Seven Steps to Improved Credit Subsidy Estimates

  • Implement an effective credit subsidy review process
  • Review and approval of key cash flow assumptions should be done by budget, accounting, and program officials
  • Review of the cash flow model’s logic and formulas should be done at a detailed level by a qualified independent person
  • Know your program’s cash flows
  • Use sensitivity analysis to identify key cash flow assumptions
  • Document the results of the sensitivity analysis and the method used
  • Compare program requirements to the cash flow models
  • Ensure the accuracy of the data used in the cash flow model
  • Use the best available data at that time
  • Validate the key cash flow data by testing it against source documentation
  • Use a statistical approach and project the results to the whole population
  • Document the approach and results of the data validity tests
  • Compare estimated performance (averages in the cash flow model) to actual historical performance for a given year(s) and assess the model’s ability to predict future performance
  • Actual cash flow data by activity year, e.g., the number and amount of defaults that occurred in year 1, year 2, etc are often used as a starting point to develop average rates for the cash flow models
  • Compare the actual cash flow data from the accounting system for the past several years (by activity year) to the estimated cash flows in the model to identify significant differences
  • Research significant differences to determine cause and whether the differences are an anomaly or the estimates need to be revised
  • Document the results of this analysis for future discussions with the internal review staff, OMB, and the auditors
  • Automate the cash flow models
  • Use central input files that are electronically linked to cohort cash flow models to ensure that revisions made to one cohort cash flow model are made to all cohorts as appropriate e.g., interest rates
  • Automate the sensitivity analysis process e.g., FHA cash flow models
  • This will significantly reduce work load and time associated with credit subsidy estimates
  • Monitor the lending environment for significant economic changes or program changes that may affect the credit subsidy calculation
  • Develop formal policies and procedures