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6、The key to whether a separate relationship exists between loan originators and special purpose entities (SPEs) in a securitization is whether:

A) a “separate corporation” of the entities has occurred.

B) a “complete sever” of the relationship between the entities has occurred.

C) an “approved sale” of the assets has occurred.

D) a “true sale” of the assets has occurred.

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The correct answer is D

The assets have to transfer from the loan originators to the SPEs through a "true sale" for a securitization to have transferred real ownership of the assets.

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7、Typical participants in a securitization include:

I.           underwriter, sponsor, regulatory agency.

II.         transferee, structuring agent, originator.

III.        sponsor, law firm, trustee.

A) I and II only.

B) I and III only.

C) II and III only.

D) I, II, and III only.

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The correct answer is C

All of the participants are typically included in a securitization except the regulatory body. The regulator will be involved if the circumstances of the deal warrant oversight.

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8、Which of the following statements most accurately describes the effect of selling a loan without recourse? The:

A) bank that sells the loan retains a contingent liability.

B) loan is removed from the balance sheet of the bank that sells the loan.

C) bank that sells the loan bears a specified percentage of the credit risk.

D) purchaser has the right to sell the loan back to the bank that originated the loan.

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The correct answer is B

When a bank originates a loan and then sells it without recourse, the loan is removed from the bank's balance sheet, and the purchaser bears all of the credit risk.

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AIM 2: Analyze the differences in the mechanics of issuing securitized products using a trust or special purpose entity.

Why might the trust structure utilize a master trust and guarantor trust? 

    I. The assets can be considered a true sale.

    II. Generate additional trustee fees.

    III. The trust remains bankruptcy remote.

A) I and II. 

B) I and III. 

C) III only. 

D) I only. 

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The correct answer is D

The two trust structure allows the assets conveyed to be sufficiently distanced from the originator. Thus, the assets are considered a true sale and the originator, not the trust, remains bankruptcy remote. The two trust structure may generate more fees but that is not the motivation for its use.

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AIM 5: Discuss the various types of internal and external credit enhancements as well as liquidity support.

1、King Motors Acceptance Corporation (KMAC), the finance arm of King Motors, issues an auto-loan asset-backed security that consists of a senior tranche, denoted Tranche A in the amount of $50 million and an interest payment of 5 percent, and two subordinated tranches, denoted Tranches X and Z respectively, each with a face amount of $35 million. Tranche X pays investors annual interest at a rate of 6.5 percent while Tranche Z pays investors annual interest at a rate of 7.5 percent. Which of the following methods of credit support would NOT affect the credit quality of subordinated Tranche X?

A) The total amount of the auto loans that make up the asset-backed issue is $125 million.

B) The weighted average interest rate on the auto loans making up the pool is 6.4 percent.

C) KMAC has a reserve in the amount of $10 million that will remain on KMAC’s balance sheet. 

D) Any defaults on the part of King Motors customers will be first absorbed by Tranche Z. 

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The correct answer is C

An investor’s claim when purchasing an ABS is solely with the ABS and no longer with the originator. The fact that KMAC has $10 million set aside means nothing for the ABS issue if it remains on KMAC’s balance sheet and is not part of the ABS issue. The other answer choices all describe forms of credit support that will support at least Tranches X and A, if not all 3 tranches. By having Tranche Z be subordinate to Tranche X, Tranche X has additional support. Also, loans of $125 million are used to back asset-backed securities worth ($50 + $35 + $35) = $120 million, which means the issue is overcollateralized. The weighted average interest rate paid on the securities is approximately 6.2%. If the weighted average interest rate on the loans that make up the pool is 6.4% that means there is an excess spread between the loans and securities that also provides support for the entire issue.