Setting Up Behavioral Models, Negative Amortization, and Service Fee Models

This chapter discusses how to:

• Set up behavioral models.

• Set up negative amortization.

• Set up service fees.

Setting Up Behavioral Models

This section provides an overview of behavioral models and discusses how to define them.

Understanding Behavioral Models

Behavioral models describe how a customer holding a particular type of product for a certain length of time might behave relative to changes in market interest rates, taking into account such factors as geography, credit rating, age of the instrument, and time of year. For example, customers can react to changing interest rates by prepaying their mortgages or withdrawing their deposits.

When projecting cash flows for these products, the Cash Flow Generator application engine takes into account the results from the behavioral models that you define, when projecting cash flows for these products.

You can assign several models to one product. For example, you can assign “Model X” to loans in Georgia that are more than five years old and have poor credit ratings and assign “Model Y” to loans in Arizona that are less than five years old with excellent credit ratings. By doing so, you create a model for each subset that you want to treat differently from the total population of that product.

Almost all of the behavioral models are evaluated only on the instrument's payment date. The only exception is the Rate Lock behavioral model, which is evaluated on the dates of the rate lock options.

This section discusses:

• Modeling criteria.

• Types of behavioral models.

Modeling Criteria

To model behavior, enter values for one or more of the following criteria:

• Weighted Average Coupon rate (WAC).

• Age (always in months).

• Rate delta.

An algorithm takes those values and processes the data according to the following parameters:

For processing to occur, ensure that you have defined at least one of the following:

• WAC value that is large enough to establish the upper bound, so that all possible WACs returned by the Product Pricing model will fall below the upper bound.

• Age value that is small enough to establish the lower bound, so that all possible ages will fall above the lower bound.

• Rate delta that is small enough to establish the lower bound, so that all possible rate deltas (returned by the Product Pricing Index minus the current WAC) will fall above the lower bound.

Types of Behavioral Models

Using the Behavioral Models page, create or modify behavioral models according to model type. The page varies according to the model type that you select. This table lists the six model types:

Pages Used to Set Up Behavioral Models

Defining Behavioral Models

Access the Behavioral Model page.

Note. This is a dynamic page. The options that you choose in the fields may activate or deactivate additional fields.

To define behavioral models:

1. Choose, on the access page, the type of behavioral model that you want to create: Charge Off, Credit Draw-Down, Deposit Growth, Deposit Runoff, Prepayment, or Rate Lock.

2. The Implementation field enables you to select the type of parameters that you can set up for your model.

   For all models, select Explicitly Specified. This is the default value.

3. Select the predefined seasonality ID.

   The options that appear here were created on the Seasonality Groups page. This enables you to factor an adjustment for cyclical (seasonal) patterns into the modeling. The seasonality factor is applied as a multiplier to the results that are returned by the behavioral model.

4. Enter the weighted average interest rate for this pool in the Weighted Average Coupon field.

   You can define as many rows as necessary for each model that has different coupon rates.

5. Select the SMM (single monthly mortality) option if you are using this method.

6. Enter the number of months (starting from origination when rates are increasing) in the Ramp-Up (Mos) field.

7. Enter the number of months during which the rate peaks do not increase or decrease in the Peak Term (Mos) field.

8. Enter the percentage rate at which a rate peaks in the Peak Rate field.

9. Enter the number of months during which charge-off rates are decreasing, eventually reaching a constant (seasoned) rate in the Ramp-Dn (Mos) field.

10. Enter the rate when it becomes seasoned in the Constant _ Rate field.

    This column varies slightly according to the model that you create. For example, this column appears as Constant Charge-Off Rate for the Charge-Off model.

11. Select the Use Age check box to enable the system to factor the age of the instrument, deposit, or loan into the modeling.

12. Enter the difference between rates in the Rate Delta (bps) field.

    If this is for the Rate Lock model, this is the difference in rates that the borrower would require to be incited to pursue the rate lock rate option and accept the rate being offered by the institution as the new rate (that is, excise option). For example, suppose that the current coupon rate is three percent, then a rate difference of one percent might be appropriate for the borrower to accept the new rate as a fixed rate, trading off the variable rate option previously on the product.

13. Enter the average age of the deposit, instrument, or loan in the Age (Months) field.

14. Enter the constant prepayment rate (CPR).

    This is the annualized percentage prepayment rate.

15. Enter the percent of Public Securities Administration (PSA) that corresponds to the CPR that you entered.

16. Enter the single monthly mortality rate (SMM), which is based on the CPR rate that you entered.

    The SMM is calculated as SMM = 1 – (1 – CPR)*1/12.

Setting Up Negative Amortization

This section provides an overview of negative amortization and discusses how to:

• Define negative amortization.

• Attach a negative amortization rule to an instrument.

Understanding Negative Amortization

Sometimes, the rate a bank charges the customer changes more frequently than the customer's payment is adjusted. Suppose that the interest rate is reset monthly, while the payment is reset annually. If the interest rate rises while the monthly payments remain the same, then the payment does not cover the interest on the loan, and the principal amount increases over time. This is known as negative amortization.

With the Negative Amortization feature, you can:

1. Specify a coefficient and a period for initial payment reduction.

2. Specify the payment reset frequency.

3. Specify the ceiling factor.

4. Place a cap and floor on the payment changes.

5. Specify the payment recast teaser and frequency.

Note. Only floating loans can amortize negatively.

Page Used to Set Up Negative Amortization

Defining Negative Amortization Rules

Access the Negative Amortization Parameters page.

To define negative amortization rules:

1. Enter a short description for the negative amortization ID.

2. Enter the percentage of monthly payments to be applied in the initial period (usually less than 100%) in the Coefficient Initial Payment field.

   You can enter this percentage as a decimal.

3. Use the Ceiling Factor field to enter the percentage that represents the upper limit to the increase in monthly payments, from one reset or recast period to the next.

   This limit applies to the life of the loan. You can enter this number as a decimal.

4. Use the Cap Payment Change (%) field to enter the upper limit to the increase in monthly payments, when resetting the rate.

5. Use the Floor Payment Change (%) field to enter the lower limit to the decrease in monthly payments, when resetting the rate.

6. Enter the number of months, days, or years representing the initial payment period during which the coefficient initial payment applies in the Initial No Pay Adjust Period field.

7. Enter the number of months, days, or years representing the reset frequency period in the Payment Reset Frequency field.

8. Enter the number of months, days, or years representing the starting point at which the rate is recast in the Recast Teaser field.

9. Enter the number of months, days, or years representing the recast frequency period in the Recast Frequency field.

Note. The payment reset calculations take into account both: the ceiling factor (over the life of the loan), as well as the cap payment change and floor payment change (in a single period). The payment recast calculation only takes into account the ceiling factor. With all negative amortization calculations, the recast rule always overrides the reset rule.

Attaching a Negative Amortization Rule to an Instrument

After you defining the negative amortization rule, assign it to the financial instruments in your Extract Transform and Load process. For test instruments, you can assign the rule directly in the Financial Instrument Entry - Instrument page. Select the Negatively Amortizing option and select the predefined negative amortization ID from the available options.

Setting Up Service Fees

This section provides an overview of service fee models and discusses how to define them.

Understanding Service Fee Models

PeopleSoft Enterprise Funds Transfer Pricing uses the Service Fees Model to model non-interest revenues and expenses in earnings simulations. These amounts correlate with product volumes and are an additional component to interest-rate sensitive earnings.

Through the Service Fee Models component, you can model fees and charges associated with your products, such as loan origination fees or monthly maintenance fees. These service fees are assigned to the products in the Price Index Model, under the financial calculation rules. These fees are then factored in as part of the regular cash flow calculations.

After you have defined the Service Fees Models, you can assign them to products or instruments on the Pricing page of the Financial Calculation Rules component.

Pages Used to Set Up Service Fees

Service Fee Model - Definition Page

Access the Service Fee Model Definition page.

To define a Service Fee Model:

1. Define each row of the model as an income or expense.

2. Apply a frequency for each row, either Periodic Fee or Origination Fee.

   The periodic fee is to be assessed with the same periodicity as the scenario definition.

3. In the Account CD field, select an account code for which the fee applies and a fee method.

   Select % of Bal (balance) (calculated as a percentage of the account balance), then enter the percent amount.

   Or select Unit Fee (a fixed amount fee per account). Then, enter a fee amount. For multi-currency processing, the fee amount should be specified in the base currency of the business unit. If the business unit includes instruments denominated in multiple currencies, the end result should be run through the Multiple Currency engine. This translates amounts to the appropriate transaction currency using the foreign exchange rate as of the run date.

4. Determine to which ledger the fee is to be posted in the Ledger Event Code field.