Loan Participations
Sample Analysis
Participation #0000 - Sample 1 Federal Credit Union
General Information
The offer was received via email from Bill Paton at Alloya on 01/01/17. The offer consists of a $5,000,000.00 pool of 500 indirect auto loans. I responded to Bill Paton at Alloya that we would be interested in performing the due diligence.
The original confidentiality agreement was signed on 01/01/17 and returned to Bill.
Upon receiving a spreadsheet with no PII listing the loans in the pool, I verified the composition of the receivables pool and sorted it multiple ways in order to begin the individual loan selection. I sorted the pool by these various metrics-
- Loan open date (looking for consistency or changes in underwriting)
- Original term (policy restriction, interest rate risk)
- Original loan amount (audit selection, not all high end loans)
- Remaining term (interest rate risk)
- Current loan balance (audit selection)
- Rate (interest rate risk)
- DQ days (default risk)
- LTV (policy restriction, default risk)
- Score (default risk, audit selection; Sample 1 uses an auto score to underwrite)
- Historical charge-off rate (distinguish new vehicle v used vehicle type)
File Review
Upon reviewing Sample 1’s lending, indirect lending, participation loan, and collection policy on 01/02/17, I needed to request additional information. The underwriting portion is very generic, listing factors to be considered such as income, credit, length of employment, DTI, LTV etc. without any qualifying parameters. Some information was received on 01/01/17, and the final information was received via email from the VP of Lending at Sample 1 on 01/02/17.
On 01/03/17, I requested 50 files to be reviewed for due diligence. Sample 1 asked for the number of files to be reduced, and I refused, citing our board approved policy. Sample 1 confirmed the loan files will be accessible using Sharefile, a secure document hosting site.
I received all the requested loan files via a secure site between 01/03/17 and 01/04/17. The underwriting of the samples was completed on 01/04/17 and my questions were sent to Bill Paton for delivery back to Sample 1.
The questions regarding underwriting were discussed via conference call on 01/05/17. I do not see evidence of any undue risk or poor judgement in the pool of loans, and am very comfortable with the loans selected. The underwriting is sound, exceptions are documented, and Sample 1 is a conservative lender. The pool has seasoned for over a year as all the loans have original dates of 5/11/15 through 10/30/15.
Exceptions
In terms of comparing the Sample 1 lending policy to the CAFCU approved participation parameters, the following maximums hold true:
| SAMPLE 1 | SAMPLE 2 | |
|---|---|---|
| Loan Amt | $45,000 in this pool | $65,000 |
| Term | 84 months | 84months but extend for GAP, MRC, DC |
| LTV | 115% | 125% + TTL, GAP, MRC |
| Debt Ratio | 45% | 50% |
| USR | N/A | 35% (NA for 600+) |
| Score | 640+ | 600+ |
| Docs | proof of income waived 700+ | 600+, over $35000 proof of income |
| Collateral | current/prior year=new | 8 years old or newer |
Sample 1 also has special programs for first time buyers, post bankruptcy, and “oldie but goodie” (vehicles over 8 years old).
In the final pool, I have discussed the following Level 4 exceptions with Pete Pawling, and we are comfortable with the following from the loans that were in the underwriting sample:
USR: 1 loan has USR of 38%
Collateral: 13 exceed 8 years old (2001-1; 2003-1; 2005-4; 2006-3, 2007-4)
Agreement Review
On 01/05/17, I returned the legal agreement with our requests for changes. The requested items, in detail, consist of:
- Questions:
- 3B: Can we agree that the review could be done electronically? I don’t expect one of our auditors or our regulators to do so at the Seller’s location in SAMPLE 1
- 4I: In addition to what is in the agreement, I would add the following: Member’s last name, direct or indirect, new or used, original rate, current rate, original loan date, loan due date, original balance, original term, final payment date, payment amount, last paid, next due, beginning monthly balance, current loan balance, seller’s loan balance, purchaser’s loan balance, accrued interest, BK (Y or N), Repo (Y or N), principle payment, interest payment, other fees, seller’s payment share, total remittance, days delinquent, delinquent principle and delinquent
- 10: The servicer, which could be the Seller, retains late fees and other fees as compensation for handling such items. Extraordinary expenses are charged to us, and I read this section to say the servicer (which could also be the Seller) gets an extra 10% of what we pay. I’m not fond of the servicer keeping the late and other fees. What can we agree upon?
- Missing from the document:
- What we would like for on-going due diligence (audited financials, ALL calculations)
- Section 3.1 from the Alloya agreement (representations and warranties), including o We had an opportunity to review loans
- No payment defaults exist which have not been cured or waived
- Loans are not classified and are on accrual status
- No loan is subject to a BK reaff
- The outstanding principal balance is as stated in the Participation Certificate
- It would be beneficial for the agreement to indicate when and how the purchaser will receive copies of the notes and security instruments
Sample 1 agreed to all questions and missing information. The participation did close on 01/14/17.