Moody's App To RTG Con LN ABS 2012

STRUCTURED FINANCE
OCTOBER 12, 2012

RATING METHODOLOGY

Table of Contents
BACKGROUND 1
MAIN RISKS OF TYPICAL
TRANSACTION 3
1. STRUCTURAL FEATURES AND EFFECT
ON CREDIT ENHANCEMENT LEVELS 3
2. MAIN CHARACTERISTICS OF
SECURITISED CONSUMER LOAN
PORTFOLIOS 5
3. OUR MODELLING APPROACH TO
RATING CONSUMER LOAN
TRANSACTIONS 5
4. KEY LEGAL AND OPERATIONAL
RISKS APPLICABLE TO CONSUMER
LOAN SECURITISATION
TRANSACTIONS 12
5. PRINCIPAL SOURCES OF
UNCERTAINTY IN THIS
METHODOLOGY 13
6. MONITORING A CONSUMER LOAN
BACKED TRANSACTION 13
APPENDIX 1: CONSUMER LOAN
UNDERWRITING AND SERVICING 14
APPENDIX 2: OUR DATA TEMPLATE
FOR CONSUMER LOAN
TRANSACTIONS 15
APPENDIX 3 17
RELATED RESEARCH 20

Analyst Contacts
Paula Lichtensztein
Assistant Vice President Analyst
39.02.914.81.144
Paula.Lichtensztein@moodys.com
Valentina Varola
Vice President Senior Analyst
39.02.914.81.122
Valentina.Varola@moodys.com
ADDITIONAL CONTACTS:
Client Services Desk: 44.20.7772.5454
clientservices.emea@moodys.com
monitor.abs@moodys.com
Website: www.moodys.com
contacts continued on the last page
Moodys Approach to Rating Consumer Loan
ABS Transactions
Consumer Loan / Global
Background
This report details our approach to rating securitisation transactions that are backed by
unsecured consumer loan receivables (defined as personal or purpose loans) and builds
on our previously published reports, such as The Lognormal Method Applied to ABS
Analysis, in June 2000.
This methodology does not apply to revolving credit products (e.g., credit cards), secured
auto loans/leases or other particular consumer products, which require a different analytical
approach given the specifics of these assets.
1
We have rated consumer loan asset-backed securities (ABS) since the 1990s, when the
securitisation of consumer loans in Europe, the Middle East and Africa (EMEA), Asia/Pacific
and Latin America began in earnest. This type of securitisation provides funding and
regulatory capital relief to the specialised lenders and banks that originate unsecured
consumer loans.

This report discusses the main risks of a typical transaction and describes the ratings process
in five incremental steps:
In the first section, we introduce a typical consumer loan securitisation structure and
discuss the effect that specific key structural features may have on the credit
enhancement levels of a hypothetical transaction.
In the second section, we summarise the main product types and loan characteristics of
the securitised portfolios.
In the third section, we focus on the quantitative analysis performed in determining
ratings for a consumer loan ABS transaction. This includes defining the asset-side model
inputs and describing our cash flow modelling processes.
In the fourth section, we examine the legal risks found in consumer loan ABS.
Finally, in section five, we identify the principal sources of uncertainty and ratings
volatility relevant to this methodology.

This report has been republished on October 12, 2012. The reference to the triangular distribution of losses in Latin
American transactions has been deleted because we will use a lognormal distribution of losses for these transactions going
forward. In addition, reference to Brazilian transactions being excluded from this methodology has been deleted.

2 OCTOBER 12, 2012 RATING METHODOLOGY: MOODYS APPROACH TO RATING CONSUMER LOAN ABS TRANSACTIONS

STRUCTURED FINANCE
Executive Summary
A typical consumer loan portfolio is made up of personal
loans and purpose loans. The former are usually granted to
individuals to bridge a temporary liquidity need, finance
one-off expenses or simply to refinance existing unsecured
indebtedness (although the bank may or may not require a
specific purpose to be disclosed). The latter are usually
originated at point of sale to finance the purchase of a
specific item (e.g., durable goods, furniture or auto
vehicles). Granularity and a short weighted-average life are
also characteristic of such portfolios. Securitised loans are
usually unsecured.
The first step in rating a transaction backed by a portfolio
of unsecured consumer loans is to parameterise the expected
default distribution based on the historical performance
data. We generally assume that defaults of a granular asset
portfolio are lognormally distributed.
Portfolio default distribution
The lognormal default distribution for the relevant
portfolio is defined by two key inputs: the mean and the
standard deviation. From these two parameters, we derive
the coefficient of variation (CoV), a measure of the
portfolios volatility relative to the mean.
Cumulative mean default assumption
For each securitised pool, we typically receive historical
performance data in the form of static cumulative default
ratios by vintage of origination. As recently originated
vintages have limited data points, we extrapolate the default
rates of these vintages to derive the expected lifetime mean
cumulative default rate. The average cumulative default
probability (DP) across the cohorts provides a starting
point mean DP of the portfolio. This value is then
adjusted to take into account different factors including:
observed performance trends in recent vintages,
underwriting and servicing quality of the originator, and
macroeconomic factors.
A timing of default curve is associated with the mean
cumulative DP for the portfolio. This curve describes the
proportion of defaults that occur in each modelled period.
Standard deviation and CoV
Historically observed cumulative default curves are used in
deriving the standard deviation and hence the CoV of the
lognormal distribution. A higher CoV implies a fatter tail
of the distribution (i.e., a higher likelihood of high default
scenarios materialising).
In order to better understand whether the parameterisation
of the lognormal distribution is appropriate and/or
consistent with other rated unsecured loan transactions, we
will benchmark the deal mean and CoV assumptions
against values assumed in other unsecured loan ABS and
secured RMBS transactions and calculate the portfolio
implied asset correlation and benchmark this against other
similar transactions as well as the Basel II standard.
Recovery rate
We give limited benefit to recoveries in modelling, due to
the unsecured nature of the loans backing the ABS notes.
Assumed recovery rates are usually in the 0%-30% range,
generally lower than the mean recovery rates assumed for
secured loans or leases (such as RMBS or auto ABS
transactions).
Other asset-based inputs to the model
Other key asset-based model inputs include the portfolio
prepayment rate, its weighted average yield and
amortisation profile.
The cash flow model
We aim to replicate the transaction structure in a cash flow
model, such as ABS ROM. A simplified version of the
model is available on www.moodys.com.
In addition to the asset-side modelling assumptions as
described above, other important transaction-specific inputs
include the hedging mechanism and the transaction specific
triggers.
ABS ROM basically produces a series of default scenarios.
In each default scenario, the corresponding loss for each
class of notes is calculated given the incoming cash flows
from the assets and the outgoing payments to third parties
and noteholders.
The expected loss (EL) for each tranche is the sum product
of: (i) the probability of occurrence of each default scenario;
and (ii) the loss expected in each default scenario for each
tranche.
The EL of each tranche is associated with a particular time
horizon in order to compare the EL to our benchmark for
that time horizon (Moodys Idealised Expected Loss table).
The relevant time horizon is the weighted-average life of the
tranche, which is calculated based on the timing of payment
of principal to the tranche under each default scenario.
We also run sensitivities to a variety of key asset inputs and
structural features in order to test the sensitivity of the notes
ratings.
Key legal and operational risks
As part of our analysis, we will review legal opinions to
obtain external comfort in relation to key legal risks in a
transaction. Each jurisdiction has different types of risk that
need to be assessed but the three main legal issues
commonly analysed in an unsecured consumer loan ABS
include: (i) national consumer protection law; (ii) set-off
risk; and (iii) commingling risk. In our analysis of the


STRUCTURED FINANCE
transaction, we will take into account any risk on which we
have not received any legal comfort or that is not mitigated
structural features.
Finally, we will carefully assess the deal operational risk.
2

Indeed the performance of a securitisation also depends on
the effective performance by various parties such as
servicers, calculation agents, trustees and cash managers
(i.e., operational risk). When not adequately covered, this
risk may preclude the transaction from achieving the
highest rating.
Main Risks of Typical Transaction
We believe the following are the main risk drivers in a
consumer loan securitisation transaction:
Portfolio Credit Quality: An accurate assessment of the
collateral credit quality is the first key element to
project the potential losses on the structured notes.
Underwriting and servicing policies (originator
specific) together with the current and forecast
macroeconomic environment represent key elements in
our analysis. Furthermore, specific loan characteristics
(e.g., repayment method) may also affect the pool
credit profile.
Transaction Structure: Specific features make the deal
structure more or less efficient from an investor
perspective. For example, a stringent principal
deficiency ledger definition will lessen leakage of excess
spread in case of performance deterioration or an early
cash trapping trigger would ensure a quicker
deleveraging of the transaction. When modelling the
transaction, we endeavour to reproduce the main
structural features described in the deal documentation,
where possible .
Counterparty Risk: We will assess whether each deal
counterparty has a clearly defined role and
responsibilities. Specific roles (e.g., swap counterparty)
are more sensitive than other, as such we carefully
evaluate the level of delinkage of the transaction.
Legal Risk: Finally we would assess the likelihood of
any legal issue to affect deal performance. The most
common risks for consumer loan transactions include
set-off and commingling risk, which we expand upon
later in this report.
1. Structural Features and Effect on Credit
Enhancement Levels
A typical consumer loan transaction would have the
following structural features:
Cash structure with quarterly paying notes with a
variable interest rate
Two distinct waterfalls (interest and principal) with
sequential principal payment
3

Cash reserve to ensure a liquidity buffer and credit
support
Hedging mechanism to cover for potential interest rate
mismatch
More specifically, differing structural features within a
consumer loan ABS transaction can have a significant effect
on the ratings of ABS bonds and/or the levels of credit
enhancement required for target ratings. Structural features
that typically have a rating impact include:
Transaction default definition
Revolving versus static portfolio
Early amortisation triggers
Availability of excess spread
For the purposes of our example below, we have used a
simplified structure with the following characteristics:
4

Three classes of rated notes
Linear amortisation with fully sequential payment of
interest and principal
Constant excess spread
Transaction default definition: In most transactions, the
default definition is objectively defined (e.g., borrowers
enter into default if they are more than six months in
arrears). If the default definition is vague (e.g., at the
servicers discretion), we will assume the default definition
is long-dated. Long-dated implies a longer period in
which excess spread is not used to cover defaults because
these defaults have not been recognised. This assumption
will typically result in higher amounts of credit
enhancement required for a given target rating compared
with a transaction where a tight default definition is used.
Defaults need to be registered in the transaction before cash
flows can be used to cover these defaults. This is often
effected via the inclusion of a principal deficiency ledger
(PDL) in the structure, whereby the principal balance of
defaulted loans is debited against the PDL on each interest
payment date and excess spread (if available) is credited to
the PDL up to the amount debited. Excess spread credited


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to the PDL is used to purchase additional eligible assets
during the revolving period and is passed through to
noteholders during the amortisation period. The
mechanism described is in place to re-balance any mismatch
in performing assets and liabilities due to asset defaults.
Consequently, the earlier the defaults are recognised, the
earlier available cash flows can be used to fill the gap
between the performing portfolio and the outstanding notes
balance, thus avoiding excess spread leakage.
Exhibit 1 shows the effect on the model output using: (i) a
six-month default definition; and (ii) an 18-month default
definition.

EXHIBIT 1:
Impact of Varying Default Definitions on Model Output
Levels
Class
Credit
Enhancement
Default Definition
Six Months
Default Definition
18 Months*
A 20.0% Aaa Aa1 (1)
B 7.3% A2 Baa2 (3)
C 6.0% Baa3 Ba3 (3)
Note: Numbers between brackets represent the number of notches of difference
between the model output of the relevant class in the two scenarios.
* Additional credit enhancement required to achieve a Aaa model output on Class A: 2%.

Revolving versus static portfolios: Unsecured consumer
loans usually have relatively short terms (two to six years).
As a result, most consumer loan ABS transactions have a
revolving period during which incoming principal
collections are used to purchase new receivables rather than
to amortise notes. Adding new receivables to the pool can
result in portfolio credit deterioration if riskier assets are
added. This risk may be partly mitigated by tight eligibility
criteria so that the quality of added portfolios remains in
line with that of the original portfolio. Among other things,
eligibility criteria may stipulate the maximum sub-pool
5

weights in the total pool, limits to geographical
concentrations, minimum seasoning, or may exclude the
addition of delinquent receivables.
Early amortisation triggers: These are typically linked to
the portfolio performance and are common features used to
mitigate investors exposure to worsening portfolio quality
over the revolving period.
6

Exhibit 2 shows the impact on the model output for a
hypothetical consumer loan transaction of: (i) the inclusion
of a revolving period; and (ii) the introduction of early
amortisation triggers.

EXHIBIT 2:
Impact of Different Structural Features on Model Output
Levels
Class
Credit
Enhance-
ment
Static
Structure
Three-Year
Revolving
Structure;
No Early
Amortisation
Triggers*
Three-Year
Revolving
Structure
with Early
Amortisation
Triggers**
A 20.0% Aaa A1 (4) Aa1 (1)
B 7.3% A2 Ba2 (6) Baa2 (2)
C 6.0% Baa3 B2 (5) Ba2 (2)
Additio
nal CE*
12.5% 1.0%
Note: Numbers in brackets represent the number of notches of difference between the
model output of the class in the relevant scenario with respect to the static structure
scenario.
*Additional credit enhancement required to achieve a Aaa model output on Class A.
**3 times mean default cumulative default trigger; one period unpaid PDL trigger.

Availability of excess spread: Excess spread is typically
calculated, and in fact modelled as, interest collections net
of senior expenses (e.g., servicing fees, bank account fees)
and interest paid on the notes. As interest rates charged on
unsecured consumer loans are generally relatively high,
excess spread is often an important source of credit
enhancement. In certain transactions, excess spread is
guaranteed via certain interest rate swap mechanisms.
The following example (Exhibit 3) shows that the reduction
of excess spread has a negative impact on all tranches and
junior notes are more sensitive to excess spread levels than
senior notes.

EXHIBIT 3:
Impact of Different Levels of Excess Spread on Model
Output Levels
Class
Credit
Enhancement 3% Excess Spread
0.5% Excess
Spread*
A 20.0% Aaa Aa1 (1)
B 7.3% A2 Baa3 (4)
C 6.0% Baa3 B2 (5)
model output of the relevant class in the two scenarios.
* Additional credit enhancement required to achieve a Aaa model output on Class A: 2.5%.

The benefit to noteholders provided by excess spread can
vary depending on the timing of defaults modelled. In
order to test the robustness of ratings, we will run model
sensitivities with different timings of default.


STRUCTURED FINANCE
2. Main Characteristics of Securitised Consumer
Loan Portfolios
Exhibit 4 summarises the main characteristics of securitised
consumer loan portfolios:

EXHIBIT 4
Main Characteristics of Securitised Consumer Loan
Portfolios
a

Loan Purpose
Personal loans: Usually granted to individuals to
bridge a temporary liquidity gap, for one-off large
expenses or to refinance
b
existing unsecured
indebtedness.
c

Purpose loans (also known as point-of-sale
loans): Loans originated at point of sale to finance
the purchase of a specific item (e.g., vehicles,
d

durable goods or furniture).
Granularity The largest borrower generally represents a
maximum five basis points (bps) of the pool, with
the average loan size seldom exceeding an
equivalent amount between 5,000 and 10,000.
e

Maturity Tenor is seldom longer than six years.
f

Amortisation Profile Predominantly French amortisation profile (i.e.,
fixed instalment up to maturity date).
Payment Flexibility Not a widespread feature in securitised pools. The
borrower may have the right to request a
suspension of payment for a limited period (e.g.,
suspending payments for up to three monthly
instalments - payment holiday) or an extension
of the loan maturity date.
Geographical
Distribution
Countries portfolios are usually spread out across
different regions. A pools geographical
distribution can have a significant influence on the
credit quality of borrowers if certain areas are
more susceptible to or more affected by a
macroeconomic downturn than others.
Origination Channel Loans are usually originated either by the lender
directly (branches) or by dealers. Direct channel
origination tends to result in better quality loan
portfolios than portfolios originated through
brokers. However, we seldom have access to
performance data split by channel of origination.
a
Exhibit 4 lists the most common characteristics of consumer loan portfolios
securitised so far. Specific portfolio or loan characteristics - not listed in the exhibit -
may require specific consideration and adjustments in our assumptions, in addition
to those listed in this report. In such cases, a detailed description of our analysis will
be included in the relevant Pre-Sale Report/New Issue Report.
b
This product traditionally has not necessarily been marketed as a means of
refinancing delinquent positions. Indeed, many lenders routinely offer those clients
with no negative credit records the option to consolidate different exposures to
better manage their finances. In fact, most past consumer loan securitisations do
not have collateral composed of re-performing unsecured loans or re-aged loans.
c
Unsecured loans granted to individuals where the loan purpose was to purchase or
refurbish residential properties or even purchase a commercial activity may
sometimes fall under the personal loan category. This is the case most notably in
Spain where, as a consequence, the maximum size of a securitised loan can exceed
200,000.
d
Auto loans included in consumer loan portfolios do not usually benefit from any
form of security as the title of the vehicle remains with the obligor and it is not
pledged/transferred in favour of/to the lender, hence the issuer.
e
Please note that securitised portfolios may occasionally include large-sized loans.
For instance, the FTA Santander Financiacion-4 securitised pool included a 2.5
million loan. These are clearly exceptions and typically require further analysis to
understand the nature and credit risk of such outlier loans.
f
Exceptions to this are represented, for instance, by the Dutch deal Chapel 2007
in which the weighted-average original maturity of the pool was 15 years. (For more
details please refer to Chapel 2007 pre sale).
3. Our Modelling Approach to Rating Consumer
Loan Transactions
The first step in rating a transaction backed by a portfolio
of unsecured consumer loans is to parameterise the expected
default distribution based on the historical performance
data, any appropriate benchmarks and any qualitative
adjustments as further described below. We assume that
defaults of a granular asset portfolio are lognormally
distributed.
7

EXHIBIT 5
Characteristics of a Lognormal Default Distribution

To date, we have assumed that granular portfolio defaults
are lognormally distributed.
However, we note that one drawback of assuming that
defaults follow a lognormal distribution is that they are not
bound at 100% (i.e., default scenarios above 100% have a
probability greater than zero under the lognormal law). As
long as the mean default and standard deviation are
relatively low, the probability assigned to these extreme
scenarios (i.e., default greater than 100%) is close to zero.
In contrast, when either the mean or standard deviation is
high, extreme scenarios with default levels above 100% may
be assigned a relevant probability. In such cases, we may
adjust the distribution parameters and re-run the model
using an inverse normal default distribution and compare
the results.
Exhibit 6 illustrates the shape of the lognormal distribution
EXHIBIT 6
Lognormal Default Probability Distribution

0
%
5
%
1
0
%
1
5
%
2
0
%
2
5
%
3
0
%
3
5
%
P
r
o
b
a
b
i
l
i
t
y
BOX 1:
Characteristics of a Lognormal Default Distribution

To date, Moodys has assumed that granular portfolio
defaults are lognormally distributed.
However, we note that one drawback of assuming that
defaults follow a lognormal distribution is that they are
not bound at 100%, i.e. default scenarios above 100%
have a probability greater than zero under the lognormal
law. As long as the mean default and standard deviation
are relatively low, the probability assigned to these
extreme scenarios (i.e. default greater than 100%) is close
to zero. In contrast, when either the mean or standard
deviation is high, extreme scenarios with default levels
above 100% may be assigned a relevant probability. In
such cases, Moodys may adjust the distribution
parameters and re-run the model using an inverse normal
default distribution and compare the results.
Chart 1 illustrates the shape of the lognormal distribution
CHART 1
Lognormal default probability distribution

0
%
5
%
1
0
%
1
5
%
2
0
%
2
5
%
3
0
%
3
5
%
P
r
o
b
a
b
i
l
i
t
y


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Each default scenario is then fed through a cash flow model
(ABS ROM
TM 8
or other excel-based cash flow models that
reflect the structural features of the deal and run through
cash flow allocations in each period during the transaction.
The loss and life for each class of notes is calculated in each
default scenario and a corresponding rating is derived.
Key Asset-Based Inputs to the Model
Default distribution: Mean default and standard deviation
The lognormal default distribution for the relevant
portfolio is defined by two key inputs: the mean and the
standard deviation. From these two parameters, we derive
the CoV, a measure of the portfolios volatility relative to
the mean. This allows better comparison of the variability
between different lognormal distributions.
9

Deriving the cumulative mean default assumption
For each securitised pool, we typically receive historical
performance data specifically, static cumulative default
ratios reported by vintage of origination.
10
This data should
be as representative as possible of the product being
securitised.
11

To be statistically relevant, each quarterly vintage should
include a sufficiently large number of loans (typically at
least 1,000 originated loans - please refer to Appendix 2 for
a detailed description of the Moodys Data Template for
consumer loan transactions). The historical data forms the
starting point in defining the mean cumulative DP and
CoV for the portfolio.
Given that recently originated vintages tend to have limited
data points, we extrapolate the default of these vintages to
derive the expected lifetime mean cumulative default rate.
12

The average cumulative DP across the cohorts provides a
starting point mean DP for the portfolio.
This starting point means DP is then adjusted to take into
account: (i) observed performance trends; (ii) portfolio
composition; (iii) underwriting and servicing quality of the
originator; (iv) internal scoring model PD assumptions; (v)
amount of historical data provided; and (vi)
macroeconomic factors.
13

i. Observed performance trends
a) Performance trends in recent vintages
b)
: A
worsening trend in the younger vintages could
prompt us to increase the mean DP assumption.
Conversely, a clear improving trend could prompt
us to decrease the assumption.
Dynamic delinquency data:
us to adjust the mean default assumption. In
general, increasing delinquencies would lead us to
increase the mean DP assumption and an
improving delinquency trend would likely lead us
to adjust the mean DP downward.
Early- and mid-stage
14

delinquency trends might not yet be reflected in
the vintage default data provided, and could lead
c) Unrepresentative vintages
ii.
: Certain cohorts of
origination may be eliminated when calculating
the mean DP if they are thought to be
unrepresentative. For instance, vintages with very
few points of observation, very low origination
volumes or different underwriting techniques may
not be relevant when deriving the expected mean
default for a securitised pool.
Portfolio composition:
iii.
If the securitised portfolio is
composed of different sub-pools with different
characteristics, we will ideally receive performance data
for each individual sub-pool (e.g., by type of
product/origination channel). The mean cumulative
DP may be calculated as a blend of each sub-pools
cumulative default assumption based on the mix of
each sub-pool in the portfolio. For revolving
transactions, the mean DP assumed for subsequent
portfolios added to the securitisation may be increased
or decreased to take into account the possible
migration in credit quality allowed by a transactions
eligibility criteria.
15

Underwriting and servicing quality of the originator:
We thus form an opinion on the originator/servicer
quality and adjusts the mean DP accordingly. For
instance, if an originator states that it has changed its
strategy to target a vastly riskier section of the market
(e.g., employees on temporary contracts), we will very
likely adjust the mean DP upwards from the data-
observed average. We will also compare the originators
historical performance with historical data provided by
its peers to better understand its risk appetite in the
context of the relevant market. Appendix 1 provides
further details on typical loan underwriting and
servicing procedures and how we assess them.

The quality of the lenders underwriting procedures a
key component in our analysis is assessed during an
operating review that we attend at the start of the
rating process. Among other things, we are particularly
keen to understand: (i) the originators target
population and risk appetite; (ii) the predominant
channel of origination; (iii) the size and trend of refusal
rate (how many applications are rejected and the
rationale); (iv) the originators underwriting
mechanisms, their understanding of the target market
and the interplay between risk and returns; and (v) the
growth rate of lenders portfolio (i.e., fast growing
portfolio volume could signal aggressive underwriting).


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iv. Internal scoring model PD assumptions
v.
: The majority
of lenders use an internal scoring model to underwrite
new loans, while some calculate a loans one-year
default probability. If we have access to the securitised
portfolios weighted-average default probability, it can
be useful to compare this to our mean DP
assumption.
16
If there is significant divergence between
these two values, we would endeavour to investigate the
drivers of such gap.
Amount of historical data provided:
vi.
In certain cases,
the historical data provided may be extremely scarce.
This might occur if the originator has only recently
started originating the consumer loan product or if an
originator has greatly changed its target market or
underwriting strategy. In this latter case, any
performance data relating to a previously marketed
product or underwriting strategy would not be relevant
to the transaction being rated. If there is limited
performance data available, we would benchmark the
portfolio against peers and take a conservative mean
DP assumption for the pool.
Macroeconomic factors
Macroeconomic variables are a key driver of default risk
in a consumer loan portfolio, even more so in Latin
American countries that are usually subject to higher
macroeconomic volatility than EMEA or Asia/Pacific.
Moreover, we have observed that default rates are
usually highly correlated with a countrys GDP growth
rate, unemployment rate, and interest rate fluctuations.
In a benign economic environment, defaults are mainly
driven by idiosyncratic risks (e.g., divorce, health
problems, deterioration in a servicers collection
capabilities) whilst during a time of economic crisis,
systemic factors such as general unemployment and
personal bankruptcy levels, as well as wage growth,
have a significant influence on a portfolios observed
defaults. A rise in unemployment levels in a country
will affect many debtors within a pool, and this risk
driver tends to prevail over others.
17
Consequently, our
portfolios mean DP assumption would also factor in
our expectation of likely future economic scenarios.
Most likely, the mean DP assumption would be
adjusted upwards if historical performance data
provided covered a buoyant economic period whilst
GDP was forecast to contract over the life of the
transaction, resulting in an increase in the
unemployment rate.
: Historical portfolio default
data applied to derive the mean DP assumption should
ideally cover an entire economic cycle. However, as this
is seldom the case, we may rely on other portfolios with
data that covers a whole economic cycle to assess how
default rates move as economic conditions change.
EXHIBIT 7
Case Study: Spain

For illustrative purposes, we consider Spain one of the
main consumer loan securitisation markets in EMEA.
In the following exhibits (Exhibit 8 and Exhibit 9), we have
plotted the problematic loans (PL) ratio for Spanish
financial institutions consumer lending and other
household lending (approximately three-month
delinquencies) against GDP growth and the unemployment
rate. The PL ratio observed in Q1 2011 (flat year-on-year
GDP growth was recorded in this period, after a severe
contraction) is around 3.5 times the median observed over
the period 2000-2006 (an average yearly GDP growth rate
of 3.6% was observed during this period), indicating that
the PL ratio tends to be negatively correlated with GDP.
On the other hand, as expected, Exhibit 9 shows a positive
correlation between PL ratios and unemployment.
EXHIBIT 8
Spain: Consumer and Other Lending to Households
PL Ratio (%) vs. GDP

Source: Bank of Spain/OECD data and Moodys Economy

EXHIBIT 9
Spain: Consumer and Other lending to Households PL
Ratio (%) vs. Unemployment

Source: Bank of Spain/OECD data and Moodys Economy

We have also plotted the three-month weighted-average
delinquencies of rated EMEA consumer loan transactions
against GDP growth (Exhibit 10) and unemployment
-6.0%
-4.0%
-2.0%
0.0%
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4.0%
6.0%
8.0% 0.0%
1.0%
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Unemployment rate (Right Axis)


STRUCTURED FINANCE
(Exhibit 11). Here, the delinquency rate observed in
Q3/Q4 2009 (peak of the curve) is around three times the
median for the period up to 2006, confirming the negative
correlation between GDP growth and problematic loans.
EXHIBIT 10
EMEA Consumer Loan 90+ Day Delinquencies on Original
Balance (OB) vs. GDP Growth

Source: Moodys Economy and Moodys calculations

EXHIBIT 11
90+ Delinquencies on OB vs. Unemployment Rate

Source: Moodys Economy and Moodys calculations

If the portfolios provided default data shows a worsening
trend due to a deteriorating economic environment, the
portfolios declining credit profile will generally be captured
when extrapolating the default data. However, if the trend
is recent and the extrapolation exercise does not result in a
higher mean DP than generally observed over a benign
economic period, we will stress the mean DP upwards,
taking into account both the economic forecast and data
from previous recessions.

Deriving the Standard Deviation and CoV
We use observed cumulative default curves to ascertain the
standard deviation and hence the CoV of the lognormal
distribution. A higher CoV implies a fatter tail of the
distribution (i.e., a higher likelihood of high default
scenarios materialising).
Generally, the CoV may be adjusted for the same reasons
that the mean default is adjusted (as described in points (i)
to (vi) above). The CoV is usually adjusted upwards to
capture uncertainties in the economic environment at the
time the transaction is launched, as well as to capture any
lack of depth in the historical performance data provided.
Similarly, when making qualitative adjustments to the
mean default and CoV, we need to ensure that we do not
over-penalise or double-count the impact of given factors by
adjusting both the mean and the CoV.
The following verification is appropriate to better
understand whether the parameterisation of the lognormal
distribution is appropriate and/or consistent with other
rated unsecured and secured loan transactions:
1. Benchmark the mean and CoV against assumptions used
for other unsecured loan ABS and secured RMBS
transactions. Regularly updated EMEA Consumer Loan
Indices reports
18
provide an efficient tool to benchmark
performance assumptions against other securitised
portfolios.
2. Calculate the portfolio implied asset correlation
19
and
benchmark this against other similar transactions, as
well as the Basel II standard. By calculating the
portfolio implied asset correlation, we measure the
degree of pair-wise linear correlation between assets in
the portfolio. A high asset correlation means that
defaults tend to cluster. As such, a high asset
correlation implies a higher volatility in the portfolio
default distribution, which would, in turn, lead to
higher credit enhancement levels.
Asset correlation allows us to benchmark different
portfolios against each other using a single metric. A
value that is considered relatively standard for
consumer lending is 4.0%.This number corresponds to
the asset correlation parameter for revolving facilities as
defined in the Basel II Accord.
20
Although the assets
analysed are not revolving facilities, we deem the
underlying borrowers to be similar.
In the following exhibit, we provide an indication of
the CoV for different mean DPs if we set the asset
correlation at 4%:
EXHIBIT 12
Pair of Mean DP and CoV Approx. Values Associated With
a 4.0% Asset Correlation
Mean DP Standard Deviation CoV
3% 1.4% 45%
5% 2.2% 40%
10% 3.5% 35%
15% 4.5% 30%

-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0% 0.0%
0.5%
1.0%
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2.0%
2.5%
3.0%
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EMEA Consumer Loan ABS 90+ days delinquencies on OB (Left Axis)
GDP Growth y-o-y (Right, Reversed Axis)
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
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0.0%
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EMEA Consumer Loan ABS 90+ days delinquencies on OB (Left Axis)
Unemployment rate (Right Axis)


STRUCTURED FINANCE
EXHIBIT 13
Cumulative Mean Default and Coefficient of Variation
Assumptions for Spanish, Italian and German Consumer
Loan ABS
21

The following exhibit (Exhibit 14) details our DP and CoV
assumption ranges for consumer loan ABS transactions in
Spain, Italy and Germany. The ranges have been split first
by country and further into two categories (pre-2008 and
post-2008). In Spain, pre-2008 assumptions were widely
revised during 2008 and 2009, in light of the stressed
economic environment and marked deterioration in
performance.
The DP assumption detailed in Exhibit 14 is the expected
mean cumulative default probability of a given pool as a
percentage of the original asset balance.
EXHIBIT 14
Consumer Loan Portfolio DP and CoV Assumptions in
EMEA Main Markets
a

Country
Pre-2008
DP Assump-
tions
Pre-2008
CoV Assump-
tions
Post-2008
DP Assump-
tions
Post-2008
CoV Assump-
tions
Spain 2.5% - 5.0%
3% average
25% - 40%
33% average
5.0% - 20.0%
10% average
25% - 50%
31% average
Italy 2.5% -4.5%
3% average
25% - 40%
33% average
5% - 8.5%
7% average
40% - 55%
46% average
Germany N/A N/A 2.5% - 7.5%
5% average
25% - 50%
40% average
a
For outstanding transactions as of June 2011

Timing of Defaults
Having determined the mean cumulative DP for the
portfolio, we define a timing of default curve and enter it
into the cash flow model. This curve describes the
proportion of defaults that occur in each period modelled.
The timing of defaults has an effect on the notes rating
levels as it determines how many defaults will occur in a
given period and, as such, how many of these defaults will
be covered by available excess cash flow or spread.
If defaults are modelled to occur when excess spread is at its
lowest levels (often the case towards the end of a transaction
when the portfolio balance has extensively amortised), fewer
defaults will be covered by excess spread. Therefore, we
tend to find that the EL on a note is higher when defaults
are back-loaded in the cash flow modelling.
Empirical evidence suggests that defaults tend to
concentrate during the early life of the loan (i.e., the first
12-24 months), gradually decreasing after this period.
19

However, due to the sensitivity of ratings to the default
timing assumption, we often test a variety of default timing
curves to measure the ratings sensitivities observed.
Several default timing assumptions are shown in Exhibit 15.
The solid line (base case) reflects a typical default timing
curve observed for an unsecured consumer loan portfolio.
EXHIBIT 15
Typical Default Timing Curves

Source: Moody's Investors Service, Moody's Performance Data Service, periodic
investor/servicer reports

Exhibit 16 shows model output changes given the different
timings of defaults shown in Exhibit 15, assuming that
annual excess spread of the underlying portfolio is 3.0%.
EXHIBIT 16
Impact on Model Output Levels of Different Default
Timings
Class
Credit
Enhancement Base Case
Back
Loaded
Front
Loaded
A 20.0% Aaa Aaa (0) Aaa (0)
B 7.3% A2 A3 (1) A3 (1)
C 6.0% Baa3 Ba1 (1) Ba1 (1)

Recovery Rate and Timing
Typically, we give limited benefit to recoveries in
modelling, due to the unsecured nature of the loans backing
the ABS notes.
22
Recovery rates are usually in the 0%-30%
range and, as expected, generally lower than the mean
recovery rates assumed for secured loans or leases (such as
RMBS or auto ABS transactions). We use historical
cumulative recovery rates by vintage of default data
provided by the originator/servicer as a starting point to
determine the recovery assumption.
The recovery rate assumption is necessarily a function of the
specific transaction default definition, which generally
varies across jurisdictions (see Transaction default
definition).
For instance, a shorter definition of default (e.g., 90 days)
would typically be associated with a higher recovery rate, as
opposed to a longer definition of default (i.e., 18 months).
In fact, early defaults may be driven by a more temporary
aspect (e.g., temporary liquidity shortfall) in such
circumstances, the defaulted position may return to
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
quarters since origination
Base case Front loaded Back loaded


STRUCTURED FINANCE
perform or the servicer may effectively recover the position
through debt restructuring.
Additional difficulties may arise when reviewing recovery
data because:
Recovery figures provided may include interest and
fees, as well as the principal component of the loan. As
a result, inflated recovery figures may be reported (in
some circumstances, recoveries in excess of 100% of
principal outstanding).
The defaulted loan may be restructured or sold, and a
recovery value of 100% recorded. This is clearly
misleading, as we have no assurance that the debtor will
maintain the restructured repayment plan and thus
make a full recovery
23
or that the originator will always
be able to sell this loan at par in the future. Structures
can be sensitive to recovery timing, especially in high
default scenarios, where the time lag between defaults
and cash flows from recoveries may result in a cash
shortfall in certain periods. We assume that recoveries
are either spread out over a certain period (e.g., half
occur in the first year and the remainder over the
following two years) or concentrated in a given period.
Economic downturn: in stressed economic times, the
average recovery rate would be negatively affected. We
stress the mean recovery rate observed to take into
consideration this specific factor.
The main factors that influence our assumptions on
recovery timing include the efficiency of the servicers
operations, its collection procedures and the historically
observed speed of recovery.
Prepayment Rate
24
and Asset Yield
We are provided with dynamic
25
historical prepayment data
by the originator and we test different prepayment scenarios
in the cash flow modelling. On the one hand, prepayments
are generally higher in a decreasing interest rate
environment or highly competitive market, where cheap
refinancing is readily available. During economic recessions,
tightening credit conditions tend to lead to a decrease in
prepayments made by borrowers. Conversely, deal-specific
prepayment rates may be driven up if lenders choose to
restructure loans for commercial reasons and, as such,
repurchase these loans from the securitisation vehicle.
High levels of prepayments may depress the cash yield
received in a transaction (and hence decrease available
excess spread) if higher yielding loans prepay first, as
debtors would have greater incentives to prepay when their
debt burden is elevated or if competitors are able to offer
cheaper re-financing options.
26
The higher the dispersion of
the interest rates in the portfolio, the higher the impact of
high-yield-loan prepayments on the available excess spread.
We typically stress the available excess spread in the
transaction if the portfolio has a widely dispersed interest
profile (please see a simplified example in Exhibit 17).
However, prepayments can also have a positive credit effect
given that borrowers who prepay their debt in full cannot
also default. In any case, we will take into account any
specificity of the market under analysis. If prepayments are
not particularly sensitive to changes in interest rates (e.g., in
Latin America), we would not apply the above approach,
but would assess, for instance, the impact that the ease of
refinancing may have on prepayments.
Once we have calculated the initial asset portfolios
weighted-average yield, it can be entered directly into the
cash flow model, which will make adjustments to the
incoming interest collections for delinquencies and defaults.
Alternatively, we may be provided with an initial portfolio
yield vector based on scheduled amortisation. However, as
discussed above, various factors including a portfolios
yield dispersion, prepayments, defaults and receivables
additions may cause yield to differentiate from the
projections provided over the life of the transaction. As
such, we will examine the dispersion of interest rates within
a pool together with the relevant eligibility criteria
27
in
order to decide whether to use the flat-charged yield, a flat-
stressed yield, the yield vector provided or a stressed yield
vector. If we choose to model a stressed yield, we are
effectively also stressing down the available excess spread.
EXHIBIT 17
How We Stress Portfolio Yield to Take Into Account
Prepayment Rates

In a decreasing interest rate environment, high interest rate
loans would tend to prepay more quickly than low interest
rate loans.
Having defined the constant prepayment rate (CPR)
assumption (e.g., 15%), we will assume that the whole
percentage is applied to loans that pay the highest rates and
will consequently calculate the appropriate portfolio yield
haircut.
Please refer to the following example:
Set of working assumptions
CPR 15%
Securitised portfolio weighted-average yield 3.15%

Simplified portfolio yield distribution
% Portfolio % Yield
15% 4%
85% 3%

We conservatively assume prepayment for all loans that
yield 4% (these loans have, for simplicity, been sized to
match the 15% CPR assumption). As a result, the portfolio


STRUCTURED FINANCE
would ultimately yield 3% (i.e., 15bps lower than the
original portfolio).

Portfolio Scheduled Amortisation
28

The final asset-based key model input is the portfolio
amortisation profile. The initial portfolio amortisation
schedule is provided by the originator. If subsequent
portfolios are sold, we may either use the same amortisation
profile as per the initial pool or simulate different
amortisation schedules based on eligibility criteria. These
vectors determine the principal cash flows to be received by
the issuer in the absence of defaults and prepayments.
Final maturity of the deal is given by the issuer and
modelled accordingly. It usually falls a few years after the
maturity date of the longest maturing loan. This gap takes
into account the recovery lag of the latest defaults in the
deal.
The Cash Flow Model
We aim to replicate the transaction structure in a cash flow
model, such as ABS ROM. A simplified version of the
model is available on www.moodys.com.
9
.
Once we have determined the asset-side modelling
assumptions, other transaction-specific inputs need to be
inserted into the cash flow model.
Transaction expenses: These include (i) fees to be paid to
transaction parties such as the trustee, cash manager, and
servicer; and (ii) note coupons. We will stress the charged
servicing fee upwards if the level is not in line with market
rates, and we generally use a minimum servicing fee
assumption of 50bps. This is to ensure that the transaction
can withstand paying a market rate servicing fee if the
original and cheaper servicing contract were to be
terminated over the life of the transaction.
Hedging: Interest rate swaps are modelled as relevant in
the cash flow model and may impact yield and excess spread
assumptions.
Triggers: When breached, these portfolio performance-
based triggers result in early amortisation of the notes or an
alteration of the priority of payments. Where the trigger is
linked to a variable that we model (e.g., defaults or reserve
fund levels), we can include this trigger in the cash flow
modelling.
Once all of the asset-side modelling assumptions and
transaction-specific inputs are implemented, ABS ROM
produces a series of default scenarios. In each default
scenario, the corresponding loss for each class of notes is
calculated given the incoming cash flows from the assets
and the outgoing payments to third parties and
noteholders.
The expected loss or EL for each tranche is the sum product
of (i) the probability of occurrence of each default scenario;
and (ii) the loss expected in each default scenario for each
tranche.
The EL of each tranche is associated with a particular time
horizon in order to compare the EL to our benchmark for
that time horizon (Moodys Idealised Expected Loss table).
The relevant time horizon is the weighted-average life of the
tranche, which is calculated based on the timing of payment
of principal to the tranche under each default scenario. In
addition, we identify the default scenario under the current
modelling assumptions under which each rated tranche
suffers its first loss. An illustrative example is shown in
Exhibit 18.
EXHIBIT 18
First Loss Suffered by Each Tranche

The rating of each class of notes indicates the EL level for
the relevant class of notes over the weighted-average life of
the notes.
As a further step, it is useful to ascertain the lowest default
scenario in which each class of notes suffers its first loss, as
well as at what speed the loss increases in each subsequent
default scenario. We endeavour to publish a graph similar
to Exhibit 19 in each New Issue Report, which associates
the default scenario with the level of losses of each class of
rated notes.
EXHIBIT 19
Default Distribution and Expected Loss Level for Each
Tranche

We also run sensitivities to a variety of key asset inputs
(e.g., mean DP, CoV, prepayments) and structural features
(e.g., turning triggers on and off) in order to test the
sensitivities of note ratings. In particular, we publish
parameter sensitivities in our New Issue Reports.
29

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
%
5
%
1
0
%
1
5
%
2
0
%
2
5
%
3
0
%
3
5
%
L
o
s
s

%
P
r
o
b
a
b
i
l
i
t
y
Lognormal Default Probability Tranche A Loss
Tranche B Loss Tranche C Loss


STRUCTURED FINANCE
Parameter sensitivities provide a quantitative, model
indicated calculation of the number of notches that a
structured finance security rated by us may vary if certain
input parameters used in the initial rating process differed.
Please note that rating models are just one tool used in the
ratings process and are not exclusively relied upon to assign
ratings. Ratings are determined collectively through the
exercise of qualitative judgment by rating committees
alongside the consideration of model results.
4. Key Legal and Operational Risks Applicable
to Consumer Loan Securitisation Transactions
As part of our analysis, we will review legal opinions to
obtain external comfort in relation to key legal risks in a
transaction. Each jurisdiction has different types of risk that
need to be assessed. Three main risks commonly analysed in
unsecured consumer loan ABS are discussed below.
Consumer protection laws
Most jurisdictions have consumer protection laws in place
to ensure that consumers are treated fairly by lenders. A
lenders failure to comply with these regulations could
potentially void the consumer loan contracts it has
originated and borrowers could consequently withhold
payments under the contract.
We will rely on legal opinions, which provide comfort that
the securitised credit agreements are highly unlikely to be
challenged under consumer protection law. We would also
rely on an originators representations and covenants as to
the fairness of its procedures for dealing with customers,
specifically in cases where the originator is highly rated and
supervised by the central bank.
Set-off risk
Set-off risk arises if the loan originator who is a deposit-
taking institution becomes insolvent. For instance, if a
borrower holds deposits with the bank and also owes money
to the bank under a loan contract, a borrower might be
entitled to set off the deposit amounts he or she has lost
against the outstanding loan amount. We would rely on a
jurisdiction-specific legal opinion to understand whether
borrowers have the right to set-off amounts against
securitised loans and, if so, the amounts that could be set
off. If borrowers set off amounts against a securitised loan
receivable, this would translate into reduced collections for
the ABS transaction.
However, in certain jurisdictions, we expect that deposit
guarantee schemes will ensure that consumers do not lose
their deposits following the insolvency of a bank (typically
up to a certain limit). As such, potential set-off loss may be
reduced and this is reviewed on a case-by-case basis.
30

If set-off risk is not fully mitigated through structural
protections (e.g., reserved against on a dynamic basis), we
will conservatively estimate the potential set-off exposure in
modelling this risk. In modelling set-off risk, we use the
originators rating to model the likelihood of originator
default and will assume that all borrowers who are able to
assert the right of set-off risk will do so following an
originators insolvency. We typically assume that there is a
50%-100% correlation between asset default scenarios and
originator default.
Exhibit 20 shows the incremental credit enhancement
required to target Aaa ABS ratings for an Aa2-rated, Baa2-
rated and B2-rated originator with a 10% set-off exposure.

EXHIBIT 20
Set-Off Risk and Different Originator Rating Levels:
Effect on Tranche Model Output Levels and Class A
Credit Enhancement
Set-off risk

No Set
Off Risk
Originator
Aa2
Originator
A2
Originator
Baa2
Originator
B2
Class A
Aaa Aa1 (1) Aa1 (1) Aa2 (2) A1 (4)
Class B
A2 A2 (0) A3 (1) Baa1 (2) Ba3 (7)
Class C
Baa3 Baa3 (0) Baa3 (0) Ba1 (1) B3 (6)
Additional
CE*
1.0% 2.5% 5.5% 1-to-1
sizing**
* Additional credit enhancement required to obtain a Aaa model output on class A
** For lowly rated originators, Aaa(sf) would be achievable if set off exposure is fully
covered (i.e., via a dedicated reserve)

Commingling risk
If cash belonging to the issuer passes through collections
accounts in the name of the originator/servicer, as part of
our analysis, we must ascertain whether in an
originator/service insolvency scenario, the deal would be
exposed to the risk of either: (i) cash belonging to the
special purpose vehicle (SPV) becoming unavailable for a
given period of time (i.e., liquidity risk); or (ii) the SPV
having only an unsecured claim against this cash in the
bankruptcy estate of the originator/servicer (credit risk).
Unless we are satisfied that the originator will not receive
any collections after it becomes insolvent or that any
collections received by it will be excluded from the
insolvency estate, we generally assume that a certain amount
of collections will be subject to commingling. The assumed
amount of commingling loss is determined for each
transaction and is based on the frequency of the transfer of
collections from the originator/servicer account into the
SPV account as well as the arrangements in place to ensure
that borrowers stop paying into the insolvent servicers
account and switch payments to either the issuer SPV or the


STRUCTURED FINANCE
successor servicers account. Assuming daily sweep of
collections into the SPV account, we generally assume that
a minimum of one month of collections will be
commingled. However, this minimum will vary depending
(among other things) on the means and frequency of
payment of the borrowers in the pool and the country of
the assets. Unless commingling exposure is suitably fully
enhanced for, we model the rating impact, having regard
for among other factors the originators senior
unsecured rating.
Collections may also be lost if the collections account bank
holding the SPVs cash becomes insolvent. This risk is
typically mitigated by the requirement that a bank holding
any cash belonging to the issuer has a minimum required
short-term rating of P-1. If the collections account bank is
downgraded below this rating level, the servicer would be
obliged to find another collections account bank or an
unconditional, first-demand guarantee on its obligations
provided by a P-1 rated institution.
As far as EMEA jurisdictions are concerned, a detailed
description of the risk and our approach on how to treat
this risk can be found in our Special Report Cash
Commingling Risk in EMEA ABS and RMBS
Transactions: Moodys Approach, published in November
2006 (SF85241).
Operational risk
The performance of a securitisation transaction depends not
only on the creditworthiness of the underlying portfolio but
also on the effective performance by various parties such as
servicers, calculation agents, trustees, and cash managers
(i.e., operational risk). When not adequately covered, this
risk may preclude the transaction from achieving the
highest rating. Please refer to Global Structured Finance
Operational Risk Guidelines: Moodys Approach to
Analysing Performance Disruption Risk (published March
2011).
5. Principal Sources of Uncertainty in this
Methodology
The key uncertainties in rating unsecured consumer loan
ABS arise from:
Limitations of historical data: We are typically provided
with static vintage default and recovery data covering five to
seven years. We often do not receive data over a stressed
economic period. Furthermore, historical data will not help
predict very severe potential portfolio credit migration due
to a change in a lenders underwriting practices.
No third-party assessment of obligors creditworthiness:
We are generally provided with the lenders historical
portfolio data and, in certain cases, with the lenders
expected portfolio PD and (loss given default) LGD.
However, we very rarely receive borrower or portfolio credit
bureau scores, which would allow us to benchmark a
portfolios credit quality against others using a uniform
metric.
Originator governance influence on loan performance:
Originators/servicers often retain the equity piece, and
sometimes a number of subordinated tranches. Especially in
revolving transactions, an originators underwriting risk
appetite has a significant influence over the pool
composition and its resultant performance. Originators
with a vested interest in the transaction may have an
increased interest in achieving a more conservative risk
profile and maximising collections from the asset portfolio.
If the originator/servicer has no exposure to the ABS
transaction, investors may be more at risk of a worsening
portfolio risk profile or less effective servicing.
6. Monitoring a Consumer Loan Backed
Transaction
As a first step, during the rating process, we will review the
transactcion reports as proposed to check all relevant
information is included. Any perceived deficiency would be
disclosed to the market. It is essential we are provided with
collateral performance data, including period and
cumulative default, delinquencies, prepayments, recoveries,
as well as data on loan restructuring and modifications.
A description of the payment allocation is regularly
provided, together with level of triggers and compliance
with such triggers.
We endeavour to monitor any rated transaction on an
ongoing basis to ensure performance is in line with
expectation. We will also check all supporting ratings.
In addition, at least once a year, we perform a detailed
review of each existing transaction to assess its performance
and potential rating effects.
Our quarterly EMEA Consumer Loan ABS Indices
18
allows
investors to compare the performance of any particular
transaction with the market performance, as well as market
performance of different jurisdictions.


STRUCTURED FINANCE
Appendix 1: Consumer Loan Underwriting and
Servicing
Underwriting procedures for unsecured consumer loans
tend to be more streamlined than those of other assets such
as mortgage loans. This is generally due to the low amounts
typically financed (on average equivalent amount of
10,000) and the unsecured nature of these loans, which
means that security does not have to be evaluated.
A large part of the credit approval process is often carried
out automatically, specifically by credit models developed
by the lender. Manual intervention may be periodically
requested, for instance in cases where the loan amount is
unusually large.
Underwriting procedures generally take into account:
Borrowers repayment capability: This is assessed by
checking a borrowers credit history and outstanding
debt as well as verifying his/her sources of income
Scorecard results
History of relationship with the lender (where relevant)
Loan terms
Product characteristics
The adjudication process also aims to determine whether
the borrowers credit profile is in line with the lenders
desired borrower credit profile.
This is a function of each lenders risk appetite: lenders with
large books and diversified business activities may be ready
to assume higher risk, which is generally counterbalanced
by higher pricing.
A prudent lender will aim to continuously validate and
adjust its credit model, in order to take into account
changing economic conditions, applicant and product
characteristics.
Notwithstanding the substantial differences between an
unsecured consumer loan and other loan products (e.g.,
mortgage loans), these consumer loan products tend to be
affected by systemic factors (macroeconomic environment)
or life factors (e.g., death, health or divorce). However,
the severity of the impact of such events on an unsecured
consumer loan versus a mortgage loans performance may
vary, as it is arguable that a borrower who has both an
unsecured consumer loan and mortgage loan exposure
would tend to pay off the mortgage loan in order to avoid
the risk of house repossession. The above is clearly a
function of the specific legal environment within each
country.
We also note that the credit assessment carried out by a
bank before extending a mortgage loan is considerably more
detailed than the analysis carried out when offering a
consumer loan, given the larger amount and longer contract
length of a typical mortgage. Indeed, for the lender, the
impact of a consumer loan default would be less severe and
cumbersome to manage than a mortgage loan default.
We note that the purpose of a loan may play a significant
part in determining a consumer loan portfolios
performance. Personal loans tend to perform worse than
loans granted to finance the acquisition of durable goods
(e.g., household appliances). An unsecured new vehicle loan
tends to perform better than a used vehicle loan, most likely
a result of differing borrower characteristics.
Furthermore, loan origination channel appears to be
another driver of portfolio performance, with broker-
originated loans showing worse performance than that
recorded by loans originated at the lenders branches.
On the one hand, as regards the servicing of consumer loan
portfolios, the process tends to be generally less aligned
across lenders, and there is generally a considerable reliance
on external and specialised parties to manage early-stage
delinquencies. Conversely, focusing on the lenders general
response to a deteriorating performance due to negative
economic environment, we note that there is a general
strengthening of the early-stage delinquencies activity (such
as the anticipated time of action), while, in some
circumstances, loan terms can be renegotiated (such as
lengthening the loan tenor).


STRUCTURED FINANCE
Appendix 2: Our Data Template for Consumer
Loan Transactions
For the analysis of unsecured consumer loan transactions
we typically requests the following:
Historical information: Defaults and recoveries (vintage
data)
Filters applied to obtain the data sample
Data should ideally cover a full economic cycle
Data sample should be representative of the portfolio
being securitised. If possible, data samples should be
split by channel of origination and type of product (or
any other relevant variable impacting performance)
Loans should be split by quarter of origination
(vintage) in order to track the performance of each
vintage through time. Each vintage should contain
enough loans for the sample to be statistically
significant (as a general rule, at least 1,000 loans)
If the transaction is multi-originator, each originator
should provide its own performance data
The vintages provided should cover the longest possible
maturity of the assets included in the pool
Default definition and sources of recoveries should be
included
Performance data on defaults
The static cumulative default rate exhibit should indicate
the cumulative default rate for each period since
origination. This rate is calculated as the ratio between the
total outstanding amount of loans that have defaulted since
their origination up to the relevant period and the volume
of origination corresponding to the vintage under analysis.
Performance data on recovery
The static cumulative recovery rate exhibit should indicate
the cumulative recovery rate for each period since default.
This rate is calculated as the ratio between the total
outstanding amount of recoveries received up to the
relevant period (coming from the same vintage of defaulted
loans) and the volume of default corresponding to the
vintage under analysis.
Historical information: Arrears information
On a quarterly basis, ideally covering a full economic cycle.
Ageing by bucket: e.g., 1-30 days overdue (first bucket), 31-
60 days overdue (second bucket), and 61-91 days overdue
(third bucket). This is calculated as the ratio between the
total outstanding amount of loans in a certain bucket at the
end of each period and total portfolio outstanding amount
at the beginning of the period.
Roll-rate analysis (i.e., percentage of delinquent receivables
in one bucket (as previously defined) that passes to the
successive bucket in the following month).
Prepayment rates (CPR)
On a quarterly basis, ideally covering a full economic cycle.
This is calculated as the ratio between total principal
prepaid during the period and the total outstanding balance
of the portfolio at the beginning of the period.
Information on internal scoring systems
Approach adopted under Basel II
Acceptance scoring model used by the
servicer/originator:
Type of model
Components of the entitys scoring model. (e.g.,
qualitative information, such as management
quality, behavioural data)
Possibility for human intervention. What is the
override percentage?
Expected PD for accepted population
Expected PD for the portfolio to be securitised (or
the different sub-segments)
Validation of the model: Discrimination power
(e.g., Powerstat or Gini coefficient), calibration
level (expected PD vs. observed default rate)
Frequency of model update
LGD
Description of LGD estimates procedure
Line-by-line information on the portfolio
If requested, we can provide originators with an Excel-based
data template. This template is designed to capture the
most important characteristics of the portfolio, such as
debtor information (e.g., industry of activity, type of
employment and nationality), loan information (e.g., tenor,
frequency of payments, type of amortisation, type of
interest rate, channel of origination and payment channel),
risk assessment (e.g., banks internal estimation of PD and
LGD).
Portfolio stratification exhibits
These exhibits summarise the portfolio information
provided on a line-by-line basis.


STRUCTURED FINANCE
Additional information
Amortisation profile: Periodic scheduled principal
amortisation expressed as a percentage of the initial
portfolio outstanding amount. Reported periods should
coincide with the payment frequency of the notes.
Yield profile: Periodic scheduled interest payments
expressed as a percentage of the portfolio outstanding
amount at the beginning of each period. Reported
periods should coincide with the payment frequency of
the notes.


STRUCTURED FINANCE
Appendix 3
EXHIBIT 21
Simplified Example: Derivation of Mean Default Rate and
Volatility Assumption

Let us assume that we have received the historical data as
summarised in Exhibits 22, 23, and 24. We also assume
that: (i) around 70% of the portfolio has been originated
after 2006; (ii) the portfolio is highly granular in terms of
debtor exposure and geographical distribution; and (iii) the
portfolio weighted-average life is equal to two years.
The cumulative mean default rate derived from the raw
data depicted in Exhibit 22 would be around 7%, whereas
the extrapolated mean default rate is equal to 10%.The
higher value of the latter is the result of the worsening trend
of the younger vintages. We will also take into account the
following elements to derive the mean PD assumption:
i. The data set does not cover a full economic cycle.
ii. There is a clear negative trend in the younger vintages.
Vintages prior to 2006 reflect positive economic
conditions, whilst new vintages show higher default
rates due to stressed economic conditions. However,
these vintages are still too young to allow for a
meaningful result based on extrapolation over two
years. The deteriorating trend can clearly be observed
in Exhibit 23, in which vintages from 2006 onwards
exhibit higher default rates than the previous vintages
over the same period following origination.
iii. The macroeconomic forecast. If it is negative, this may
further accentuate the negative trend.
iv. The worse-than-average performance of an outstanding
transaction with the same originator and servicer as
shown in Exhibit 24.
After consideration of these elements, we would modify the
results obtained from extrapolating the historical data and
would likely assume a mean cumulative default of 13%-
15%.
With regard to the volatility assumption, the CoV
calculated incorporating the full data sample is 40%.
However, if we only consider data from 2006 onwards
(origination period that is more representative of the
portfolio being securitised), the CoV decreases to 35%.
Given the high granularity of the portfolio, the short
average life and the fact that we have already applied several
stressful adjustments to the mean DP, we would likely
assume a CoV of 35%, which implies an asset correlation
equal to 4.5%-5.0%.

EXHIBIT 22
Default Rates by Vintage of Origination (Raw Data)

Source: Moody's Investors Service

EXHIBIT 23
Default Trend

Source: Moody's Investors Service

EXHIBIT 24
Previous Transaction of Same Originator vs. Regional
Consumer Loan ABS 90-180 Days Delinquency

Source: Moody's Investors Service, Moody's Performance Data Service, periodic
investor/servicer reports

0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1718 19 2021 22232425262728
C
u
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l
a
t
i
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e

D
e
f
a
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t
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Quarters since Origination
2002Q1 2002Q2 2002Q3 2002Q4
2003Q1 2003Q2 2003Q3 2003Q4
2004Q1 2004Q2 2004Q3 2004Q4
2005Q1 2005Q2 2005Q3 2005Q4
2006Q1 2006Q2 2006Q3 2006Q4
2007Q1 2007Q2 2007Q3 2007Q4
2008Q1 2008Q2 2008Q3 2008Q4
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
C
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9
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+

d
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d
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i
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q
u
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n
c
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e
s
Cumulative 90+ arrears after Q6 since origination
cumulative 90+ arrears after Q8 since origination
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
9
0
-
1
8
0

d
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y

d
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%

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Market Index Previous transaction


STRUCTURED FINANCE

1
For example, Japan installment sales loan receivables are not specifically covered by this methodology. Analysis of portfolio made up of such assets would require
analysis of a given set of risks, which are not covered in this report (e.g., market value risk (secured auto loans), and significant linkage to originator credit profile
(operational leasing)). Italian cessione del quinto (i.e., 20% salary assignment loans) and similar type of loans ( e.g. loans to employees of French electricity
and gas companies ) also require further analysis of a set of risks and protective features not covered by this report (e.g. amongst others: the creditworthiness of the
employer, any specific insurance coverage related to unemployment, death and any other events, the creditworthiness /diversity of the insurance providers, the
pools diversification across different public sectors and the operational risk related to payment of salaries, deductions and handling of claims). On the other hand,
Italian cessione del quinto granted to other types of borrowers (e.g. non civil servants) , in some instances, may follow the general framework described in this
report, but could also consider some of the risks and protective features listed above.
2
Please refer to Global Structured Finance Operational Risk Guidelines: Moodys Approach to Analyzing Performance Disruption Risk, published April 2011.
3
Some structures may contemplate a pro rata payment feature, which would revert into sequential upon portfolio performance deterioration. In addition, Spanish
structures typically have an unified waterfall.
4
Summary of the main modelling assumptions:
Default distribution Lognormal
Mean default 6.5%
Coefficient of variation 40.0%
Recovery rate 25.0%
Annualised constant prepayment rate 10.0%
Spread on portfolio 3.0%
Cash reserve 0.0%

5
Sub-pools are generally made up of personal loans, purpose loans and unsecured auto loans.
6
Most effective triggers are usually net excess spread trigger, unpaid PDL, and triggers linked to arrears levels.
7
Please refer to The Lognormal Method Applied to ABS Analysis, July 2000.
8
Moodys ABSROM v.1.0 User Guide, May 2006 available on www.moodys.com. Please note that more recent versions of the model are used internally but
are currently not publicly available.
9
The advantage of using the CoV (instead of the standard deviation) is that the CoV is a relative measure, as opposed to an absolute value. All other assumptions
being the same, a higher CoV implies a wider distribution, and therefore a higher credit enhancement.
10
Cumulative defaults as a percentage of originated receivables balance for each cohort originated.
11
Historical performance data provided should, where possible, relate to a portfolio with similar characteristics to those being securitised, including among other
things uniform underwriting criteria, loan tenors and loan purposes. If this is not possible, proxies can be supplied, but greater uncertainties arising from this
will likely be reflected via a qualitative adjustment to our assumptions.
12
This procedure is fully described in our report Historical Default Data Analysis for ABS Transactions in EMEA, November 2005.
13
An additional possible adjustment may be triggered by renegotiation limits included in the deal documentation. Generally, there are constraints on the servicer's
ability to renegotiate loan terms and conditions, including maturity extension. For instance, the servicer may be able to renegotiate the maturity of only 2% of the
portfolio and cannot extend it beyond the final maturity date of the deal. As such, no adjustments are required to Moodys assumptions. In the case of less strict
renegotiation limits, we may adjust our DP assumption to take into account the potential higher volatility on the portfolio performance.
14
Early and mid-stage delinquencies generally refer to 1- 60 days in arrears.
15
More precisely, we typically derive the portfolio mean DP for revolving transactions assuming the worst possible portfolio composition given the eligibility
criteria. For example, let us assume that the portfolio is made of personal loans (30% of total portfolio) and auto loans (70% of total portfolio), with a mean DP
equal to 6% and 3%, respectively. The mean DP assumption for the portfolio securitised at closing will be 3.9%. However, if according to documentation,
personal loans may come to represent up to 50% in the portfolios purchased during the revolving period, then we will assume a mean DP of 4.5% for such new
portfolios.
16
We expect internal scoring systems to have gone through validation processes (preferably by the central bank).
17
Modelling Credit Risk of Portfolio of Consumer Loans, Madhur Malik and Lyn Thomas; 2006 CORMSIS-07-12. ISSN 1356-3548.
18
Please refer to Moodys EMEA Consumer Loan ABS Indices, regularly published.
19
Assuming that the portfolio defaults follow an inverse-normal distribution, the implied asset correlation can be derived from the following formula

Where,
p: mean default
: standard deviation
: asset correlation
: standard bivariate normal cumulative distribution function
20
Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards A Revised Framework, (2005), Bank
for International Settlements.. Basel II determined asset correlation parameter for revolving facilities is 4%, whereas for other retail it is defined by a PD-
dependent formula, the results of which range from 3% to 16% (the higher the DP, the lower the correlation):

21
Spain
- 18 transactions outstanding: 8 closed pre-2008; 10 closed post-2008 (2008 included).
- Eleven originators with consumer loan ABS outstanding in the market.
- Average transaction size is 1 billion.
- Ten transactions had their DP assumptions revised upwards in 2009/2010.
- Increase in DP assumptions in Spain driven by stressed economic environment in 2008 and 2009.
- Revised DP assumptions = expected mean default over portfolio balance at the point of revision.
- Wide range of assumptions across the Spanish market is due to the varied portfolio credit quality across lenders.
Italy
- Eight transactions outstanding: four closed pre-2008; four closed post-2008 (2008 included).
- Six originators with consumer loan ABS outstanding in the market.
- Average transaction size is 1.2 billion.
( ) ( ) ( )
2 1 1
2
, , p p p N u u =

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|
35
* 35
35
* 35
1
1
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* 03 . 0
e
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PD PD


STRUCTURED FINANCE

- Two transactions had their DP assumptions revised upwards in 2009/2010.
- Revised DP assumptions = expected mean default over portfolio balance at the point of revision.
- Lower DP assumptions for Italy as compared to Spain may be due to certain market characteristics (e.g., the low level of household indebtedness), but may also
be due to the low number of transactions closed in 2009 and 2010, and the fact that transactions reviewed were highly seasoned.
Germany
- Six transactions outstanding: All transactions closed from 2008 onwards.
- Two originators with consumer loan ABS outstanding in the market.
- Average transaction size is 0.9 billion.
- No DP assumptions have been revised upwards: the recent closing of these deals explains this.
22
We typically apply a substantial haircut to the mean recovery rate values derived from historical data provided by the originators.
23
In a recessionary environment, a recent poll of several lenders has shown us that renegotiation/restructuring of the loan terms is widely used to recover difficult
positions.
24
Prepayments are unscheduled principal collections (i.e., partial or total repayment of the outstanding debt before the amounts become due).
25
Dynamic prepayment data is calculated as the ratio between prepayment amount received during each period and the outstanding portfolio as of the same date.
The constant prepayment rate or CPR is often expressed as an annualised percentage.
26
This risk can be mitigated with a swap agreement that guarantees a certain level of excess spread. This type of swap is very common among Spanish and Dutch
transactions.
27
For revolving transactions, whose eligibility criteria require a minimum level of yield on purchasable receivables, we may use this minimum level as input on the
model.
28
For revolving structures, different asset amortisation profiles are tested for the subsequently added portfolios based on loan tenor eligibility criteria.
29
Please see V Scores and Parameter Sensitivities in the Global Consumer Loan ABS Sector, May 2009
30
For a description of our approach to set-off risk in Italy, please refer to Moodys Approach to Set-off Risk in Italian Structured Finance and Covered Bonds
Transactions, February 2010 (SF217795). For a description of our approach to set-off risk in the UK, please refer to Moodys Approach to Quantifying Set-off
Risk for Securitisation and Covered Bonds Transactions Originated by UK Deposit-Taking Institutions, December 2009 (SF188004)


STRUCTURED FINANCE
Moodys Related Research
For a more detailed explanation of our approach to these types of transaction as well as similar transactions please refer to the
following reports:
Rating Methodologies:
Moodys Approach to Rating Australian Asset-Backed Securities, July 2009 (SF174008)
Moodys Approach to Quantifying Set-off Risk for Securitisation and Covered Bonds Transactions Originated by UK
Deposit-Taking Institutions, December 2009 (SF188004)
Moodys Approach to Set-off Risk in Italian Structured Finance and Covered Bonds Transactions, February 2010
(SF217795)
Cash Commingling Risk in EMEA ABS and RMBS Transactions: Moodys Approach, November 2006 (SF85241)
Historical Default Data Analysis for ABS Transactions in EMEA, November 2005 (SF64042)
The Lognormal Method Applied to ABS Analysis, July 2000 (SF8827)
Moodys Approach to Set-off Risk in Italian Structured Finance and Covered Bonds Transactions, February 2010
(SF217795)
Rating Implementation Guidance:
V Scores and Parameter Sensitivities in the Global Consumer Loan ABS Sector, May 2009 (SF161508)
Global Structured Finance Operational Risk Guidelines: Moodys Approach to Analyzing Performance Disruption Risk,
April 2011 (SF241345)
Special Reports:
Italian Consumer and Auto Loan Securitisation, December 2004 (SF47503)
EMEA Consumer Loan Periodic Indices
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent
reports may be available. All research may not be available to all clients.

We publish a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our
website, at www.moodys.com/SFQuickCheck.


STRUCTURED FINANCE

contacts continued from page 1

Additional Contacts
Alex Cataldo
Senior Vice President
39.02.91481.103
Alex.Cataldo@moodys.com
Henry Charpentier
Managing Director Structured Finance
34.91.768.8216
Henry.Charpentier@moodys.com
Maria Muller
Senior Vice President
1.212.553.4309
Maria.Muller@moodys.com
Ilya Serov
Senior Credit Officer
61.2.9270.8162
Ilya.Serov@moodys.com
Marie Lam
Vice President Senior Credit Officer
852.3758.1379
Marie.Lam@moodys.com

Contributor
Martin Fernandez
Vice President Senior Analyst
54.113752.2021
Martin.Fernandez@moodys.com
ADDITIONAL CONTACTS:
Frankfurt: 49.69.2222.7847
London: 44.20.7772.5454
Madrid: 34.91 .414.3161
Milan: 39.023.6006.333
Paris: 33.1 7070.2229

Report Number: SF184265
2011 Moodys Investors Service, Inc. and/or its licensors and affiliates (collectively, MOODYS). All rights reserved.
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solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the
information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO
WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODYS IN ANY
FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moodys Corporation (MCO), hereby discloses that most issuers of debt
securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have,
prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to
approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MISs ratings and rating
processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities
who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually
at www.moodys.com under the heading Shareholder Relations Corporate Governance Director and Shareholder Affiliation Policy.
Any publication into Australia of this document is by MOODYS affiliate, Moodys Investors Service Pty Limited ABN 61 003 399 657,
which holds Australian Financial Services License no. 336969. This document is intended to be provided only to wholesale clients
within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you
represent to MOODYS that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor
the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of
section 761G of the Corporations Act 2001.
Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moodys Japan K.K. (MJKK) are MJKKs current
opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, MIS in the
foregoing statements shall be deemed to be replaced with MJKK.
MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moodys Overseas
Holdings Inc., a wholly-owned subsidiary of MCO.
This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or
any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based
on this credit rating. If in doubt you should contact your financial or other professional adviser.

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STRUCTURED FINANCE

OCTOBER 12, 2012

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