eTrade 2011 Annual Report Download - page 65

warranties or material misrepresentation on the part of the seller. Any loans identified with these deficiencies are
submitted to the original seller for repurchase. Approximately $113.8 million of loans were repurchased by the
original sellers for the year ended December 31, 2011. A total of $335.5 million of loans were repurchased by the
original sellers since we actively started reviewing our purchased loan portfolio beginning in 2008.
During the years ended December 31, 2011 and 2010, we agreed to settlements with three particular
originators specific to loans sold to us by those originators. One-time payments were made to us to satisfy in full
all pending and future repurchase requests with those specific originators. We accepted these offers as we
believed the economics of these settlements were to our advantage. During the years ended December 31, 2011
and 2010 we applied $46 million and $25 million, respectively, to the allowance for loan losses, resulting in a
corresponding reduction to our net charge-offs as well as our provision for loan losses.
Underwriting Standards—Originated Loans
We provide access to real estate loans for our customers through a third party company. We structured this
arrangement to minimize our assumption of any of the typical risks commonly associated with mortgage lending.
The third party company providing this product performs all processing and underwriting of these loans. The
third party company is responsible for the credit risk associated with these loans and purchases the loans from us
shortly after the loan closes. We originated $129.7 million in loans during the year ended December 31, 2011 and
we had commitments to originate mortgage loans of $140.8 million at December 31, 2011.
Liquidity Risk Management
Liquidity risk is monitored and managed by ALCO. We have in place a comprehensive set of liquidity and
funding policies that are intended to maintain our flexibility to address liquidity events specific to us or the
market in general. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources for additional information.
Interest Rate Risk Management
Interest rate risks are monitored and managed by ALCO, including the analysis of interest sensitivity to
changes in market interest rates under various scenarios. The scenarios assume both parallel and non-parallel
shifts in the yield curve. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk for additional
information about our interest rate risks.
Operational Risk Management
Operational risks exist in most areas of the Company from clearing to customer service. While we make
every effort to protect against failures in the internal controls system, no system is completely fail proof.
Loss of company and customer assets due to fraud represents one of our most significant operational risks.
Fraud losses typically result from unauthorized use of customer and corporate funds and resources. We monitor
customer transactions and use scoring tools which prevent a significant number of fraudulent transactions on a
daily basis. However, new techniques and strategies are constantly being developed by perpetrators to commit
fraud. In order to minimize this threat, we offer our customers various security measures, including a token based
multi-factor verification system. This token creates a unique password which changes every sixty seconds and
must be used along with the customer’s self-selected password to access their account. We believe this system is
an extremely effective tool for preventing unauthorized access to a customer’s account.
The failure of a third party vendor to adequately meet its responsibilities could result in financial loss and
impact our reputation. On an annual basis, the Vendor Management group monitors our vendor relationships and
arrangements. The vendor risk identification process includes reviews of contracts, financial soundness of
providers, information security and business continuity.
62