The most frequent trigger is when the 3-month average excess spread earned on the receivables falls to zero or less. When this happens, prepayments are used to retire credit card tranches sequentially, instead of using them to purchase more receivables.

Since credit card balances are revolving, principal is not amortized. As such, interest on credit card ABSs is paid periodically and the principal is placed under a “lockout period,” during which time no principal is paid to the ABS holders. Principal payments made during the lockout period are used to purchase additional underlying assets or receivables. Once the lockout period ends, principal payments are passed on to the security holders. This post-lockout period is known as the “principal amortization period.”

Credit card receivable-backed securities do not pay principal and interest each payment just like a mortgage-backed security. Interest is paid periodically and principal is placed under a lockout period.

Pooled Small Business Administration (SBA) loans must have similar terms and features. SBA loan payments are based on the reference rate at the beginning of each period.

SBA loans are backed by the credit of the U.S. government. Most SBA loans are variable rate, where the rate is based on prime and reset monthly or quarterly. The investor receives three cash flows: interest, principal repayment and principal prepayments.

In student loan asset-backed securities (SLABs), there are three periods. During the deferment period, the borrower makes no payments and the loan accrues no interest. During the loan repayment period, the borrower makes principal and interest payments based on a reference rate plus margin. Prepayments may occur because government guarantees are paid when there are defaults.

With U.S. government FFELP loans, the government guarantees of up to 98% of principal and accrued interest. Alternative loans (student loans not in the FFELP) are securitized, but not guaranteed by the U.S. government. In general, there are three periods with SLABs. During the deferment period, the borrower makes no payments and the loan accrues no interest. During the grace period, the borrower makes no payments but the loan accrues interest. During the loan repayment period, the borrower makes principal and interest payments based on a reference rate plus margin.