Introduction to Retail Securitisation
Loan Securitisation allows the user to pool various type of existing or new bilateral loans or assets such as, mortgage loans, personal loans, credit cards, and so on and sell these pools of loans as securities or bonds to another entity (investor).
Securitisation is classified into two types namely Mortgage-Backed Securities (MBS), and Asset-Backed Securities (ABS). The bank can securitise a regular bilateral loan or not securitise it. It is not always mandatory to indicate the system that the bank might securitise the loan at the time of arrangement creation. The bank can securitise an ongoing loan by triggering a share transfer activity anytime during the life of the arrangement.
By securitising a loan, the selling institution becomes free from the risk of loan defaults and at the same time gets access to new funds, whereas the investor can participate in the loan market for better returns on their capital investment. As the investor becomes the legal entity for the purchased loans or assets, the principal and interest payments collected from the customer repayments are passed to the buying entity, although the servicing obligations and rights remain with the selling entity.
Loan Securitisation transactions involve huge risk (as the borrower of the underlying loan may default), the buying entity is very specific in the selection of assets. Example of selection criteria are:
- Loans that belong to a borrower whose risk rating is moderate or very low.
- Loans that are 100% secured by collaterals.
- Loans based on interest pricing – Fixed or Variable.
- Loan amount less than X amount.
- Loans with term or maturity less than n years.
- Loans that have repayment schedule – Annuity, Interest Only, and so on.
Although these loans are sold to another entity, the servicing obligations and rights remain with the selling entity. The borrower continues to repay the loan to the selling entity which ultimately gets credited to the investor’s Nostro account with the bank or remitted on a set frequency periodically to the investor’s beneficiary account.
The selling entity identifies the sold loans as off-balance items. Also it is common for the selling entity to buy-back the sold assets partially or fully from the investor and the loans become on-balance from the buy-back date.
Loan Securitisation enables the following:
- Creation of securitisation entity or investors and their details.
- Creation of securitisation program or asset pools.
- Loan securitisation using share transfer where the loans are transferred to the investors books.
- Securitisation of a single loan (by performing a share transfer event) or a group of loans (using the Bulk Upload option for performing the share transfer event).
- Option to sell loans either in full or partial (for example, x % of loan outstanding)
- Classification of the loans – securitised (sold)
- Transfer the securitised loans from on-balance to off-balances.
- Reporting the securitised loan balances in off-balance GL.
- Principal and interest owed to the investor.
- Charges such as insurance, tax can be excluded.
- Buy-back or repurchase of the sold assets or asset pools.
- Option to buy back either with or without the Accruals of interest and Past Dues when the asset is fully sold to the investor
- Provide online enquiries/reports
- Securitised loans by investor – Active, Closed Loans, all.
- Securitised loans by pools – Active, Closed Loans, all.
When the selling institution securitises a loan, the investors become sub-participants to the loan. With the Share Transfer option, the bank can transfer the asset to the investor. The investor pays the funds amount to the bank. After the securitisation of the loan, the borrower continues to repay the loan to the selling entity which gets credited to investor’s Nostro account with the bank. The bank maintains the records of the sold loans as off-balance items.
Limitations
The limitations in the Loan Securitisation module are:
- A loan with Interest property set to accrue by Bill cannot be securitised.
- A loan with charges set to accrue cannot be securitised.
- A loan with option to defer the bill cannot be securitised.
- Reporting property class is not supported in a product with participant condition (loan securitisation does not work with Reporting Property class).
- When charges are set to amortise in a loan product, the amortisation of charges is applicable only for the charges made due in the banks book. (The investor's book amortise must be configured in their system).
- The system currently supports non-revolving loans. A complex scenario with current and overdraw or overdraw with revolving loans are not supported.
- When a part of loan is sold to an investor, the loan interest and charges are made due on pro-rated basis between the bank and the investor.
- A skim can be applied on the interest and a non pro-rated split can be applied on charges for a securitised contract.
- Periodic charges cannot have a non pro-rated split configured.
- The non pro-rated split of charges can be defined in participant condition while adding the participant to the product or after the share transfer using an update activity in participant condition.
- It is not possible to update the non pro-rated split at the time of Share Transfer activity.
- When the asset is bought back from the investor, the interest accruals are based on the investor and bank's balances and are automatically updated on pro-rated basis.
- When the asset is bought back from the investor, any non pro-rated charge split configured in the loan’s Participant condition must be removed manually by amending the participant condition.
- A loan that is charged-off cannot be securitised. Only a loan in bank's book can be securitised.
- If a loan is partially charged off (using LENDING-CHARGEOFF-ACCOUNT) then the portion of the loan not charged-off can be sold to the investor.
- Loan restructure is not possible in a securitised loan.
- Technical loans cannot be created on a securitised loan.
- Splits and merge are not possible on a standalone loan. A bilateral loan that is securitised cannot be split or merged.
- It is possible to trigger a change product for a loan irrespective of the participant property being part of the loan. That means, it is possible to change the loan product from a product without participant condition to a product with participant condition and vice versa. The only limitation is the loan should not be securitised at time of change product.
- During a change product from a product without participant condition to a product with participant condition, the user must change the regular limit attached to a neutral limit (else the system raises an error).
- During a change product from a product with participant condition to a product without participant condition, the user must change the neutral limit attached to a normal limit (else the system raises an error).
- During a change product from a product with participant condition to a product without participant condition or vice versa, the balance treatment must be set to resetting or allowed to be input at the time of change product.
- When a loan is securitised, the AA.PROCESS.ACTIVITIES service must be run to fetch the arrangement overview screen without any issues.
- AA.PARTICIPANT.ARRANGEMENT stores the details of the loans in which the customer is an investor. AA.PROCESS.ACTIVITIES must be run to get this table updated.
- Update Participant Arr in AA.PARAMETER can be set to No to stop the system from updating the AA.PARTICIPANT.ARRANGEMENT table. The participant information is available in the AA.ACCOUNT.DETAILS and it can be used for verifying the investor information for the loan.
- Consider a pool where the buyback of the loan is asset principal with accruals. Any interest accrual on the due bill that is with the investor would stay with the investor and continue to accrue in investor’s book. (for example, an penalty interest accrual before and after the buyback for a due bill in the investor book remains in the investor book).
Configuration
The banks / financial institutions can securitise bilateral loans. To securitise an existing or a new bilateral loan, the loan product must have the Participant property class (Sub-Participant Property Type) attached to it, proofed and published, either before or after a bilateral loan contract is created.
The Balance Treatment field must be set as Participation for selling the asset to the investor. The user must set this field at the time of loan creation or the system itself updates this field to Participation to trigger participant accounting in the loan, at the time of share transfer.
The investors of the loan can buy their share through the process of share transfer. To do a share transfer, the bank user should use the Capture Share Transfer activity. The activity opens the Share Transfer Transaction Class where the necessary details can be captured .
Property Class
Loans that can be securitised have their parameters setup similar to a normal loan, except that the product must have the Participant property class at the time of loan securitisation.
Read AA Product Builder user guide for details on Product Construction and Configuration process. Read AA Property Classes user guides for detailed information on Property Classes.
Illustrating Model Parameters
The details about the model parameters for securitising a loan are:
|
Parameter |
Description |
|---|---|
|
Account |
The Account property class determines the accounting during securitisation. The user can choose between participant accounting and regular bilateral loan accounting. . |
|
Accounting |
The Accounting property class is used by all products. Arrangement Architecture (AA) uses activity-based accounting. Each property has different actions, which require accounting. For each action, a corresponding allocation rule definition is required. Allocation rules can be defined either at property or property class level. |
|
Participant |
The Participant property class holds information (such as ID, share percentage, beneficiary information) for the investors that participate in the loan (who have fully or partially bought the loan arrangement). Further, the accounting option for the participant as memo or contingent type of accounting is updated in Participant condition. |
|
Share Transfer |
The Share Transfer property class transfers shares between investors during the life of the loan. The buyer or seller are an existing or new lender or entity. |
Illustrating Model Products
The Lending product line encompasses Home Equity, Line of Credit, Mortgages, Personal Loans, Small Business Loans, and Securitised Mortgage Loans for Temenos Transact. The loan securitisation module allows the user to securitise a bilateral loan.
The products listed below are enabled in the model bank to demonstrate a bilateral loan securitisation.
|
Product Name |
Product Attributes |
|---|---|
| Mortgages |
Securitised Mortgage Loan is a mortgage product with periodic interest setup and constant repayment schedule having automatic disbursement configured. Accounting condition for this product is enabled for bilateral loan securitisation. Participant Property of Sub-Participant Type is added to the product. The bilateral loan created in this product can be sold to an investor. Loan securitisation is part of the existing AA Lending product line, and it allows the user to sell a group of loans to a third-party investor. The Accounting condition is updated to support loan securitisation. |
| Consumer Loan |
Accounting Condition for this product is enabled for bilateral loan securitisation.
|
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