Al Bf Ssfamethodv2 Jul13 (1)

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In This Issue:

A Primer on the SSFA Method forCalculating the Risk Weights forSecuritization Exposures UnderU.S. Basel III

Introduction

Hierarchy of Approaches forCalculating Risk Weights forSecuritization Exposures

Overview of SSFA

Overview of KSSFA

Observations About SSFA

Conclusion

Client AlertJuly 2013

A Primer on the SSFA Method for Calculating theRisk Weights for Securitization Exposures UnderU.S. Basel III

Introduction

In July 2013, the Board of Governors of the Federal Reserve System (the FRB),

the Office of the Comptroller of the Currency (the OCC) and the Federal DepositInsurance Corporation (the FDIC) issued a set of final rules (the Final Rules)designed to implement the Basel III capital standards in the United States.1Among other things, the Final Rules specify a minimum total capital ratio of 8%for banking organizations.2This ratio is computed by dividing a bankingorganization's total capital by its total risk-weighted assets.

Many banking organizations have assets consisting of investments in asset-backed securities and other securitization exposures. Such investments and otherexposures must be considered when a banking organization calculates its totalrisk-weighted assets as well as other capital ratios specified in the Final Rules.

The Final Rules contain new methods for determining the risk weights applicable

to securitization exposures. Consistent with the requirements of the Dodd-FrankWall Street Reform and Consumer Protection Act (the Dodd-Frank Act), thesenew methods eliminate the ratings-based methods currently utilized under Basel Iand Basel II.

This article focuses on the Simplified Supervisory Formula Approach (SSFA), amethod for calculating the risk weights for securitization exposures that will beapplicable to a wide range of banking organizations. As explained below, ascompared to the ratings-based capital rules of Basel I and Basel II, SSFA will leadto generally higher risk weights, and therefore higher capital requirements, forsecuritization exposures.

This article is organized as follows:

Hierarchy of Approaches for Calculating Risk Weights for SecuritizationExposures

Overview of SSFA

Overview of KSSFA


Conclusion


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2 A Primer on the SSFA Method for Calculating the Risk Weights for Securitization Exposures Under U.S. Basel IIIJuly 2013

Hierarchy of Approaches for Calculating Risk Weights forSecuritization Exposures

The Final Rules place banking organizations into different categories and specifya hierarchy of risk weighting approaches to be utilized by banking organizations ineach category. The chart below summarizes these categories and approaches.

Approaches for

Calculating Risk-

Weighted Assets

Types of Banking

Organizations Covered

Hierarchy of Approaches

for Calculating Risk

Weights for Securitization

Exposures3

Standardized

Approach

All banking organizations 1. Use either;

a. SSFA; or

b. if the bankingorganization is not amarket risk bankingorganization,4the

gross-up approach.

5

2. If the banking organization

cannot or chooses not toapply the methodsdescribed in #1 to asecuritization exposure,assign a 1,250% riskweight to the securitizationexposure.

Advanced

Approach

Any banking organization

that:

has consolidated

total assets of $250

billion or more; or

has consolidated

total on-balance

sheet foreign

exposure of $10

billion or more; or

is a subsidiary of a

banking organization

that uses the

advancedapproaches; or

elects to use the

advanced

approaches.

1. Use the supervisoryformula approach(SFA).6

2. If the banking organizationdoes not qualify for SFAunder #1, use SSFA.

3. If the banking organizationdoes not qualify for SFAunder #1 and does notapply SSFA under #2,assign a 1,250% riskweight to the securitizationexposure.

Note that pursuant to thecapital floor imposed by theCollins Amendment, any

banking organization usingthe advanced approach tocalculate its risk-weightedassets must also calculate itsrisk-weighted assets underthe standardized approachand apply the result thatyields the highest calculationof risk-weighted assets (andthus thelowest capitalratios).

7

Market Risk Any banking organization 1. If the banking organization


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,% ; and

20% (supervisory floor)

If tranche straddles

KA:

RW = Greater of:

,%+ ,% ;

20% (supervisory floor)

The capital charge (i.e., the amount of capital required to be held against thetranche as a percentage of its carrying value) equals RW times8% (the totalcapital requirement). For example:

if RW is 1,250%, the capital charge is 100% (1,250% times8%) (i.e.,dollar-for-dollar capital required);

if RW is 20%, the capital charge is 1.6% (20% times8%); and

if RW is 1,250% timesKSSFA, the capital charge is KSSFA% (1,250% timesKSSFAtimes8%).

Step-by-Step Application of SSFA

The following chart presents a step-by-step application of the mathematicalexpression of SSFA presented above. The first three steps relate to the pool ofsecuritized assets and the remaining steps relate to each tranche of thesecuritization.

Step Description Calculation/Explanation

1 Determine KGfor the pool of

securitized assets.

KGis the capital charge that the banking

organization would incur if it held the

securitized assets directly, rather than

securities backed by such assets. It can be

thought of as the baseline capital cushion

applicable to the securitization.

KGequals 8% for the types of consumer

assets most frequently securitized.

2 Calculate Wfor the pool of

securitized assets.

W is a ratio, the numerator of which is the

dollar amount of underlying securitized

assets that meet the criteria specified

below and the denominator of which is

total dollar amount of all underlying

securitized assets.

Criteria:

(i) ninety days or more past due;

(ii) subject to a bankruptcy or insolvency


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proceeding;

(iii) in the process of foreclosure;

(iv) held as real estate owned;

(v) has contractually deferred interest

payments for 90 days or more;9or

(v) is in default.

3 Calculate KAfor the pool of

securitized assets.

KA= (1-W)KG+ W(0.5)

KAcan be thought of as adjusting the

baseline capital cushion (KG) to account for

the observed adverse performance of the

securitized assets (measured by W).

For that portion of the securitizedassets for which there is no observed

adverse performance (1-W), the

capital cushion continues to equal

the baseline (KG).

For that portion of the securitized

assets for which there is observed

adverse performance (W), the capital

cushion is equal to 50%.

4 Calculate the attachment

point (A) and detachment

point (D) for each tranche.

A = The attachment point for the tranche,

calculated as the ratio of the current dollar

amount of underlying exposures that aresubordinated to the exposure to the

current dollar amount of all underlying

exposures.

D = The detachment point for the tranche,

calculated as parameter A plus the ratio of

the current dollar amount of other tranches

that arepari passuwith such tranche.

The attachment point (A) for a tranche is

that point in the capital structure at which

the tranche begins to absorb losses and

the detachment point (D) for a tranche is

that point in the capital structure at which

the tranche has become a total loss. The

points of the capital structure are simply

intervals in a range from 0% (the bottom of

the most junior tranche) to 100% (the top

of the most senior tranche).

The attachment and detachment points

denote (1) the tranche's relative level of


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seniority in the capital structure and (2) the

thickness of the tranche (measured as D-

A). The relative level of seniority of a

tranche, as well as its thickness, are key

inputs in the SSFA method for determining

the risk weight of that tranche.

5 Identify whether the

tranche:

is junior to KA

is senior to KA; and

straddles KA.

Mathematical expression:

DKA

A


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equal to

1,250% x KSSFA

for such portion.

The total RW for thetranche is the sum of

the RWs for the two

portions as

described above.

Note that

supervisory floor of

20% RW applies.

To aid the reader in determining the approximate capital charge under SSFA for a

given tranche, Appendix A contains a chart showing the capital charge underSSFA for tranches with attachment points (A) ranging from 0% to 100% andtranche thicknesses (D-A) ranging from 2% to 40%, where KG= 8% and W = 0%.

Graphical Representation of Capital Charges Under SSFA

The following graph depicts the marginal capital charge at each point in thecapital structure under SSFA.13

Capital Charges Under SSFA


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Overview of KSSFA

The KSSFAFormula

As noted above, KSSFAis used in determining the risk weight applicable to anytranche (or portion thereof) senior to KAin the capital structure. KSSFAis equal to:

() where,

1. KG= The weighted average total capital requirement of the underlyingsecuritized assets (8% in the case of most types of consumer assets).

2. = (1 ) + 0.5

3. W= The proportion of the underlying securitized assets that meet thefollowing criteria:

i. ninety days or more past due;ii. subject to a bankruptcy or insolvency proceeding;iii. in the process of foreclosure;iv. held as real estate owned;v. has contractually deferred interest payments for 90 days or more;14

orvi. is in default.

4. = 1

5. =An indicator variable that is 0.5 for securitizations that are notresecuritization exposures and is 1.5 for resecuritization exposures.

6. =

7. = ( , 0)

8. A = The attachment point for the securitization exposure, calculated asthe ratio of the current dollar amount of underlying exposures that aresubordinated to the exposure to the current dollar amount of allunderlying exposures.

9. D= The detachment point for the securitization exposure, calculated asparameter A plus the ratio of the current dollar amount of thesecuritization exposures that arepari passuwith such securitizationexposure.

10. e= 2.71828, the base of the natural logarithms.

Economic Basis of KSSFA

The KSSFA formula derives from the mathematical approaches used in hedging. Ahedge is an investment or position that is designed to offset or otherwise protectagainst changes in the value of an underlying exposure. Capital held by a bankingorganization can be considered a hedge against unexpected changes in the valueof the investment against which such capital is held. The amount of capital ( i.e.,the amount of the hedge) as a proportion of the underlying exposure that isprotected by the capital (i.e., the hedge) is referred to as a hedge ratio.


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Both the ratings-based approaches under Basel I and Basel II and K SSFAfunctionas hedge ratios in that they determine the amount of capital required to protect abanking organization from unexpected changes in the credit profile of asecuritization exposure. However, unlike the ratings-based approaches, KSSFAutilizes hedging mathematics to dynamically adjust for changes in the condition ofthe underlying exposure; i.e., KSSFAreflects changes in the credit quality of the

securitized assets (as measured by parameter W), thus providing hedgeprotection against a greater range of contingencies as compared to the ratings-based approaches (which are usually unaffected by small changes in creditquality). As with any hedge, the greater the range of contingencies being hedgedagainst, the higher the cost of hedging will be (e.g., a hedge (insurance policy)against the risk of a home being destroyed by fire is less costly than a hedgeagainst the risk of a home being damaged ordestroyed by fire). Thus, KSSFAcomes at the cost of generally higher capital charges when compared with theratings-based capital charges under Basel I and Basel II.


SSFA is Dynamic

SSFA risk weights for a given tranche can change as the performance of theunderlying securitized assets (measured by parameter W) changes and as theattachment and detachment points for that tranche change over time. The ratings-based methods of Basel I and Basel II (see Appendix B) produce static riskweights for a given tranche (unless the rating of that tranche changes).

Performance of the underlying assets will drive changes in parameter W.Such changes may be relatively more pronounced in securitizations ofsubprime assets than in securitizations of prime assets. While theperformance of the underlying assets may lead to adjustments in thecredit rating of a tranche and thus the risk weight under Basel I and BaselII, SSFA is clearly much more sensitive to changes in the performance of

the underlying securitized assets.

A transaction's priority of payments will drive changes in the attachmentand detachment points of a particular tranche. For example, a sequentialpay transaction will result in gradually higher attachment and detachmentpoints as the transaction de-levers. Thus, the risk weighting of asubordinated tranche may decline dramatically as its relative position inthe capital structure improves. Risk weights under Basel I and Basel II donot adjust as a transaction de-levers, except in those instances where therating of a subordinate tranche is increased as its relative position in thecapital structure improves.

SSFA Leads to Generally Higher Capital Charges than Basel I andBasel II

As compared with Basel I and Basel II, SSFA generally results in somewhathigher capital charges for very senior tranches and much higher capital chargesfor the subordinated tranches. These results are significantly pronounced withrespect to securitizations that have low attachment points. For example, a primeauto loan securitization will have a relatively small residual interest and thus thetranches will generally attach at a much lower level than is the case in a subprimeauto loan securitization, in which the residual interest is typically larger. Thefollowing table illustrates this effect with respect to a recent subprime auto loansecuritization and a recent prime auto loan securitization.


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Tranche

(SequentialPay)

Attachment%

(A)

Basel I

CapitalCharge

Basel II

CapitalCharge

SSFA

CapitalCharge

15

Class A-1

Rated A-1

Subprime Auto: 81.51% 1.60% 0.56% 1.60%

Prime Auto: 78.41% 1.60% 0.56% 1.60%

Class A-2

Rated AAA

Subprime Auto: 48.53% 1.60% 0.96% 1.60%

Prime Auto: 46.27% 1.60% 0.96% 1.60%

Class A-3

Rated AAA

Subprime Auto: 32.70% 1.60% 0.96% 1.60%

Prime Auto: 16.24% 1.60% 0.96% 1.70%

Class A-4

Rated AAA

Subprime Auto: N/A

Prime Auto: 7.64% 1.60% 0.96% 44.77%

Class B

Rated AA

Subprime Auto: 25.45% 1.60% 1.20% 1.60%

Prime Auto: 4.73% 1.60% 1.20% 100.00%

Class C

Rated A

Subprime Auto: 16.45% 4.00% 1.60% 4.81%

Prime Auto: 2.78% 4.00% 1.60% 100.00%

Class D

Rated BBB

Subprime Auto: 7.60% 8.00% 6.00% 44.25%

Prime Auto: 0.84% 8.00% 6.00% 100.00%

Class E

Rated BB

Subprime Auto: 5.25% 16.00% 34.00% 100.00%

Prime Auto: N/A

As noted above under Overview of KSSFA-- Economic Basis of KSSFA, KSSFAhedges against a wider range of contingencies (any change in parameter W)than do the ratings-based approaches (only changes in the credit rating). Someportion of the generally higher capital charges under SSFA can be attributed tothis difference, as the cost of hedging against a wider range of contingencies isgenerally higher than the cost of hedging against fewer contingencies.

SSFA Can Lead to Anomalous Results Due to a Fixed KG

As explained above, SSFA utilizes KGas the baseline capital cushion for asecuritization transaction. For the types of consumer assets that are mostfrequently securitized, KGis 8% regardless of the credit quality of the underlyingassets. The fixed KG, when coupled with the different attachment and detachmentpoints for comparably-rated tranches in different types of transactions, has thepotential to lead to anomalous results.

For example, the initial SSFA capital charge for the Class A-4 AAA-ratedtranche in the prime auto securitization referenced above (44.77%) is about thesame as the initial SSFA capital charge for the Class D BBB-rated tranche in the

subprime auto securitization referenced above (44.25%). Had KGbeen set at 4%rather than 8% for the prime auto securitization, the initial SSFA capital charge forthe Class A-4 tranche would be only 3.72%. Although the anomaly will correctitself, to some extent, as parameter W increases over time for the subprimetransaction relative to the prime transaction, it is difficult to rationalize a similarcapital charge for those two tranches at any point in time.


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SSFA Applies Unevenly Across the Capital Structure

SSFA does not provide a smooth continuum of risk weights and capital chargesacross all tranches of a securitization. Rather, SSFA divides the capital structureinto four distinct domains:

(1) the dollar-for-dollar domain (consisting of those tranches junior to KA, forwhich dollar-for-dollar capital is required);

(2) the partial KSSFAdomain (consisting of the tranche that straddles KA, forwhich (a) dollar-for-dollar capital is required for the portion of suchtranche junior to KAand (b) the KSSFAformula applies in determining therisk weight and capital charge for the portion of such tranche senior toKA);

(3) the full KSSFAdomain (consisting of those tranches senior to KAfor whichthe KSSFAformula applies in determining the risk weight and capitalcharge); and

(4) the supervisory floor domain (those tranches for which the 20% riskweight / 1.6% capital charge supervisory floor applies).

These distinct domains, and their respective methods for calculating risk weightsand capital charges, can lead to cliff effects and generally uneven results ininstances where a tranche migrates across domains as its attachment anddetachment points change. Moreover, changes in credit quality (measured bychanges in parameter W) have a substantial effect on risk weights and capitalcharges for tranches in the partial KSSFAdomain and the full KSSFAdomain, buthave no effect in the dollar-for-dollar domain and have no effect in the supervisoryfloor domain unless the changes are severe enough to cause the KSSFAcalculation to exceed the supervisory floor.

Conclusion

The elimination of the ratings-based approaches under Basel I and Basel IIrepresents a significant change in the way that risk weights for securitizationexposures are determined in the United States. Although the reliance onsometimes unreliable ratings is an obvious shortcoming of the ratings-basedapproaches, SSFA has its own shortcomings as noted above. Over time, it islikely that SSFA will have a material impact on the capital charges associated withthe securitization exposures of banking organizations.

www.bakermckenzie.com

For further information pleasecontact

Christopher B. HornPartnerBaker & McKenzie LLPNew York, NY1 212 626 [email protected]

Erica KhaliliAssociateBaker & McKenzie LLPNew York, NY1 212 626 [email protected]

Nigel Thavasi, PhDEconomic AnalystBaker & McKenzie EconomicConsulting LLCPalo Alto, CA1 650 251 [email protected]


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Appendix A

SSFA Capital Charges (expressed as a percentage)for:

Attachment Points (A): 0% to 100%

Tranche Thicknesses (D-A): 2% to 40%

Attachment Points (A)

D-A 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24%100%

2% 100.00 100.00 100.00 100.00 78.69 47.73 28.95 17.56 10.65 6.46 3.92 2.38 1.60

4% 100.00 100.00 100.00 89.35 63.21 38.34 23.25 14.10 8.55 5.19 3.15 1.91 1.60

6% 100.00 100.00 92.90 75.47 51.79 31.41 19.05 11.56 7.01 4.25 2.58 1.60 1.60

8% 100.00 94.67 81.61 63.84 43.23 26.22 15.90 9.65 5.85 3.55 2.15 1.60 1.60

10% 95.74 85.28 71.07 54.59 36.72 22.27 13.51 8.19 4.97 3.01 1.83 1.60 1.60

12% 87.74 75.90 62.16 47.26 31.67 19.21 11.65 7.07 4.29 2.60 1.60 1.60 1.60

14% 79.34 67.56 54.80 41.43 27.71 16.81 10.19 6.18 3.75 2.27 1.60 1.60 1.60

16% 71.62 60.45 48.76 36.75 24.54 14.89 9.03 5.48 3.32 2.01 1.60 1.60 1.60

18% 64.84 54.45 43.77 32.93 21.98 13.33 8.08 4.90 2.97 1.80 1.60 1.60 1.60

20% 59.00 49.40 39.63 29.78 19.87 12.05 7.31 4.43 2.69 1.63 1.60 1.60 1.60

22% 54.00 45.12 36.16 27.15 18.11 10.98 6.66 4.04 2.45 1.60 1.60 1.60 1.60

24% 49.69 41.48 33.22 24.93 16.63 10.08 6.12 3.71 2.25 1.60 1.60 1.60 1.60

26% 45.98 38.36 30.71 23.04 15.36 9.32 5.65 3.43 2.08 1.60 1.60 1.60 1.60

28% 42.76 35.66 28.54 21.41 14.27 8.66 5.25 3.18 1.93 1.60 1.60 1.60 1.60

30% 39.95 33.30 26.65 19.99 13.33 8.08 4.90 2.97 1.80 1.60 1.60 1.60 1.60

32% 37.47 31.23 24.99 18.74 12.50 7.58 4.60 2.79 1.69 1.60 1.60 1.60 1.60

34% 35.28 29.40 23.52 17.64 11.76 7.13 4.33 2.62 1.60 1.60 1.60 1.60 1.60

36% 33.32 27.77 22.22 16.66 11.11 6.74 4.09 2.48 1.60 1.60 1.60 1.60 1.60

38% 31.57 26.31 21.05 15.79 10.53 6.38 3.87 2.35 1.60 1.60 1.60 1.60 1.60

40% 30.00 25.00 20.00 15.00 10.00 6.07 3.68 2.23 1.60 1.60 1.60 1.60 1.60

Assumes KG= 8% and W = 0%. The capital charge is calculated as 8% (the total capital ratio

requirement) times the SSFA risk weight.


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Appendix B

Risk Weights for Securitization Exposures under Basel I and Basel II

Basel II

Rating Basel I Senior,

Granular

Non-Senior,

Granular

Non-

Granular

AAA 20% 7% 12% 20%

AA 20% 8% 15% 25%

A+ 50% 10% 18% 35%

A 50% 12% 20% 35%

A- 50% 20% 35% 35%

BBB+ 100% 35% 50% 50%

BBB 100% 60% 75% 75%

BBB- 100% 100% 100% 100%

BB+ 200% 250% 250% 250%

BB 200% 425% 425% 425%BB- 200% 650% 650% 650%


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Endnotes

1For the interim final rule published by the FRB and the OCC, seehttp://www.federalreserve.gov/bcreg20130702a.pdf.For the interim final rule adopted by the FDIC,

seehttp://www.fdic.gov/news/board/2013/2013-07-09_notice_dis_a_res.pdf?source=govdelivery .These interim final rules will be reconciled and published as final rules in the Federal Register.

2Total capital is the sum of common equity tier one capital, additional tier one capital and tier twocapital.

Common equity tier one capital consists of common stock instruments plus retainedearnings plus accumulated other comprehensive income plus common equity tier oneminority interest, subject to certain limitations minus any gain-on-sale associated with asecuritization exposure minus other specified regulatory adjustments and deductions.

Additional tier one capital consists of subordinated capital instruments (plus any relatedsurplus) that are issued and paid, have no maturity and that meet other specified criteriaplus tier one minority interest, subject to certain limitations minus specified regulatoryadjustments and deductions.

Tier two capital consists of subordinated capital instruments (plus any related surplus) that

are issued and paid, have a minimum original maturity date of at least five years and thatmeet other specified criteria plus total capital minority interest, subject to certain limitationsplus allowance for loan and lease losses (ALLL) up to 1.25% of the banking organization'sstandardized total risk-weighted assets not including any amount of the ALLL (and excludingin the case of a market risk banking organization, its standardized market risk-weightedassets) minus specified regulatory adjustments and deductions.

3Before applying any of the risk-weighted approaches, a banking organization must deduct from itscommon equity tier one capital any after-tax gain-on-sale resulting from a securitization and apply a1,250% risk weight to the portion of a credit enhancing interest-only strip that does not constituteafter-tax gain-on-sale.

4A market risk banking organization is any banking organization with aggregate trading assets andliabilities equal to: (1) 10% or more of its total assets or (2) $1 billion or more.

5A banking organization must apply either the SSFA or the gross-up approach consistently across allof its securitization exposures. The gross-up approach utilizes four inputs: (1) the pro-rata share (the

par value of the banking organization's securitization exposure as a percentage of the par value of thetranche in which the securitization exposure resides), (2) the exposure amount, (3) the enhancementamount (the par value of all tranches that are more senior to the tranche in which the securitizationexposure resides) and (4) the applicable risk weight (the weighted-average risk weight of theunderlying exposures in the securitized pool). Under the gross-up approach, a banking organizationwould calculate the "credit equivalent amount," which equals (a) the sum of the exposure amount ofthe banking organization's securitization exposure and (b) the pro-rata share times the enhancementamount. To calculate the risk weight for a securitization exposure under the gross up approach, thebanking organization must apply the applicable risk weight to the credit equivalent amount.

6The SFA is based on a complex formula that utilizes seven inputs: (1) amount of the underlyingexposures, (2) the securitization exposure's proportion of the tranche in which the securitizationexposure resides, (3) the sum of the risk-based capital requirements and expected credit losses forthe underlying exposures divided by the amount of the underlying exposures (KIRB), (4) the tranche'scredit enhancement level, (5) the tranche's thickness, (6) the number of underlying securitizationexposures and (7) the securitization exposure's weighted average loss given default.

7

The Collins Amendment refers to Section 171 of the Dodd-Frank Act. That provision requires theappropriate Federal banking agencies to establish minimum leverage and capital requirements on aconsolidated basis for insured depository institutions, depository institution holding companies, andnonbank financial companies supervised by the FRB. These minimum leverage and capitalrequirements may not be less than the generally applicable leverage capital requirements, which areto serve as a floor for any capital requirements that the agency may require, nor quantitatively lowerthan the generally applicable leverage and capital requirements that were in effect for insureddepository institutions as of the date of enactment of the Dodd-Frank Act.

8The market risk approach contains various adjustments based on market-based variables. Thoseadjustments are beyond the scope of this article.
http://www.federalreserve.gov/bcreg20130702a.pdfhttp://www.fdic.gov/news/board/2013/2013-07-09_notice_dis_a_res.pdf?source=govdeliveryhttp://www.fdic.gov/news/board/2013/2013-07-09_notice_dis_a_res.pdf?source=govdeliveryhttp://www.federalreserve.gov/bcreg20130702a.pdf


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2013 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law f irms around the world. In accordance with the common terminology used in professional serviceorganizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law f irm.

This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.

9Criteria excludes principal or interest payments deferred on: (1) federally-guaranteed student loans,in accordance with the terms of those guarantee programs and (2) consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisionsincluded in the contract at the time funds are disbursed that provide for periods of deferral that are notinitiated based on changes in the creditworthiness of the borrower.

10Criteria excludes principal or interest payments deferred on: (1) federally-guaranteed student loans,in accordance with the terms of those guarantee programs and (2) consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisionsincluded in the contract at the time funds are disbursed that provide for periods of deferral that are notinitiated based on changes in the creditworthiness of the borrower.

118% * (1,250%*KSSFA) = KSSFA%

128% * 20% = 1.6%

13The graph assumes that KGequals 8% and that parameter W equals 0%.

14See note above regarding types of principal and interest payments excluded from these criteria.

15 The figures presented do not take into account funds on deposit in the reserve account and assumethat parameter W equals 0%.

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Al Bf Ssfamethodv2 Jul13 (1)