topic, one that can mean different things to different people. for our purposes here today, i will define erm as a process that enables management to deal effectively with uncertainty and the associated risk and opportunity, enhancing the capacity to build stakeholder value. borrowing from erm literature, i would say that erm includes : • aligning the entity's risk appetite and strategies ; • enhancing the rigor of the entity's risk - response decisions ; • reducing the frequency and severity of operational surprises and losses ; • identifying and managing multiple and cross - enterprise risks ; • proactively seizing on the opportunities presented to the entity ; and • improving the effectiveness of the entity's capital deployment. some of you are probably familiar with the erm framework published more than two years ago by the committee of sponsoring organizations of the treadway commission, or coso. the coso framework provides a useful way of looking at erm and helps generate further discussion. in the coso framework, erm consists of eight interrelated components, which are derived from the way management runs an enterprise and integrated with the management process : ( 1 ) internal environment, ( 2 ) objective setting, ( 3 ) event identification, ( 4 ) risk assessment, ( 5 ) risk response, control activities, ( 7 ) information and communication, and ( 8 ) monitoring. each of these components is described in more detail in the coso literature. notably, the coso framework states explicitly that although its components do not function identically across entities, its principles should apply to institutions of all sizes. small and midsize entities, for example, may choose to apply the framework in a less formal and less structured way and scale it to their own needs - as long as quality is maintained. this explicitness about the universal applicability of principles underscores the message from financial institution supervisors that sound risk management is expected of every institution, and that it should reflect an institution's size and level of complexity. as most of you know, running a smaller or less complex institution presents different types of challenges and requires a risk - management framework appropriately tailored to the institution. for example, many smaller organizations face the challenge of ensuring independent review of processes and decisions because their officers and staff members often have multiple responsibilities, which can result in conflicts of interest. for smaller organizations, erm can provide a framework to strategically assess how risks are changing. that is, risk should be considered as part of the annual budgeting and

income and assets. although some lenders may have used elements of nontraditional mortgage products successfully in the past, the recent easing of traditional underwriting controls and the sale of some types of nontraditional products to subprime borrowers may generate losses on these products greater than has been observed in the past. additionally, information from other sources seems to indicate that more borrowers are purchasing real estate with no equity down payment by using simultaneous second liens. the greater prevalence of risk - layering practices and sales of nontraditional mortgage products to nonprime borrowers have occurred in the past few years as competition for borrowers and declining profit margins has prompted lenders to loosen their credit standards to maintain loan volume in a slowing environment. the industry trends i have just described, taken together, were what led the federal reserve, ncua, and the other banking agencies to issue guidance on nontraditional mortgage products last september. the guidance emphasizes that an institution's risk - management processes should allow it to adequately identify, measure, monitor, and control the full set of risks associated with these products. it reminds lenders of the importance of assessing a borrower's ability to repay the loan, both now and when amortization begins and interest rates rise. nontraditional mortgage products warrant a bank having strong risk - management standards as well as adequate capital and loan - loss reserves. further, bankers should consider the impact of prepayment penalties for arms. lenders should provide enough information so that borrowers clearly understand, before choosing a product or payment option, the terms of and risks associated with these loans, particularly the extent to which monthly payments may rise and negative amortization may increase the amount owed above the amount originally borrowed. subprime mortgage lending the agencies'guidance on nontraditional mortgage products did not specifically address mortgage lending to subprime borrowers - although, as noted, nontraditional mortgage products are sometimes offered to subprime borrowers. both lenders and supervisors are aware of the benefits of subprime lending to homeowners, and both have an interest in ensuring that the market remains viable over the longer term. to ensure that viability, it is important to maintain sound underwriting standards and product terms as well as sufficient consumer protection practices. therefore, subprime mortgage lending continues to be an area that supervisors monitor closely. while overall mortgage delinquency rates remain low by historical standards, they have been increasing in recent months