Securitization
The process of pooling loans or other receivables and selling securities backed by their payments to investors, freeing up capital for new lending.
What securitization is
Securitization turns a pool of loans, such as consumer, auto or buy now, pay later loans, into tradable asset-backed securities (ABS). The originator sells the loans to a special purpose vehicle, which issues notes to investors and pays them from borrowers' payments.
How it works
Notes are split into tranches. Senior notes are paid first and carry less risk, while junior classes absorb losses before them in exchange for higher yields. A servicer collects payments, and federal risk retention rules generally require the sponsor to keep at least 5% of the credit risk.
- 01 · POOL The originator selects loans and sells them to a special purpose vehicle.
- 02 · ISSUE The vehicle issues notes in tranches and sells them to investors.
- 03 · SERVICE A servicer collects borrower payments and passes them to noteholders by priority.
| Tranche | Paid | Risk |
|---|---|---|
| Senior | First | Lowest; protected by the tranches below it |
| Mezzanine | After senior notes | Medium |
| Residual or equity | Last | Highest; absorbs losses first |
This order of payments is called the waterfall.
When businesses use it
- Fintech platforms funding growth with loans bought from a bank partner after origination
- Card, auto and consumer lenders turning loan pools into term funding
- Private credit investors buying notes or residual interests
- Lenders moving from warehouse lines to longer-term funding
CRB Securities, a Cross River company, offers structured products including ABS issuance, loan sale advisory and private placements for the fintech ecosystem. Securities offered through CRB Securities, LLC, Broker-Dealer, Member FINRA/SIPC. See CRB Securities at Cross River.