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© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. NDPPS 241743

For more information

To learn more about our services and capabilities, please contact your local KPMG representative or one of the following KPMG Mortgage and Consumer Lending Services Leaders:

Mark Twerdok

Credit Risk Services Leader 412-232-1599

mtwerdok@kpmg.com Kimberly Davis-Riffe

Mortgage and Consumer Lending Services Leader Operations

703-286-6850

kdavisriffe@kpmg.com Pedro Goitia

Mortgage and Consumer Lending Services Leader Securitization and Operations

703-286-8140 pgoitia@kpmg.com

Anthony Sepci

Mortgage and Consumer Lending Services Leader Securitization, Operations, and Analytics

213-955-8665 asepci@kpmg.com Douglas Williams

Mortgage and Consumer Lending Services Leader Accounting Systems Development, Securitization, and Tax

703-286-8380 dwilliam@kpmg.com

Anita Agarwal Managing Director Operations and Valuations 949-885-5412

anitaagarwal@kpmg.com Viktor Beletskiy Principal

Model Development and Securitization Tax 703-286-8036

vbeletskiy@kpmg.com Jeffrey Bower Managing Director Operations and Analytics 610-989-3668

jebower@kpmg.com Christopher Boyles Managing Director

Accounting Systems Development and Analytics 949-885-5523 cboyles@kpmg.com Michael Cwiok Managing Director Operations 312-665-2231 mcwiok@kpmg.com Edmund Green Managing Director Operations 703-286-8692 elgreen@kpmg.com John Hermle Partner

Securitization and Valuation 703-286-8125 jhermle@kpmg.com Jeffrey Hulett Managing Director Operations 703-286-6695 jhulett@kpmg.com Glenn Hursh Managing Director Operations 412-232-1589 ghursh@kpmg.com Shelley Lee Hing Partner

Accounting Systems Development and Securitization

703-286-8339 sleehing@kpmg.com

Jeffrey Miskell Managing Director

Accounting Systems Development 703-286-8212 jmiskell@kpmg.com David Pang Partner Securitization Tax 703-286-8293 djpang@kpmg.com Tina Stoliar Partner Securitization and Regulatory Reporting 949-885-5838 tstoliar@kpmg.com Larry Walker Managing Director Operations 214-840-4058 larrywalker@kpmg.com

CREDIT RISK MANAGEMENT

Mortgage and

Consumer Lending

Services

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Methodologies and services designed for today’s

turbulent economies

3

Responding to a range of client needs

4

Services for major industry lending sectors

5

Mortgages 6

Auto loans and leases

7

Non-bank accounts receivables (Utilities/Telcom)

8

Credit cards

9

Small business lending and equipment leasing and financing

10

Student loans

11

GSEs and Federal Financial Services

12

Related securitization and modeling services

13

Contents

Mortgage and Consumer Lending Services

19

KPMG Fast for modeling and analytics

KPMG maintains a dedicated team of systems professionals specializing in securitization to help serve client needs. Our investments in professional resources, software, and technologies form the building blocks of our practice, and help place us at the forefront of new transaction structures. The cornerstone of our technology platform is KPMG FAST, a family of structured finance software products developed by KPMG’s professionals. KPMG FAST is written in efficient, easy-to-maintain code that captures both data and function in modules. The result is a highly flexible securitization modeling and analytics system designed for the following functions:

• Generate collateral and bond cash flows along with related calculations

• Perform bond administration and tax reporting functions in both a production and ad hoc environment

• Facilitate modeling

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Mortgage and Consumer Lending Services

Effective yield model system

The ongoing financial crisis has placed many companies in the position of having acquired loans or debt securities in a purchase business combination subject to FAS 141 R, including combinations done as FDIC-assisted transactions. Often with these transactions, the expectation is to receive less cash flow than the contractual cash flows of the loan due to evidence of credit deterioration of the borrower, which triggers the accounting for these loans and securities under ASC 310-30

(SOP 03-3).

KPMG’s standard model system functionality includes:

• ASC 310-30 (SOP 03-3) Effective Yield functionality including: – Expected and actual cash flows generation

– Accretable yield, including amortization – Nonaccretable difference

– Variable interest rate adjustments – Prepayment assumption adjustment – Impairment calculation

– Reversal of impairment – Carrying value tracking

• ASC 310-20 (FAS 91) Effective Yield functionality for assets not impaired including:

– Expected cash flows generation

– Retrospective yield method -“Cumulative catch up” adjustment

– Premium and discount amortization – Carrying value tracking

• FDIC Loss Share functionality including:

– Indemnification asset calculation, tracking, adjustment, and reporting

– Monthly loan tracking – Monthly FDIC reporting

– Loss share reimbursement claim submission report

• Tax Effective Yield functionality including: – Market Discount accruals per IRC 1272(a)6 – Market Discount recognition per IRC 1278(b) – Tax basis tracking

– Loss recognition calculation per IRC 166

– Deferred tax asset/liability reconciliation and reporting

• Transaction matrix and chart of accounts

• Journal voucher and reporting: – Accounting

– Tax

– FDIC Loss Share – Managerial – Regulatory – Ad hoc

• System control features include:

– Errors and exception handling and reporting – Access controls

– User level roles, and responsibilities functionality control – Change management and activity/audit logging

– Automated rollback and forecasting functionality

Mortgage and Consumer Lending Services

3

Methodologies and

services designed

for today’s turbulent

economies

Key risk issues for mortgage and consumer lending organizations:

• Reputational risk

• Regulatory rules, both current and projected

• Increased capital requirements and growing customer service demands that drive the development of new business models

• Market volatility and economic uncertainty

• Press coverage and public opinion—both positive and negative—about the industry and competing companies

Over the past few years, the mortgage and

consumer lending industry has experienced

unprecedented changes and turmoil.

Financial services and housing have become

the nation’s two most challenged sectors of

the economy, and mortgage and consumer

loan professionals remain concerned about the

state of industry, concerns that are also shared

by regulators, lenders, consumers, and the

public media.

In response to current economic uncertainties,

several new reforms and agencies such as the

Consumer Financial Protection Bureau have

been established to help mitigate, manage,

and monitor ongoing risk in the industry.

This constantly changing environment directly

impacts the financial, operational, and regulatory

requirements of mortgage and consumer lending

organizations. Many of these organizations

recognize the need to address growing regulatory

scrutiny, develop and improve processes for

managing their financial risks, and implement

enhanced controls to mitigate risk.

How KPMG can help

KPMG’s Mortgage and Consumer Lending (MCL) Services practice is ready to assist your organization as you navigate this complex and dynamic credit market landscape.

The MCL practice group includes over 180 KPMG professionals in the United States who focus specifically on mortgage and consumer lending, providing deep industry knowledge and experience in the financial services sector. Team members are based in various locations across the United States and the world, and they can be quickly deployed to assist clients, regardless of their location.

Our service offerings support business process improvement and redesign, compliance assistance with new regulations, and financial assistance at the portfolio and loan level. We use credit analytics, financial analysis, and other tools and methodologies to support informed decision making. We can also monitor loan performance, forecast borrower behavior, estimate credit losses, and help mitigate credit and lease residual risks. In short, KPMG member firms are well-positioned to help organizations gain market share and stay competitive in the mortgage and consumer lending marketplace. We have an established record for assisting lending organizations across a wide variety of industries and government agencies. We also possess the advantage of access to additional advisory, tax, and audit resources, enabling them to examine and address issues from a variety of business perspectives.

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Mortgage and Consumer Lending Services

Responding to a

range of client needs

Client need Response by KPMG specialists

Many lenders offer new loan products without understanding the economic consequences or credit risk implications. They sometimes also need support technology.

We help lenders to develop a solid business case for major investments or new business undertakings based on detailed analysis, including expected financial returns.

New loan and leasing underwriting credit policy need to be clearly defined and centralized. Changes in credit policies decisions must be implemented quickly so the company can address rapidly changing market conditions.

We assist organizations in creating a well-defined credit policy to set boundaries within which the business can operate.

Many companies have not adjusted their underwriting, pricing guidelines, or portfolio management strategies to account for the changing risk profiles of new and existing borrowers or changing economies. Score cut-off, line assignment, and ongoing line management strategies are outdated and do not reflect the current risk profiles of borrowers.

We provide an underwriting assessment program that identifies opportunities to improve profitability through underwriting and open to buy (OTB) line management, all while managing to expected risk levels.

Regulators today are looking for a broader review of mortgage and consumer lending businesses that expand beyond individual file reviews. Organizations need a clearly defined business strategy, quality control metrics, and approved credit policy for originations, servicing, and collections.

We offer portfolio review services for lenders that cover the full credit cycle and provide insight into industry best practices. Our review and testing services support areas such as

account acquisition and underwriting, account management and servicing, collections, foreclosure and real estate owned (REO) property.

Credit risks inherent in the prerecession lending boom have not been identified or reversed. Historical trends and modeled assumptions are obsolete and are not indicative of the future performance. Operational areas have not been rebalanced in line with the forecast.

We work with lenders to develop collections-scorecard strategies in conjunction with dialer strategies to reduce charge-offs while helping to minimize collections operations costs. We develop early detection methodologies for high-risk portfolio segments, helping to choose an optimal path in line with lowering credit losses and reducing associated costs. Financial services leaders need to update their key

performance indicators (KPIs) or benchmarks to reflect the impact of current market trends.

We assist lenders in developing KPIs, defining benchmarks, and automating management reporting to track queues, operating costs, and portfolio performance.

The regulations concerning Allowance for Loan and Lease Losses (ALLL) have left several areas open for interpretation. Companies use varying models and processes to meet their reserve objectives. GAAP and regulatory considerations may not be fully addressed.

We help lenders in evaluating their existing policies and procedures for ALLL to address questions such as how loans and leases should be pooled, how frequently the allowance should be adjusted, and what observable data is relevant, including when a charge-off should be taken.

Mortgage and Consumer Lending Services

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Modeling

Loan modification and market discount system

The current credit crisis has created serious economic stresses within the debt finance industry. One means to mitigate potential damages is through loan modification. The effective use of this strategy offers distressed borrowers assistance by restructuring their loans with more favorable terms. It also largely preserves the lender’s investment, which could otherwise be lost through default.

Performing such modifications, however, carries the possibility of side effects that result from the current tax law. While modifications can mitigate economic distress, they also have the potential to trigger the realization of capital gains or losses, as well as Original Issue Discount (OID). Thus, a well-prepared institution needs to be able to perform the tax computations associated with any loan modifications that are made.

Tax significant modification testing and gain/loss functionality

• Ability to determine if loan modification will be considered significant for tax purposes as described in Treasury Regulation 1.1001-3, including:

– Term test

– Yield threshold test

– Test loan for Adequate Stated Interest as described in Treasury Regulation 1.1274-2, including all necessary imputation calculations

– If modification is significant, the system will determine the amount of gain/loss and recalculate the original issue discount associated with the deemed newly issued loan – Perform de minimis testing and interest holiday testing to

determine appropriate OID amortization methodology

Processing capabilities

• Ability to process modified loans in a single batch using electronic feeds of underwriting data

Tax-effective yield functionality

• Market discount accruals per IRC 1272(a)(6)

• Market discount recognition per IRC 1278(b)

• Tax-basis tracking

• Loss recognition calculation per IRC 166

• Deferred tax asset/liability reconciliation and reporting

• Standardized reporting

Book accounting for modified loan functionality

• Postmodification accounting, including impairment charge calculation under FASB ASC 310-10 (previously FAS 114) and income accruals

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Mortgage and Consumer Lending Services

Tax Advisory Services

Market discount and premium amortization for portfolios of assets

KPMG has helped various types of clients on projects that require the calculation of market discount and premium amortization for portfolios of assets. This service assists companies in determining the amount of income to be reported in their funds.

The following calculations are provided:

• Accrue market discount (MD) and acquisition premium (AP) amounts, both accrued and recognized, and track accrued and unrecognized MD and AP

• Calculate original issue discount (OID) and qualified stated interest (QSI) income

• Summarize and report the OID, QSI, recognized and unrecognized MD or AP quarterly (Summary Report)

• Calculate and roll forward tax basis of the portfolio assets

• Calculate taxable gain/loss for disposed of portfolio assets

• Determine significant loan modification effects to taxable income

• Determine bad debt deductions

• Calculate quarterly estimated taxable income

• Reconcile book to tax differences

KPMG has developed a system specifically designed to handle these calculations. The advantages of our system are:

• Timing: Our system is designed to perform calculations

utilizing periodic cash flows, thus enabling us to provide information expeditiously.

Efficiency: We are able to process high volumes of data

quickly and efficiently.

Flexibility: Our system can be customized or enhanced

depending upon your company’s needs through either a licensing arrangement, work flow outsourcing engagement, or a combination of the two.

Securitization Tax

Tax Compliance Services

• PFIC tax reporting which includes the preparation of PFIC Annual Information Statement

• CFC tax reporting which includes the preparation of Form 5471

• CDO equity investor tax planning service: capability to provide estimated taxable income amounts

• Consulting on the amortization of deferred loan costs/fees and reconcile book/tax amortization

• Preparation of tax based cash to accrual financial statements that support calculation of US Equity holder’s PFIC income

Mortgage and Consumer Lending Services

5

Services for major

industry lending sectors

KPMG’s MCL practice group includes

specialists in a range of lending sectors. In

fact, many of these professionals have worked

in the sectors they now serve. The MCL team

is backed by additional resources available

from other KPMG practice groups such as

regulatory and financial services technology.

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Mortgage and Consumer Lending Services

KPMG at work

After experiencing significant growth from major acquisitions of established mortgage companies, a top mortgage banking organization was concerned about the integration and proper implementation of a consistent control environment. Since agency repurchase demand volume had increased, the client recognized the potential of repurchase risk related to agency execution.

KPMG specialists conducted a thorough analysis of all material documentation related to the review. Documentation included investor contracts, investor guidelines, policy and procedures, training and job aides, process flows, reports, and data management processes. We further conducted a thorough on-site risk assessment of the bank’s mortgage originations, business operations, and secondary marketing data management areas. At the same time, we reviewed underwriting and control processes.

As a result, the KPMG team was successful in helping the bank to meet its risk assessment needs to improve its repurchase risk management.

The Dodd–Frank Wall Street Reform and

Consumer Protection Act, BASEL III, increased

government scrutiny, changes in

government-sponsored enterprises (GSEs), increased

competition, and the erosion of consumer

confidence have all created significant challenges

for the mortgage sector.

Mortgages

To address these challenges, KPMG’s MCL Services practice offers a dedicated, multidisciplinary team of professionals with years of mortgage industry experience. The team includes specialists from financial services, operational, fraud/forensics, regulatory, and technology disciplines.

Advantages with KPMG:

• Rapid-response teams that can be deployed quickly and efficiently

• A broad-based, holistic approach that leverages the advisory, audit and tax practices of KPMG member firms

• Diverse intellectual capital in the MCL practice group that can be used to manage a large number of mortgage and consumer lending issues

Mortgage and Consumer Lending Services

15

Payment Verification Services

KPMG’s payment verification services can provide you with a verification that your monthly, quarterly, and annual securities payments are calculated within the parameters set forth in the transaction documents. We have over 15 years of experience in providing recalculation services across a range of capital structures and RMBS, CMBS, and ABS collateral types. Our goal is to help you minimize calculation and model errors to enhance timeliness and accuracy of payments. The following are some of the key services KPMG offers related to the payment verification process:

Monthly Payment Calculations

• KPMG will recalculate bond payments including the ending balance, principal, and interest amounts for each security after a thorough review of the governing transaction documents.

• KPMG will objectively perform payment calculations prior to distribution date to ensure ample time for corrections and to help determine accuracy of payments.

Validation of Client Payment Calculations

• KPMG will analyze the payments calculated by internal models and compare them to the data supplied by the client.

• Analysts will perform detailed trigger analysis on reported loss and delinquency figures.

• KPMG will perform objective calculation of floating rate class interest rates will be performed utilizing the indices provided by the client.

• Tailored tolerance ranges will be established for both collateral and bond calculations.

• Variance reports for each transaction will be prepared and analyzed for any amounts that exceed tolerance levels.

• Discrepancies will be resolved through the collaboration of KPMG’s analytics team and the client’s payment administration group.

• KPMG will provide value-added insight on industry best practices and enhanced trustee reporting features.

Advisory Services: Regulation AB

KPMG assists issuers and servicers in complying with the SEC’s requirement of Regulation AB (Reg AB). Reg AB establishes uniform requirements for registration, ongoing reporting and disclosures for publicly issued asset-backed securities (ABS) transactions. A key focal point of Reg AB relates to the 1122(d)(3), Investor Remittance and Reporting Process:

Investor Remittance Reports: Completeness

• Review each Pooling and Servicing Agreement to ensure all required investor reporting items are properly disclosed in the Investor Remittance reports.

• Confirm that reports are prepared in accordance with timeframes and other terms set forth in the transaction agreements.

Investor Remittance Reports: Accuracy of Calculations

• Review reporting items to be disclosed and confirm that they are calculated in accordance with the terms specified in the transaction agreements.

• Verify that total unpaid balance and number of pool assets reported on Remittance Reports agree to the amounts provided by servicers.

• Investor Remittance Reports: Payment Allocation and Remittance – “Waterfall Verification”

• Amounts due to investors are allocated and remitted in accordance with timeframes, distribution priority and other terms set forth in the transaction documents.

In addition to the services above, KPMG offers the full range of Reg AB compliance services including:

• General Servicing considerations, 1122(d)(1)

• Cash Collections and Administration, 1122(d)(2)

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Mortgage and Consumer Lending Services

Securitization

RMBS, CMBS, ABS, and CDO Services

KPMG has in-depth knowledge across all primary securitization asset classes: RMBS, CMBS, ABS, and CDOs. This enables us to assist with all accounting, tax, and advisory aspects of securitization. KPMG provides a wide array of services beginning with the initial planning stage of a securitization or CDO transaction and continues through the execution phase and postclosing.

Pretransaction Services

• Accounting advice on various structures

• Tax advice and planning

• Readiness assessment

Transaction Services

• Agreed-upon procedures reports

• Cash flow modeling (reverse engineering) and bond analytics

• Verification of collateral attributes

• Verification of collateral quality, collateral coverage, and portfolio tests

• Collateral stratification

Post-closing Services

• Ramp-up date procedures

• Verification procedures over note valuation reports, including collateral quality, collateral coverage, and portfolio tests

• Redemption date procedures

• Payment verification

• Regulation AB Advisory

Operational

• Securitization policies and procedures

• Monthly servicer/investor reporting process

• Risk monitoring methodologies and templates

• Static pool data and loss/prepayment curves

• Performance monitoring tools

• Collateral amortization methodologies

• Valuation and OTTI analysis

• Model validation

Mortgage and Consumer Lending Services

7

Auto loans and leases

Auto financing and leasing organizations are

experiencing record growth in loan volume and

are facing growing pressures to approve loans

quickly and service more accounts without

increasing expenses. Increased regulatory

pressures add a new dimension to identifying

risks while maintaining control. As the pendulum

shifts to sales and volume, organizations often do

not maintain proper focus on risk oversight leading

to rapidly increasing risk in relation to a rapidly

growing portfolio.

The KPMG team has experience across the entire credit life cycle of auto lending from originations to collections and recoveries. KPMG can help to develop and review credit policies to ensure alignment with the lender’s risk appetite, validate risk-based pricing to balance risk and reward, assess and recommend collection strategies to help maximize cash collections and reduce delinquencies, and assess remarketing strategies to help maximize recoveries and reduce turn time. Additionally, KPMG can assist in the design and develop of credit control environments across the life cycle for managing risks and indentifying control weaknesses as well process improvements.

Just as important as front- and back-office activities, KPMG can assess and recommend improvements to ALLL methodologies and scoring models benchmarking against industry practices and regulatory guidance, recommending improvements, and offering remediation plans.

Advantages with KPMG:

• Tested approaches structured to help improve risk control and contain losses incurred through poorly designed processes or functions

• Thorough knowledge of ALLL methodologies used in quantifying client reserves appropriately

• A better line of sight of the issues that impact the client’s bottom line

• Tools and data to help clients better control risks and increase revenues in a cost-effective manner

KPMG at work

A large, new and used automotive finance company was experiencing increasing delinquency levels and rising servicing costs causing securitization caps to be breached and operating budgets to be at risk. The company had no line of sight into performance to track servicing’s effectiveness or productivity. The company also had concerns about controls in place to manage processes. The company engaged KPMG to analyze delinquency trends as well as develop a service tracking dashboard. KPMG analyzed collection strategies and recommended use of behavior scoring in conjunction with champion/ challenger campaigns to reduce delinquency rates. Working with servicing management, KPMG designed and populated a management dashboard of key processes and performance indicators and began monthly tracking of performance. Key indicators included: segmented delinquency levels, charge off, promises to pay/broken, call penetration and results, and performance by collector. Based on data analyzed, KPMG recommended rescheduled work hours to coincide with optimal call times to increase contact rates, dialer campaigns to focus on the at risk customers, new collection strategies driven by behavior scores to challenge existing practices, and incentive plans tied to collector performance.

By working with KPMG professionals, the company reduced 30+ day delinquency by over 50bps over a 15-month horizon as well increased contacts to delinquent borrowers by over 50 percent and helped reduced

the risk of securitization breaches. Additionally, the company reduced servicing costs by over 20 percent over a 1-year period as a result of process improvement recommendations.

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Mortgage and Consumer Lending Services

Nonbank accounts receivables

(Utilities/

Telcom)

Increased competition, declining sales, shrinking

customer bases, rising bad-debt expenses,

and a steady increase in the cost of acquiring

and servicing customers are only some of the

problems facing companies managing accounts

receivables today.

The KPMG team can help reduce customer acquisition costs and risks by working hand-in-hand to design customer plans and products correlated to credit risk. We can help develop new strategies for collections such as calling programs, multiple collection (dunning) paths, and qualifying criteria for deposits, installment plans, and deferrals. We can also forecast performance and indentify key performance metrics to monitor collection activities and develop methodologies for managing third-party activities in the collections process.

Equally important, we quantify the benefits of our

recommendations for each of our engagements and maintain ongoing relationships to help ensure that the quantified benefits have been realized.

Advantages with KPMG:

• Linking risk across the organization, thereby providing increased knowledge about customers help:

– Target and acquire the right customers – Retain the most profitable customers – Limit their exposure on risky customers

• Designing methodologies to improve collections effectiveness and operations

• Modeling capabilities to assist in forecasting, validating existing models, creating critical KPIs and dashboards, and quantifying the impact of changes

KPMG at work

A major power and utilities company faced increasing bad debt expense, a breakdown in the collections department activities, and ineffective management reporting. In addition to concerns about “full-file” reporting to credit bureaus, the company lacked any strategies to support efficient collections or third-party agency services.

The company engaged KPMG professionals to acquire historical data and management reports. After analyzing the data, the team recommended process improvements and enhancements and built business cases for each recommendation, highlighting 12-month earnings before interest, taxes, depreciation, and amortization (EBITDA) improvements. Finally, the team presented its findings to various key members of the senior management and operations teams.

By working with KPMG professionals, the company saw a decrease in its bad debt expense to US$20 million from US$25 million. The company also realized an improvement in its charge-off rate and a decrease in its delinquency rate.

Mortgage and Consumer Lending Services

13

Related securitization and

modeling services

To complement our operational services, MCL’s

Securitization team can leverage the capabilities

of experienced, highly skilled professionals and

sophisticated technology to help our clients

identify, analyze, and resolve a range of financial,

liquidity, and regulatory challenges affecting their

securitization programs.

Our approach allows us to provide comprehensive services for each engagement—from assisting with the initial

strategic planning and decision-making processes to portfolio identification, preparation and transaction modeling, and tax reporting over the life of a transaction.

In addition, KPMG’s professionals can leverage our extensive industry relationships in helping clients select all parties to a transaction, including underwriters, attorneys, rating agencies, bond insurers, and others. We also have access to extensive market information and firsthand transaction experience, enabling us to provide leading transaction structuring advisory capability, as well as the ability to advise on capital structures and collateral types in light of current industry trends and criteria.

Advantages with KPMG:

• A coordinated and efficient transaction process, from pretransaction to postsettlement

• Improved transaction execution strategies

• Appropriate accounting treatment

• Tax savings and deferral solutions

• Efficient and accurate securitization accounting and servicer/investor reporting

• Proactive risk management of securitization retained interests

• Analytical tools to manage a wide range of transaction needs

We currently advise clients in the following areas:

• FDIC assisted transactions

• IFRS conversion

• Financial asset dispositions and acquisitions

• ECALSA loan file review

• 5 percent retention

• OTTI and valuation process review

• HAMP

• Regulation Z

• Basel II

• Implications of the Dodd-Frank Act

• Implications of Reg AB revision proposal

• Distressed (MBS, ABS, CMBS) debt portfolio taxable income and basis analysis

• Model development load modification, ASC 310-20 (FAS 91), ASC 310-30 (SOP 03-3), FDIC Loss Share Reporting

• Model Validation

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Mortgage and Consumer Lending Services

GSEs and Federal

Financial Services

As a result of the 2008 financial meltdown and the subsequent placement of GSEs under conservatorship, GSEs are facing significant short- and long-term challenges. Pressure from the public and congress to reform the way in which the mortgage industry is structured threatens the very existence of GSEs. Examples of regulatory challenges potentially affecting GSEs include compliance with changes to the Real Estate Settlement Procedures Act (RESPA), Truth in Lending Act (TILA), and the Dodd-Frank Wall Street Reform and Consumer Protection Act. In the future, as other enterprises may be permitted to offer competitive capabilities, GSEs will be under greater pressure to attract capital and achieve returns on capital sufficient to sustain the competitive advantage they currently enjoy.

KPMG’s MCL Services practice group has successfully assisted GSEs in achieving regulatory compliance, managing risk, and driving business performance. Our partners and professionals can help turn risk and compliance efforts into opportunities to drive sustainable business value by providing services in areas such as governance, risk and compliance, enterprise risk management, IT strategy and planning, business intelligence, regulatory compliance, credit risk, market risk, operations risk, and regulatory risk.

Advantages with KPMG:

• Leadership in the MCL space

• Integrated, multi-disciplinary, and cross-functional

knowledge and skill sets in risk consulting and management consulting

• Over 190 experienced and highly qualified specialists with a majority located in the greater Washington metropolitan area in close proximity to GSEs

KPMG at work

A government housing agency authority wanted to strengthen its risk management and fraud prevention framework to ensure that its programs and insurance funds are better protected from fraudulent and abusive lending practices and unmanageable credit risk. The KPMG team evaluated the government housing authority’s current systems capabilities and business processes and identified weaknesses that required correction.

The initial stage of the engagement focused on identifying a broad set of issues that government housing authority faces in its internal capabilities across Single Family, Multifamily, and Health Care. The effort resulted in the identification of 25 priorities. In addition, KPMG’s professionals are helping the government housing authority to implement an efficient, streamlined counterparty risk identification system that automates the assembly of information. The system also assigns risk metrics to counterparties so that staff members can access the information in one place on a select number of reports that clearly indicate potential risk.

With the help of the KPMG team, the government housing authority has been able to strengthen its risk management and fraud prevention framework in alignment with its goals and objectives.

Mortgage and Consumer Lending Services

9

Credit cards

Since 2007 the credit card industry has witnessed

a significant rise in borrower delinquencies and

card-balance charge offs. Industry developments

include a significant tightening of credit standards,

a reduction in exposure to higher-risk borrowers,

and the introduction of rigorous legislation that

control sources for fee income. As a result, credit

card organizations are now faced with the challenge

of increasing profitability through building brand,

balances, and their customer base, all in the face

of borrower retrenchment, market volatility, and

increased regulation.

The KPMG MCL team includes industry professionals with deep experience in credit card lending operations and strong capabilities in mathematical analysis and model building. Areas of specialization involve regulatory agency assistance, interpretation of complex financial services regulations, and borrower-related state and federal consumer compliance rules. The team can also draw on resources from KPMG member firms that include a Forensics practice to assist in fraud investigation, an Accounting Advisory practice, and a Transactions Services practice to help credit card organizations seeking to expand market share through strategic acquisitions.

Advantages with KPMG:

• Rapid evaluation of operational conditions and recommendations for better practices

• Tools to size and address analytical problems, helping to formulate a statistically valid and well-documented mathematical solution

• Approaches based on a detailed understanding of consumer lending laws and regulations

• Access to variable cost methodologies for data management needs

KPMG at work

A leading provider of risk management services, including insurance and reinsurance brokerage, was experiencing unacceptable credit card losses. Management turned to KPMG’s MCL team to provide a detailed review of the targeting, underwriting, pricing, and originations processes. The team was also asked to provide specific recommendations on process improvements.

Our professionals evaluated and critiqued targeting, underwriting, and pricing models. At the same time, team members provided management with a thorough assessment of the strengths and weaknesses of both the development and application of these tools. In addition, the team evaluated the client’s staff modeling skills, and feedback was shared with management. Assessments were also conducted on data aggregation methods, with comments detailing new opportunities for improvement. With KPMG’s assistance, the client enhanced its credit card underwriting processes as well as modeling and scorecard development methodologies. The client also realized improvements in data capture, organization, query, and modeling capabilities.

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Mortgage and Consumer Lending Services

The decline in economic activity and its impact

on business borrowing as well as the change

in borrowers’ appetite for credit have severely

affected the size and profitability of small business

loan and leasing portfolios. Traditional customer

acquisition models may no longer apply, and

the need to identify new and viable customer

segments has changed business acquisition

models. Equally significant, the decline in new

construction activity is forcing equipment leasing

companies to seek alternative markets in order to

remain viable.

The KPMG MCL team offers a range of services to assist our small business lending and equipment lending clients. Team members include specialists with extensive experience in revolving and fixed lending, leasing underwriting and operations, mathematical analysis, and model building. We can conduct thorough operational gap assessments to determine how a lender’s operations compare to leading industry practices, helping to identify areas for improvement. To support client goals related to prospecting for new

customers or enhancing balance utilization, KPMG specialists use existing account-level performance data with borrower characteristics to build highly refined customer targeting models, underwriting scorecards, and response and activation models. In addition, MCL team members can design and build comprehensive relational data sets to support specific and general modeling, and financial reporting analytics.

Advantages with KPMG:

• Ability to quickly evaluate operational conditions, specify gaps and recommend better practice solutions

• Ability to address regulatory questions and issues based on our thorough understanding of state and federal lending laws and regulations

• Ready access to variable cost methodologies supporting data management, credit analysis and financial reporting needs

Small business lending and

equipment leasing and financing

KPMG at work

A major personal computer manufacturer was seeking to increase sales to its small business customers by implementing a new department focused on small business lending and equipment leasing. KPMG’s MCL team was engaged to execute a comprehensive review of the client’s small business financing objectives and then develop an implementation plan.

KPMG’s team members began by conducting in-depth interviews with key management to determine the parameters sought for implementing a new business function. Using this information, the MCL team then designed an entire business process including underwriting and accounting system recommendations, staffing configuration and job descriptions, underwriting policies and procedures, and account management and collections procedures. Once the process design was approved by the client, KPMG implemented the design. As a result of the team’s efforts, the client gained a fully operational small business lending and equipment lease financing business unit.

Mortgage and Consumer Lending Services

11

Student loans

In 2010 the federal government announced that all federally funded student loans would be underwritten and issued by the Department of Education. This vastly changed the landscape for both the federally funded and privately funded student loan industry. In addition, significant concerns have been raised about the growth and quality of student loans that are very similar to the issues raised prior to the mortgage finance crisis.

Key challenges in this sector include a loss of federal guarantees, pressure on industry participants to underwrite higher risk loans, collection challenges as graduating students are unable to find work and begin loan repayment, default management as deferment and forbearance periods are exhausted, and pressures to reduce cost and increase efficiency as top line growth slows and portfolio performance weakens.

KPMG has strong qualifications and experience in the student lending industry. Our professionals have both technical skills and strong industry knowledge required to help clients meet the multifaceted challenges facing the student lending industry today.

Advantages with KPMG:

• A broad-based, holistic approach that leverages the Advisory, Audit, and Tax practices of KPMG member firms

• Deep knowledge of industry issues, regulations, and current developments

• Tools to size and address analytical problems and assess risk

• Methodologies for portfolio management and revenue enhancement

KPMG at Work

A leading financial services company specializing in education needed to improve its models for loans and certifications, which required a substantial amount of processing time based on the large volumes of data. The company needed to enhance decision-making and support an increase in work load in addition to meeting federal and Department of Education System Security requirements. KPMG’s specialists helped the company identify the business and reporting requirements for the Loan Premium model including a Premium Amortization model, which was hosted at KPMG’s office and then eventually migrated to company’s facility. The KPMG team also supplied system architects and IT security professionals to work with the company’s team to support Certification and Accreditation requirements for loan servicing at the Department of Education.

References

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