Reps and Warranties
by Penelope Moreland-Gunn, Peter J. Elmer and Timothy J. Curry

Representations and warranties (R&Ws) are legally binding statements primarily made by sellers assuring buyers that certain minimum asset quality requirements are met. R&W risk can be significant for institutions that actively purchase and sell loans, because R&W risk exposure increases each time a purchase or sale is made. The authors discuss the early difficulties of the Resolution Trust Corporation (RTC) in trying to sell assets without R&Ws. Their study also analyzes the RTC's claims experience with R&Ws, and compares the estimated costs and benefits of granting R&Ws.