Discover 2015 Annual Report Download - page 130

-114-
Through its wholly-owned indirect subsidiary, Discover Funding LLC, 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. 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 issued 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.
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, 2015, no
economic or other early amortization events have occurred.
The table below provides information concerning investors’ interests and related excess spread (dollars in
millions):
Investors’
Interests(1)
Number of
Series
Outstanding
3-Month Rolling
Average Excess
Spread
At December 31, 2015
Discover Card Execution Note Trust (DiscoverSeries notes) ................................................... $ 21,642 37 14.03%
(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
PCI 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.
Currently there are three trusts from which securities were issued to investors. Principal payments on the long-term
secured borrowings are made as cash is collected on the underlying loans that are used as collateral on the secured
borrowings. The Company does not have access to cash collected by the securitization trusts until cash is released in
accordance with the trust indenture agreements and, for certain securitizations, no cash will be released to the
Company until all outstanding trust borrowings have been repaid. Similar to the credit card securitizations, the
Company continues to own and service the accounts that generate the student loan receivables held by the trusts and
receives servicing fees from the trusts based on either a percentage of the principal balance outstanding or a flat fee per
borrower. Although the servicing fee income offsets the fee expense related 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.
Under terms of all the trust arrangements, the Company has the option, but not the obligation, to provide
financial support to the trusts, but has never provided such support. A substantial portion of the credit risk associated