Discover 2014 Annual Report Download - page 131

-117-
charge-offs occurring within the securitized pool of receivables and receive a contractual rate of return and Discover
Bank is paid a servicing fee as servicer. Any cash flows remaining in excess of these requirements are reported to
investors as excess spread. An excess spread rate of less than 0% for a contractually specified period, generally a three-
month average, would trigger an economic early amortization event. In such an event, the Company would be required
to seek immediate sources of replacement funding. Apart from the restricted assets related to securitization activities, the
investors and the securitization trusts have no recourse to the Company’s other assets or the Company's general credit
for a shortage in cash flows.
The Company is required to maintain a contractual minimum level of receivables in the trust in excess of the face
value of outstanding investors’ interests. This excess is referred to as the minimum seller’s interest requirement. The
required minimum seller’s interest in the pool of trust receivables, which is included in credit card loan receivables
restricted for securitization investors, is set at approximately 7% in excess of the total investors’ interests (which includes
interests held by third parties as well as those certificated interests held by the Company). If the level of receivables in
the trust was to fall below the required minimum, the Company would be required to add receivables from the
unrestricted pool of receivables, which would increase the amount of credit card loan receivables restricted for
securitization investors. A decline in the amount of the excess seller’s interest could occur if balance repayments and
charge-offs exceeded new lending on the securitized accounts or as a result of changes in total outstanding investors’
interests. Seller's interest is impacted by seasonality as higher balance repayments tend to occur in the first calendar
year quarter. If the Company could not add enough receivables to satisfy the requirement, an early amortization (or
repayment) of investors’ interests would be triggered. The Company retains significant exposure to the performance of
trust assets through holdings of the seller's interest and subordinated security classes of DCENT and previously DCMT.
In addition, the Company has the right to remove a random selection of accounts, which would serve to decrease the
amount of credit card loan receivables restricted for securitization investors, subject to certain requirements including
that the minimum seller's interest is still met.
Another feature of the Company’s credit card securitization structure that is designed to protect investors’ interests
from loss, which is applicable to the notes issued from DCENT, is a reserve account funding requirement in which
excess cash flows generated by the transferred loan receivables are held at the trust. This funding requirement is
triggered when DCENT’s three-month average excess spread rate decreases to below 4.5%, with increasing funding
requirements as excess spread levels decline below preset levels to 0%.
In addition to performance measures associated with the transferred credit card loan receivables or the inability
to add receivables to satisfy the seller's interest requirement, there are other events or conditions which could trigger an
early amortization event, such as non-payment of principal at expected maturity. As of December 31, 2014, no
economic or other early amortization events have occurred.
The table below provides information concerning investors’ interests and related excess spread at the end of the
current period (dollars in millions):
Investors’
Interests(1) # of Series Outstanding
3-Month Rolling
Average Excess
Spread
At December 31, 2014
Discover Card Execution Note Trust (DiscoverSeries notes) ................................................... $ 21,739 39 13.95%
(1) Investors’ interests include third-party interests and subordinated interests held by wholly-owned subsidiaries of Discover Bank.
The Company continues to own and service the accounts that generate the loan receivables held by the trusts.
Discover Bank receives servicing fees from the trusts based on a percentage of the monthly investor principal balance
outstanding. Although the fee income to Discover Bank offsets the fee expense to the trusts and thus is eliminated in
consolidation, failure to service the transferred loan receivables in accordance with contractual requirements could lead
to a termination of the servicing rights and the loss of future servicing income, net of related expenses.
Student Loan Securitization Activities
The Company’s student loan securitizations are accounted for as secured borrowings and the trusts are treated as
consolidated subsidiaries of the Company. Trust receivables underlying third-party investors’ interests are recorded in
purchased credit-impaired loans, and the related debt issued by the trusts is reported in long-term borrowings. The
assets of the Company’s consolidated VIEs are restricted from being sold or pledged as collateral for other borrowings
and the cash flows from these restricted assets may be used only to pay obligations of the trusts.