Asset-backed securitization (ABS)
Also known as: ABS · Auto ABS · Securitization · Asset-backed securities
Pooling loans or receivables — auto loans, leases, card balances — into a special-purpose vehicle that issues securities to investors, paid from the cash flows of the pool.
Legal basis
17 CFR 229.1100 et seq. (Regulation AB)
In a securitization, an originator sells a pool of receivables to a bankruptcy-remote vehicle, which issues notes in tranches of different seniority. Investors are paid from what borrowers pay; losses hit the junior tranches first. Auto loans and leases are among the largest US ABS asset classes, and they let lenders and captive finance companies recycle capital into new originations.
Public ABS are governed by the SEC's Regulation AB, which requires disclosure of the pool and its historical delinquencies and losses — and, for auto loans, asset-level data for every loan in the pool. Under the credit risk retention rules adopted after the 2008 crisis, the sponsor must generally keep at least 5 percent of the credit risk, so it shares in the losses it originates.
Pool performance starts at origination. Fraud and misrepresentation that pass underwriting — synthetic identities, straw buyers, overstated income — end up as early defaults inside the pool. Stronger identity and behavioral screening at entry, and continuous monitoring of the collateral, show up later as tighter loss curves.
Frequently asked questions
What is an auto ABS?
A security backed by a pool of auto loans or leases. Borrowers' monthly payments pass through the securitization vehicle to investors, in order of seniority, and the offering discloses asset-level data on the loans under Regulation AB.