NEW YORK – Recognizing the importance of seller/servicer operations in asset-backed securities performance, Fitch Ratings has published its rating methodology for U.S. ABS seller/servicers, becoming the first agency to publish formal rating criteria.
Titled ‘Rating ABS Seller/Servicers: Credit Where Credit is Due’, the criteria establishes a more precise connection between the operational and financial quality of the seller/servicer and credit enhancement determination. ‘This is first and foremost an enhancement to the ABS credit process,’ says Kevin Duignan, Managing Director, ABS, Fitch Ratings. ‘While Fitch has always used seller/servicer assessments to augment its other analytical tools, this more formalized approach will give ABS investors the increased rating transparency they have come to expect from Fitch.’
Fitch’s approach is distinctive in a number of ways. First, it will become a formal, required component of Fitch’s credit analysis. Second, it includes both the seller and servicer components of the operations rather than the traditional ‘servicer only’ approach. Third, the criteria is developed on a product specific basis to reflect the risks unique to each asset type. And finally, it provides for a clearer description of the impact of the seller/servicer’s financial condition on the ultimate operational rating.
Fitch’s analysis of ABS seller/servicers encompasses three major evaluation factors (corporate performance, origination and servicing) and will adopt the same 1 (highest) to 5 (lowest) scale already utilized by Fitch’s Operational Risk Group for other areas of structured finance. ‘Fitch’s approach capitalizes on the expertise of product specialists, transaction analysts, and financial institution and corporate analysts in addition to the experience of the Operation Risk Group which has established programs for RMBS and CMBS sellers and servicers and CDO asset managers,’ says Diane Pendley, Managing Director, Operational Risk, Fitch Ratings.
This report outlines Fitch’s review processes for ABS seller/servicers, the methodology used to assign ratings, and the ongoing monitoring activities which apply generally to most if not all ABS products. Individual, product-specific addenda reports will be subsequently published that will delineate those features of origination and servicing unique to individual asset types.
The seller/servicer review effort initially focuses on the core consumer ABS products: credit cards, student loans and autos. Fitch is currently in the process of reviewing a number of credit card seller/servicers and expects to follow those shortly with reviews in the student loan and auto sectors.
The ‘Rating ABS Seller/Servicers’ criteria report is available on the Fitch Ratings web site at www.fitchratings.com.
