices and locations used.
• Describe products being offered.
• Description of the sales force, commission structure and historical sales.
• Target customer demographics.
• Criteria and use of prescreening and promotions.
• Response rates by marketing technique.
• Use of the Internet, direct mailings and third-party resources.
• Approval and monitoring processes for third-party originators/affiliates.
• Closing and rescission rates.
• Sales and marketing costs.
• Portfolio statistics (upgrades, green loans, borrower quality, foreign obligor, etc.).
• Procedures for ensuring new account setup accuracy and data integrity.
• Post-origination quality reviews.
Underwriting Guidelines
• Underwriting policies and procedures by product and loan type including down payment requirements.
• Is underwriting centralized?
• Recent or planned changes to underwriting guidelines.
• Approach to verifying income, assets and employment.
• Loan-to-value parameters.
• Qualifying rate and ratios.
• Documentation requirements.
• Occupancy and property eligibility.
23
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Use of non-traditional credit in underwriting.
• Non-U.S. citizen requirements/eligibility (i.e. rent checks and utility bills).
• Procedures for ensuring compliance with regulatory and predatory lending laws.
• Use of credit scoring, automated underwriting and other technology.
• Underwriter compensation structure.
• Authority levels.
• Exception and override process/practices.
• Process for completing data integrity checks.
• Fraud detection procedures and systems.
• Closing, funding and titling process.
• Trailing documentation follow-up.
Technology
• Core origination system strengths and weaknesses, including reporting capabilities.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Security measures employed to ensure compliance with consumer privacy laws.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 13: Sample Operational Risk Questions for U.S.
Wholesale Auto Loan Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Ability to provide representations and warranties.
• Portfolio size and composition.
• Strategic initiatives.
• Recent or planned mergers or acquisitions.
• Risk management practices.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Third-party outsourcing/servicing arrangements, if applicable.
• Securitization history and future plans.
• Have you ever been terminated from a transaction for cause?
• Historical repayment rate.
• Runoff rates.
• Vintage loss performance and trends to date.
• Competition.
• Outline payment terms and repurchase agreements, if any.
24
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Controls and Compliance
• Quality control (QC) and internal audit procedures.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of a CFPB, regulatory or state investigation? If so, discuss
any findings.
• Have you ever been terminated or not in good standing with any federal or state regulatory body? (If
so, please explain).
• Process for interpreting and tracking state, local and federal regulatory compliance statues, including
the use of counsel and compliance software.
• Repurchases due to breaches of representations and warranties ($ and #).
• Litigation (past, present and expected).
• Storage and updating of policies and procedures.
Origination and Sourcing
• Origination strategy and channels.
• Sales and marketing practices.
• Approval and monitoring processes for dealers.
Underwriting Guidelines
• Underwriting policies and procedures.
• Recent or planned changes to underwriting guidelines.
• Approval process for potential dealers.
• Documentation requirements.
• Insurance requirements and verifications.
• Exception and override process/practices.
• Fraud detection procedures and systems.
• Closing and funding process.
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Web site availability, usage and security.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 14: Sample Operational Risk Questions for U.S.
Healthcare Receivables Originators
Company and Management
• Company history, ownership and operating experience in the healthcare business.
• Financial condition/profitability.
• Portfolio size and composition.
• Strategic initiatives.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
25
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Organizational charts.
• Recent or planned mergers or acquisitions.
• Securitization history and future plans.
• Use of outsourcing, temporary staff and offshore resources.
• Historical performance by channel.
Controls and Compliance
• Risk management practices.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of any regulatory action? If so, discuss any findings.
• Litigation (past, present and expected).
Sourcing
• Who is your primary target market?
• Why did you select this target market?
• Describe sourcing by product type (patient/provider etc.).
• What is your expectation for growth?
Origination/Underwriting
• How is product underwritten?
• Are underwriting methods determined/controlled/monitored centrally or regionally?
• Are any credit scoring models used? Is there more than one model used for different purposes?
• What are the documentation requirements?
• Verification of insurance process.
• Discuss exception/override process.
• How does the firm compete for business (e.g. fast turnaround)?
• How do you manage relationship(s) with patients/healthcare providers/insurance companies?
• Discuss any grading of healthcare providers.
• Are all credits underwritten in-house?
• Does the company file UCC’s?
• What fraud prevention techniques are used?
• Historical denial rates.
• How quickly are approvals turned around?
• How are credit limits determined?
• Are there any in-house limits regarding industry concentrations, national concentrations, and/or client
concentrations etc.?
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Web site availability, usage and security.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
26
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Exhibit 15: Sample Operational Risk Questions for U.S.
Asset-Based Loan Receivables and Factoring Originators
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Portfolio size and composition.
• Strategic initiatives.
• Management experience.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Organizational charts.
• Recent or planned mergers or acquisitions.
• Securitization history and future plans.
• Use of outsourcing, temporary staff and offshore resources.
• Historical performance by channel.
Controls and Compliance
• Risk management practices.
• Internal and external audit results.
• Efforts to ensure regulatory compliance, including adherence to the CFPB rules.
• Have you been or are you now the subject of any regulatory action? If so, discuss any findings.
• Litigation (past, present and expected).
Market Position
• Who do you consider to be your chief competition and why?
• How has your market position changed since your entry into the business?
• Why has it changed? How do you expect it will change in the future?
• What do you consider to be your competitive advantages/disadvantages?
• What distinguishes you from the competition?
• Discuss the future growth outlook for the company.
• How do you manage the relationship with manufacturers and clients?
• Cyclicality – cite the factors that affect the industry and your company (i.e., demand/utilization rates).
Target Markets
• Who is your primary target market?
• Why did you select this target market?
• How have sales trended? What is your expectation for growth?
Markets
• How large is the direct sales force?
• Are brokers or outside personnel used in the sales function?
• How is the sales force compensated (salary, commission, share profits and losses of company)?
• Does the sales force act as the first level of credit (i.e., pre-screening)?
• How much business is sourced through direct versus indirect sales?
• Describe how sales leads are obtained (vendor, broker, cold calling).
• Describe portfolio acquisitions that have occurred in the past.
27
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Origination/Underwriting
• How is product sourced and underwritten?
• Are underwriting methods determined/controlled/monitored centrally or regionally?
• Are any credit scoring models used? Is there more than one model used for different purposes?
• Discuss payment terms.
• Discuss exception/override process.
• How does the firm compete for business (e.g., fast turnaround or lower documentation requirements)?
• What fraud prevention techniques are used?
• Are all credits underwritten in house, regardless of who originates it (vendor/broker)?
• What is the minimum number of years in business that you require for a lessee?
• Do financial statements have to be audited or will you accept unaudited statements?
• Do you obtain guarantees or other forms of enhancement?
• How much reliance is placed on the asset (asset-based lender or cash flow lender)?
• How quickly are approvals turned around?
• How are credit limits determined?
• Any in-house limits regarding industry concentrations, national concentrations, and/or client concentrations, etc.?
Legal
• Under what jurisdiction are the contracts originated and executed?
• Has the enforceability of contracts been tested in a lessee bankruptcy?
• Does the company file UCCs?
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 16: Sample Operational Risk Questions for
Container Originators
Company and Management
• Company history, ownership and operating experience in the container business.
• Financial condition/profitability.
• Management experience.
• Portfolio size and composition.
• Organizational charts.
• Strategic initiatives.
• Number of employees and underwriters.
• Staffing, training and retention rates.
• Recent or planned mergers or acquisitions.
• Securitization history and future plans.
• Use of outsourcing, temporary staff and offshore resources.
• Historical performance by channel.
28
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Controls and Compliance
• Risk management practices.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of any regulatory action? If so, discuss any findings.
• Litigation (past, present and expected).
Market Position
• Who do you consider to be your chief competition and why?
• How has your market position changed since your entry into the business?
• Why has it changed? How do you expect it will change in the future?
• What do you consider to be your competitive advantages/disadvantages?
• What distinguishes you from the competition?
• Discuss the future growth outlook for the company.
• How do you manage the relationship with manufacturers and machinery providers?
• Cyclicality – cite the factors that affect the industry and your company (i.e., demand/utilization rates).
Target Markets
• Who is your primary target market?
• Why did you select this target market?
• How have sales trended? What is your expectation for growth?
Markets
• How large is the direct sales force?
• Are brokers or outside personnel used in the sales function?
• How is the sales force compensated (salary, commission, share profits and losses of leases written)?
• Does the sales force act as the first level of credit (i.e., pre-screening)?
• How much business is sourced through direct versus indirect sales?
• Describe how sales leads are obtained (vendor, broker, cold calling).
• Describe portfolio acquisitions that have occurred in the past.
Origination/Underwriting
• How is product sourced and underwritten?
• Are underwriting methods determined/controlled/monitored centrally or regionally?
• Are any credit scoring models used? Is there more than one model used for different purposes?
• Discuss payment terms.
• Discuss exception/override process.
• How does the firm compete for business (e.g., fast turnaround or lower documentation requirements)?
• What fraud prevention techniques are used?
• Are all credits underwritten in house, regardless of who originates it (vendor/broker)?
• What is the minimum number of years in business that you require for a lessee?
• Do financial statements have to be audited or will you accept unaudited statements?
• Do you obtain guarantees or other forms of enhancement?
• How much reliance is placed on the equipment (asset-based lender or cash flow lender)?
• How quickly are approvals turned around?
• How are credit limits determined?
• Are there any in-house limits regarding industry concentrations, national concentrations, and/or lessee
concentrations, etc.?
29
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Tracking of Containers
• Ordering containers – What does the lessee need to do in order to commit to purchasing units? What
does the company have to do to order containers from the manufacturer?
• What systems are used to track and report on container location?
• How does the company verify that the delivery of containers has taken place?
• Outline a typical inspection at the depot gate. How is the lessor involved in this process?
Legal
• Under what jurisdiction are lease contracts originated and executed?
• Are all leases hell or high water and triple net?
• Are lease documents drafted legally as true leases?
• Has the enforceability of lease contracts been tested in a lessee bankruptcy?
• Are there any restrictions on subleasing?
• Do the addenda to the master lease agreements constitute separate legal contracts?
• UCC filing policies: how does the company perfect its ownership of equipment subject to the operating
lease agreements?
• Describe the perfection process for the secured loan financings and ABS. What additional UCCs are
filed, if any, to perfect the creditors’ secured interest in pledged equipment and related leases?
• Does the company keep the original lease contracts and other lease documentation, or are they held by
the lenders or their agents (e.g., custodian)?
Technology
• Core origination system strengths and weaknesses.
• Capacity remaining in the origination system.
• Website availability, usage and security.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Exhibit 17: Sample Operational Risk Questions for U.S.
Film Rights Securitizations
Company and Management
• Company history, ownership and operating experience.
• Financial condition/profitability.
• Discuss affiliated businesses other than film production and distribution.
• Management experience.
• Staffing, training and retention rates.
• Corporate organizational chart.
• Historical film production volume and library size and composition, if applicable.
• Overview of the motion picture industry and how it has changed over the last five years.
• Strategic initiatives.
• Cause of termination of third-party distribution rights, if applicable.
• Recent or planned mergers or acquisitions.
• Recent or planned transfer of distribution rights, if applicable.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Have you been or are you now the subject of any regulatory action? If so, discuss any findings.
30
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
• Securitization history and future plans.
• Third-party outsourcing arrangements, if applicable.
• Competitive position in the industry.
Production Companies and Distributors
• Provide an overview of the development and green light process. At what stage is a film green-lighted
for production?
• Provide an overview of film production and how the company manages production.
• Provide an overview of a film’s budget oversight and approval requirements to exceed budget.
• Describe how the company decides on financing specific films with co-financing partners, if applicable.
• Describe how the producer/distributor develops its ultimates and how/when they are updated.
• Does the company have in-house distribution capabilities or is distribution outsourced to a third-party?
• Discuss the marketing strategy in each distribution channel. How large is the marketing team?
• Provide an overview of domestic and foreign output and distribution agreements. Distinguish between
first and second cycle.
• Discuss timing of collections by distribution window.
• Discuss the opportunities and challenges in each distribution channel.
• Discuss the strategy with respect to digital distribution.
Billing & Collections
• Discuss cash collection process by channel and territory and the process by which cash is ultimately
deposited into the issuer’s account.
• Are accounts commingled? If so, for how long?
• Account reconciliation and timing.
• Arrears management.
• Historical default experience and remedies upon a default.
• Typical payment terms by channel and territory.
Investor Reporting
• Procedures for dissemination of reports to investors and trustees.
• Average number of investors remitted to on a monthly basis (last 12 months).
• Average dollar of monthly remittances (last 12 months).
• Number of late remittances in the last 12 months.
Litigation & Copyright Enforcement
• Litigation (past, present and expected).
• Participations & residuals dispute handling process.
• Provide an overview of the actions taken to protect against theft of intellectual property.
Technology
• Discuss information technology (IT) systems.
• Core IT system strengths and weaknesses.
• Capacity remaining in the system.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
31
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Exhibit 18: Sample Operational Risk Questions for U.S.
TV Programming Licensing Rights
Company and Management
• Company history, ownership and operating experience.
• Corporate organizational chart.
• Discuss affiliated businesses other than TV programming production and distribution.
• Financial condition/profitability.
• Management experience.
• Staffing, training and retention rates.
• Programming library size, composition and cash flows.
• Overview of the TV broadcast industry and how it has changed over the last five years.
• New strategic initiatives.
• Cause of network license termination, if any.
• Recent or planned mergers or acquisitions.
• Recent or planned transfer/sale of program intellectual property rights, if any.
• Recent or planned programming acquisitions.
• Internal and external audit results.
• Efforts to ensure regulatory compliance.
• Has the company previously been or currently the subject of any regulatory action? If so, discuss any
findings.
• Securitization history and future plans.
• Discuss third-party outsourcing arrangements.
• Competitive position in the industry.
Programming Production & Management
• Provide an overview of the development of new programming.
• Provide an overview of the production logistics for each program. What is the company’s role in overseeing production?
• How is the program venue selected?
• Are any of the hosts contracted under long term contracts?
• Are any elements of production subject to local/state government approval?
• When do contract renewal discussions typically begin?
Network License & Ancillary Fees
• Provide an overview of ancillary revenues beyond network license fees.
• Provide an overview of how the company sells available advertising time it is granted in its program, if
any.
• Provide details on license fees and ancillary revenues denominated in foreign currencies.
• Marketing strategy for network and ancillary revenues. How large is the marketing team?
• Discuss the company’s strategy with respect to digital distribution.
• When is a license fee receivable created?
• When are network license fees due and payable? Are they paid in one installment or several?
• Are there any executory elements in the network license agreements and other ancillary contracts other
than delivery of the program?
• Are there any participations & residuals paid to talent and to the guilds?
32
Operational Risk Assessment for U.S. ABS Originators Methodology
February 2015
Billings & Collections
• Discuss cash collection process and the process by which collections are ultimately deposited into the
special-purpose vehicle account.
• Are accounts commingled? If so, for how long?
• Methods of payments: check, wire, automated clearing house.
• Payment processing and controls.
• How are disputes handled?
• Arrears management.
• Historical default experience.
Investor Reporting
• Procedures for the dissemination of reports to investors and trustees.
• Average number of investors remitted to on a monthly basis (last 12 months).
• Number of late remittances in the last 12 months.
Technology
• Provide an overview of the company’s information technology (IT) systems.
• Core IT system strengths and weaknesses.
• Capacity remaining in the system.
• Website availability, usage and security, if applicable.
• Procedures for vendor selection and oversight.
• Disaster recovery/business continuity plans and success of last test.
• Frequency of full-system backup.
• Future initiatives.
Litigation & Copyright Enforcement
• Litigation (past, present and expected).
• Participations & residuals dispute handling process, if applicable.
• Provide an overview of the actions taken to protect against theft of intellectual property.
33
Copyright © 2015, DBRS Limited, DBRS, Inc. and DBRS Ratings Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is
obtained by DBRS from sources DBRS believes to be accurate and reliable. DBRS does not audit the information it receives in connection with the rating process, and it does not and
cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings,
reports and any other information provided by DBRS are provided “as is” and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty,
express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall
DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data,
interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising
from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS
Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and
other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell
or hold any securities. A report providing a DBRS rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and
its agents in connection with the sale of the securities. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities
for assigning ratings and from subscribers to its website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer
links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form
without the prior written consent of DBRS. ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT
http://www.dbrs.com/about/disclaimer. ADDITIONAL INFORMATION REGARDING DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON
http://www.dbrs.com.
www.dbrs.com
Corporate Headquarters
DBRS Tower
181 University Avenue
Suite 700
Toronto, ON M5H 3M7
TEL +1 416 593 5577