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CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features

A bank sells a pool of auto loans to a special purpose entity, which issues ABS. The bank then enters insolvency. Which outcome is most likely if the sale qualifies as a true sale?

If the sale is a true sale, the loans stay with the special purpose entity and the insolvent bank's creditors have no claim on them. Ownership has legally passed to the SPE, so the assets are outside the bank's estate and investors rely on the pool.

  1. AThe bank's creditors may claim the loans because the bank was the originator
  2. BThe loans remain with the special purpose entity and the bank's creditors have no claim on themCorrect
  3. CThe ABS investors become unsecured creditors of the bank

Explanation

With a true sale, the bank no longer owns the loans, so they are not part of its bankruptcy estate. Creditors of the bank cannot reach them, and investors look to the SPE's pool for payment rather than to the bank as an unsecured creditor.

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