eTrade 2007 Annual Report Download - page 54

Underwriting Standards—Originated Loans
We originate loans that generally fall into two categories:
•Mortgage Loans—Prime credit quality first-lien mortgage loans secured by single-family residences.
•Home Equity Loans—Prime credit quality second-lien mortgage loans, including home equity lines of
credit, secured by single-family residences.
We originate loans primarily through our mortgage lending sales force. The loans are almost entirely
secured by a primary residence for the purpose of purchase money, refinance, debt consolidation, or home equity
loans. We originate both amortizing and interest-only mortgage loans; however, we do not originate negative
amortization or option ARMs.
We price our loans based on the competitive environment as well as the risk elements inherent in the loan.
We evaluate criteria such as, but not limited to: borrower credit score, loan-to-value ratio (“LTV”),
documentation type, occupancy type and other risk elements. In the second half of 2007, we adjusted our loan
origination practices and pricing to significantly curtail originations of higher risk loans, particularly home equity
loans with FICO scores below 660 or a CLTV greater than 89%. In addition, during the second half of 2007, we
exited our wholesale mortgage origination channel and no longer originate loans through brokers.
Our underwriting guidelines were established with a focus on both the credit quality of the borrower as well
as the adequacy of the collateral securing the loan. We have designed our underwriting guidelines so that our
one- to four-family loans are salable in the secondary market. These guidelines include limitations on loan
amount, loan-to-value ratio, debt-to-income ratio, documentation type and occupancy type. We also require
borrowers to obtain mortgage insurance on higher loan-to-value first lien mortgage loans.
The table below summarizes the underwriting guidelines for the major originated loan types that we offered
as of December 31, 2007(1). However, one- to four-family loans originated and held on our balance sheet, rather
than sold to third party investors, are typically held to more stringent underwriting criteria. In the fourth quarter
of 2007, we retained approximately 10% of the total one- to four-family retail loans originated. All of our home
equity loans originations were retained in 2007 and 2006.
First Lien —
Full Documentation
First Lien —
Stated Income/Verified Asset Home
EquityUnderwriting Requirement Conforming(2) Non-conforming(3) Conforming(2) Non-conforming(3)
Minimum Credit Score 620 620 680 680 660
Maximum Debt-to-Income 50% 40% 50% 50% 50%
Maximum CLTV 95% 95% 95% 80% 89%
No Bankruptcy/Foreclosures 4+ Years 4+ Years 4+ Years 5+ Years 5+ Years
(1) The majority of loans are originated within the guidelines listed above; however, loans can be originated outside these guidelines if
originated for sale under specific investor requirements or if there are compensating factors that improve the overall credit quality of the
loan.
(2) Conforming loans conform to the standards set forth by Fannie Mae and Freddie Mac. The single family conforming loans limit was
$417,000 for the year ended December 31, 2007.
(3) Non-conforming loans (or jumbo loans) have a loan amount greater than the standard set by Fannie Mae and Freddie Mac.
Underwriting decisions are made based on the overall credit characteristics of the loan, and are not
automatically approved if the loan meets the individual criteria. Therefore, the average credit characteristics of
the loans we originate are stronger than the minimum criteria summarized in the table above. For example, in the
fourth quarter of 2007, the average retail loan originated had a FICO of 750 and an average CLTV of 69%.
We supplement our loan underwriting process with a post-closing quality control process. Our quality
control process consists of a re-verification of loan documentation, an underwriting and appraisal review, and
other underwriting guideline reviews. This combination of an underwriting process and a quality control process
allows us to evaluate and measure adherence to the prescribed underwriting guidelines.
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