Many non-mortgage assets could be used as collateral in securitization such as auto loan, credit card receivables, personal loans, and commercial loans. Asset-backed securities (ABS) that are not guaranteed by a government or quasi-government entity are subject to higher credit risk.
Auto Loan-backed Securities
Auto loan-backed securities are backed by auto loans and lease receivables. The cash flows are the borrowers’ scheduled monthly payments (interest payments and scheduled principal repayments). As such, the outstanding principal balance declines as principal is distributed to bond classes each month.
All auto loan-backed securities have some form of credit enhancement such as a senior/subordinated structure. The excess interests can be retained and deposited into a reserve account to serve as a protection against future losses.
Credit Card Receivable-backed Securities
When a purchase is made on a credit card, the credit card issuer (the lender) extends credit to the cardholder (the borrower). If the lender doesn’t want to keep the receivables on its balance sheet, it can issue a Credit card receivable-backed security. The cash flows of credit card receivables include interest, principal payments, and annual fees. The interest rate may be fixed or floating and fees include late payment fees and annual membership fees.
The collateral of credit card receivable-backed securities is a pool of non-amortizing loans, meaning payments on the principal are not made until a lump sum is required. The principal is reinvested to issue new loans during the lockout period.
Which of the following non-mortgage asset-backed-securities is (are) amortizing loans?
A. Auto loan-backed securities
B. Credit card receivable-backed securities
C. Both A and B
The correct answer is A.
An amortizing loan is a loan where the principal of the loan is paid down over the life of the loan (that is, amortized) according to an amortization schedule, typically through equal payments.
Only auto loan-backed securities are amortizing loans. On credit card receivable-backed securities, payments on the principal are not made until a lump sum is required.
Reading 45 LOS 45h:
Describe types and characteristics of non-mortgage asset-backed securities, including the cash flows and risks of each type