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This subsection lists various players in one type of securitization transaction. But it is important to note that securitizations can be structured in many different ways and the parties involved can be given many different names. It is equally important to realize that these different entities are not unrelated or independent of each other. Instead, a complex web of relationships was consciously worked out in an attempt to insulate various parties from the conduct of the originating lender.

Originator/Lender. The originator of the loans.

Seller/Sponsor/Arranger. The Seller is the party that sells the loans to the Depositor. The term Seller is also used in a different context as the entity that sells securities certificates to investors. The Seller can be the Originator, or an affiliate of the Originator. Alternatively, the Originator can sell the loans to another entity who, in turn, becomes the Seller, who then sells the loans to the Depositor.

Depositor/Issuer. The Seller transfers the notes to a Depositor, also sometimes called an Issuer, or a “Bankruptcy-Remote Entity” or a “Special Purpose Vehicle” (SPV). (Sometimes, however, the Trust is termed the SPV.) The Depositor is a temporary, intermediary owner of the mortgages, and it issues securities that represent undivided interests in the cash flows from a particular pool of loans.51 The Depositor sells the securities and transfers legal title in the loans to a trust entity. The Depositor’s primary function is to create a legal separation between the entity that is producing the loans (the Originator or Seller) and the Trust, which ultimately holds the loans. This separation is referred to as “bankruptcy remoteness” and the Depositor is often referred to as a “bankruptcy remote entity” in that it is attempting to insulate the financial integrity of the securities from any economic difficulties of the Seller.52 This separation also is intended to create holder-in-due-course status.53

Servicer. The entity that collects monthly payments from borrowers and passes on required cash flows to the Trustee.54 The Servicer must advance to the Trust payments due from delinquent borrowers, and also must advance the costs of foreclosure. The Servicer retains a fee from borrower payments and can also pocket late charges, bad check charges and other costs. Servicing contracts typically delegate to the Servicer the authority to proceed with foreclosure and, within specified limits, approve loss mitigation options. The right to service a portfolio of securitized loans has been regarded as a valuable asset and was traditionally reserved by the Seller for itself, so in many securitized transactions the Seller and the Servicer are the same company. When these companies file bankruptcy, it is often these servicing rights that are their principal assets. But there is also a growing trend to use third party servicers who are not affiliated with the Seller. In recent years, larger financial institutions have viewed mortgage servicing as a less lucrative activity than in the past. These major players divested themselves of certain servicing contracts, a trend that has accelerated the transfers of servicing rights to new companies. Often these “non-bank” servicers do not have a direct relationship with any federally regulated depository institution. This has led some oversight agencies to suggest the need for heightened regulation of non-bank servicers.55

Trustee. Usually a commercial bank, the Trustee acts on behalf of the Trust and the investors. Its role is essentially administrative: to represent the Trust, to monitor the effectiveness of the servicing, to manage and oversee the payments to the bondholders and to administer any reserve accounts. Should the Servicer fail, it is the Trustee’s job to step in as temporary servicer until a replacement can be hired.

Trust. The pool of securitized loans is usually transferred to a Trust organized under Delaware or New York law. But other legal structures, such as limited liability corporations, may be used as well. Each Trust will own one pool of loans and will have no other assets. The Trust’s sole function is to own the loans. Securitization trusts are often structured to qualify as “real estate mortgage investment conduits” (REMICSs) under the Internal Revenue Code56 in order to reduce taxes on income generated by the pool of loans.

Custodian. The custodian is typically in possession of a “collateral file” for each loan within a given pool. The collateral file should contain the original note, original mortgage, original title policy, original assignments and other origination documents. Where a note is bearer paper,57 and not payable to the order of a named party, a Custodian may hold onto the bearer paper for safekeeping as an agent for the Trust. The Custodian is often the Trustee or the Servicer.

Underwriter. The Wall Street investment firm that provides the initial capital to purchase the securities from the Depositor/Issuer and then, at a profit, sell them to its customers—institutional investors like insurance companies and mutual funds. As the initial purchaser of all of the bonds, the Underwriter plays a key role in structuring the entire transaction, including a role in determining the characteristics of the underlying loans.

Rating Agency. Provides supposedly independent evaluation of the credit quality of the securities. There are four rating agencies: Standard & Poors, Moody’s, Fitch, and Duff & Phelps. One of them has to rate the bonds as having AAA quality in order for the transaction to be regarded as marketable.58 The Rating Agencies research the characteristics and performance of asset-backed securities (ABS) deals, and rating agency websites are a good source of information about ABS transactions.

Insurer. In order for the asset-based securities to be graded as AAA, they may need to be “credit enhanced.” Often these enhancements come in the form of bond insurance provided by firms that historically insured municipal bonds.59

Warehouse Lender/Facility. This financial entity provides the short-term capital that a small lender needs to fund the mortgages initially, until the loans are securitized. Once the Underwriter purchases the securities, there should be enough cash to repay the Warehouse Lender. The Warehouse Lender role has been played by large commercial banks, but underwriting firms have provided warehouse funding as well, sometimes taking a security interest in the loans up until they are transferred to the securitization trust.

The existence of all of these entities underscores the complexity of the securitization process. The ability to securitize mortgage loans that become due years in the future provides an effective means by which an originating lender can sell all of its loans and receive cash immediately, allowing it to then seek out new loans. On the other hand, the securitization process attempts to insulate those supplying this capital from any wrongdoing of the originating lender.60


  • 51 {47} 17 C.F.R. § 2403b-19(a) (depositor is considered the issuer of the securities on behalf of the trust).

  • 52 {48} See Thomas J. Gordon, Securitization of Executory Future Flows as Bankruptcy-Remote True Sales, 67 U. of Chi. L. Rev. 1317 (2000); Lynn M. LoPucki, The Death of Liability, 106 Yale L.J. 1 23–30 (1996).

  • 53 {49} See § 7.16, infra.

  • 54 {50} See §, infra.

  • 55 See Financial Stability Oversight Council, 2019 Annual Report; Office of the Inspector General, Federal Housing Finance Agency, FHFA Actions to Manage Enterprise Risks from Nonbank Servicers Specializing in Troubled Mortgages; U.S. Government Accountability Office, Report to Congressional Requesters, Nonbank Mortgage Servicers, Existing Regulatory Oversight Could be Strengthened (Mar. 2016) (GAO-16-278); Pamela Lee, Urban Institute, Nonbank Specialty Servicers: What’s the Big Deal? (2014).

  • 56 {51} 26 U.S.C. §§ 860A to 860G.

  • 57 {52} Bearer paper is a negotiable instrument that is payable to “bearer” or otherwise indicates that the person in possession of the instrument is entitled to payment. A negotiable instrument that does not state a payee or is payable to “cash” or the like is also bearer paper. U.C.C. § 3-109. See §§,, infra.

  • 58 {53} See David Reiss, Subprime Standardization: How Rating Agencies Allow Predatory Lending to Flourish in the Secondary Mortgage Market, 33 Fla. St. U. L. Rev. 985 (2006) (reviewing the literature on rating agencies and providing detailed explanation of their function in rating loan pools). See also Christopher L. Peterson, Predatory Structured Finance, 28 Cardozo L. Rev. 2185 (2007) (“Credit ratings on each tranche are essential, since they obviate the need for each individual investor to do due diligence on the underlying mortgages in the pool.”).

  • 59 {54} See Christopher L. Peterson, Predatory Structured Finance, 28 Cardozo L. Rev. 2185 (2007) (discussing internal credit enhancement, for example, dividing the loan pool up into classes which receive payment in descending order of risk, and external enhancement, including insurance).

    Bond insurance is an example of “external” credit enhancement. Even more common are methods of “internal” enhancement. One example of an internal credit enhancement is a “senior/subordinated structure,” in which the securities are divided into senior and subordinate layers with the subordinate investors assuming a greater risk of loss in return for receiving a higher return than the senior bondholders. By illustration, a $100 million pool of thirty-year fixed rate mortgages might require, in the judgment of a rating agency, a loss coverage of 8%, resulting in the issuance of $8 million in subordinate bonds in order to provide AAA rating to the remaining senior class of $92 million. Often, additional support is created during the early years of the security by diverting the subordinated share of principal repayments into reserve funds. When bond insurance is present, the insurers usually are not in first-loss position, often taking a risk position behind the subordinate bondholders.

  • 60 See Kathleen C. Engel and Thomas J. Fitzpatrick IV, Complexity, Complicity, and Liability up the Securitization Food Chain: Investor and Arranger Exposure to Consumer Claims, 2 Harv. Bus. Law Q. 345 (2012) (examining theories of derivative liability for various players in the securitization process).