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
