Originator, Servicer and Trustee in a Securitisation

Three jobs, and they are separate even when one party holds two of them. One party made the loans and transferred them into the structure: the originator. One collects from the borrowers each month and hands the money on: the servicer. One holds the structure for everybody who bought a piece and acts when the collecting stops: the trustee. Not one of the three decides which piece absorbs a loss first.

Why does one pool need three separate names?

A pool of receivablesMoney already promised by somebody else, falling due on stated dates. An unpaid shop bill qualifies and so does an outstanding loan. The word fixes which direction the money will travel and says nothing at all about who is sending it. has been put inside a structure of its own. Putting the pool there is settled elsewhere. Everything that has to keep happening afterwards is not settled, and there turn out to be three of those jobs, not one.

Somebody had to put the pool there. A borrower does not post cheques to a structure, so somebody has to take in the money each month. And the people who paid for the pieces are not in the room when anything goes wrong, so somebody has to be answerable to them. Three questions, and the reason they need three names is that the answers can differ, and when two of them are merged in a reader's head the risk appears to sit somewhere it does not.

The same three jobs turn up in a form that has nothing to do with finance. A wedding is booked. One person negotiated the hall and signed for it. A second person, on the day, is the one collecting envelopes at the door and keeping a list. A third person, an uncle nobody thinks about until something goes wrong, holds the signed booking and is the one who will argue with the hall if the power fails. Ask any guest who is in charge and the answer is whoever holds the envelopes, the one person they can see.

The guest's mistake is the whole difficulty. The visible party is the collecting party, and visibility is not the same as responsibility. On a securitisation the collecting party is very often the same firm that made the loans in the first place. Now the visible party genuinely was the party that mattered once, so the confusion gets stronger rather than weaker.

What are the three jobs, before they are named?

Take the names away for a moment. Names are the part a reader forgets three weeks later, and the jobs are the part that stays useful. There are three things that have to be true about any securitisation, and each of them is a job somebody is doing.

Job one is to put the pool there. Sarvani Receivables Trust holds Rs 1,200 crore of receivables and nothing else at all. The trust did not make those loans, and it has no branches, no staff and no other business. Somebody made the loans, on ordinary terms, in the ordinary course of lending, and then transferred them across into this structure. The party that did that is called the originator. Notice the tense. Made, and transferred. Making and transferring is a completed act rather than a continuing one, and everything below turns on that.

Job two is to collect. Every borrower in the pool pays something on some date each month. Somebody has to actually receive that money, chase the ones who are late, keep the records straight, answer the phone when a borrower asks about a payment, and hand what has been collected to the structure. Collecting is a real operation with real people in it, and it does not stop existing because the loans changed hands. The party doing it is called the servicer.

Job three is to hold the structure and to act. Somebody bought the senior piece of Rs 960 crore, somebody bought the mezzanine piece of Rs 180 crore, and somebody bought the equity piece of Rs 60 crore. The buyers are numerous and scattered, and no single one of them can do very much alone. The party that holds the structure on their behalf, and that moves when the servicer stops moving or when the pool stops behaving the way it was described, is called the trustee.

Three jobs. Three different questions they answer. Who put the pool there, who is collecting, and who acts on behalf of the buyers. Every party in a securitisation is doing one of those, and telling them apart is entirely a matter of asking which question the party is the answer to.

What does the originator stop doing?

Most readers get this next part wrong, and it is worth sitting with rather than skimming. Once the pool has been transferred, the receivables are no longer the originator's to keep. The money the borrowers pay each month is no longer the originator's income. The money arrives, belongs to the structure, and goes out to the buyers of the pieces in the order the documents fix.

Now the awkward half. The originator very often continues to collect. The originator has the borrower relationship already, along with the branch, the call centre, the reminder messages and the records. Setting up a second operation to collect the same money from the same people would be expensive and would confuse everybody, so the sensible arrangement is usually to leave the collecting exactly where it was.

So the same name keeps appearing on the borrower's monthly statement, and from the borrower's side nothing at all has changed, and none of that is evidence about who holds the receivable. The name on the statement answers the collecting question. The name is silent on the putting-the-pool-there question, silent on the standing-behind question, and silent because nobody ever asked it those.

Take the finance out of it entirely. A milk vendor delivers to forty houses and collects at the end of the month. He sells the next six months of those collection rights to somebody who wants steady money, and he keeps doing the rounds because he is the one the households know. Every household still sees him at the gate on the first. Not one of them has any reason to know the rights were sold, and not one of them could say from the doorstep who is now entitled to the money they hand over.

A transfer either moved the receivables off the originator's own books or it did not, and the true saleThe question of whether a transfer really moved something out of the seller's accounts, or merely looked like it did while leaving the seller exposed. It is decided by a written test rather than by what the parties call the deal. question is decided by a test set by the Institute of Chartered Accountants of India at icai.org. How much of the structure an originator has to keep, and the conditions on which it may support the structure after issue, sit with the Reserve Bank of India at rbi.org.in. All three get rewritten on somebody else's calendar, and the current wording of each is kept at those addresses.

Whose money is it between the fifth and the tenth?

One payment is worth following closely, because this is the sharpest question here and the answer is not the comfortable one. A borrower pays the servicer on the fifth of the month. The structure receives that money on the tenth. On the seventh it is sitting somewhere. Whose is it?

The money is the structure's, and it was the structure's from the moment the borrower paid, even though for five days it sat in hands that do not belong to the structure at all. The servicer is holding it. The servicer does not own it, cannot lend it out, cannot net it off against something else it is owed, and cannot treat it as its own for any purpose. The money is passing through.

Everybody has met this without noticing. A conductor on a bus is holding a bag of cash at four in the afternoon and not one rupee of it is his. A property agent holding a deposit for a fortnight is holding somebody else's deposit. A wedding caterer's runner walking back with envelopes has money in his hands that will be counted by somebody else. In each case the money is in transit, and in each case what protects the person it actually belongs to is an arrangement rather than good manners.

On a securitisation that arrangement has three visible parts, and each one exists because of these five days. The five days are why the structure keeps its own collection account rather than letting collections rest in the servicer's general banking. Somebody has to be able to insist, and that is why there is a trustee at all. And a rule settles what becomes of collections when a servicer is replaced, rather than whatever the two parties would prefer at the time.

The last of those three is worth naming precisely. The Reserve Bank of India at rbi.org.in is named for what a servicer must do and for what happens to money in transit on a replacement, and the requirement itself is kept at that address. The shape of the problem holds whatever the rule says. There is a window of days each month in which the money exists, belongs to the structure, and is not yet in the structure's hands.

What is the trustee actually for?

The best way into this is to ask who else could possibly do the job. Somebody bought Rs 960 crore of senior piece, somebody bought Rs 180 crore of mezzanine piece and somebody bought Rs 60 crore of equity piece. The buyers are not three people but a scattered set, most holding a modest amount, none knowing the others, and every one individually far too small to be worth anybody's time.

Now suppose something needs doing. The servicer has gone quiet. Reports have stopped arriving. Money that should have reached the structure has not. What is a single buyer holding a small slice of the senior piece supposed to do about it? Write a letter? Sue somebody? By the time that buyer has found out who else holds a slice, the problem that needed solving urgently has stopped being urgent and started being permanent.

The trustee exists because a right nobody can exercise is not worth having, and a scattered set of buyers cannot exercise anything. One party holds the structure on behalf of all of them at once. The trustee is the party the servicer reports to, the party that can insist, the party that can call for information, and the party that can move when the servicer stops moving. Every individual buyer's ability to have something done runs through it.

The residents of a building know this arrangement. Sixty flats cannot each argue with the lift contractor. So they elect a committee, and the committee holds the contract and does the arguing. Nobody imagines the lift belongs to the committee. Sixty separate complaints are much weaker than one body entitled to complain, so without the committee the contractor is answerable to nobody in practice.

The Securities and Exchange Board of India (SEBI), at sebi.gov.in, decides what a trustee must actually do and what it must do before it is allowed to stop. Both get revised. The description of the job is the useful part in any case: the trustee is the single point at which a scattered set of buyers becomes one party capable of acting.

Can one party hold two of the jobs?

Yes, and it usually does. The originator and the servicer are commonly the same firm, and the reason is already in view: the borrower relationship is there, the collection machinery is there, and building a second one to do the identical work would cost money and annoy everybody. Nothing about that arrangement is suspicious. One firm holding both jobs is the ordinary case rather than the exception.

The trustee is the one that is kept apart. A party cannot usefully be both the one being watched and the one doing the watching, so the separation is structural rather than cosmetic. If the same firm collected the money, held the structure on behalf of the buyers, and was the party that would have to act against itself when collections stopped arriving, then the buyers would have a trustee in name and nothing in substance.

Everybody understands this instantly outside finance. A cricket team does not supply its own umpire. A shop does not audit its own till. A landlord does not sit on the tribunal hearing a complaint against himself. In none of those cases is anybody accusing anybody of anything. The second seat exists only to be a check on the first, so filling both seats with one person leaves the arrangement with no value at all.

Two cautions, and they matter. First, common is not the same as permitted: who may hold which of these roles, and on what terms, belongs to SEBI at sebi.gov.in together with the Reserve Bank of India at rbi.org.in. Second, a structure with the originator also servicing is not thereby better or worse than one without. Better or worse is a judgement, and the identity of the parties supplies no evidence for one either way.

How is one role told from another in practice?

Five questions do it. Put any party in front of them and the answers place it. Titles on documents vary. The five questions do not, and that is why they are worth keeping.

What does the party do. Does the pool's money pass through its hands. Whom does it answer to inside this structure. Can it be replaced without any of the amounts moving. Does it stand behind the pieces. Answered for a party, all five identify which of the three roles it holds, and the fifth row is the one that reads the same in every column.

What if the servicer stops?

The servicer of Sarvani Receivables Trust stops servicing tomorrow morning. Collections do not arrive. What happens to the Rs 240 crore that sits under the senior piece?

Notice what does not change. The pool is still Rs 1,200 crore of receivables. The borrowers still owe exactly what they owed on the morning before, and no borrower's obligation was ever to the servicer in the first place. The senior piece is still Rs 960 crore. The mezzanine piece is still Rs 180 crore, the equity piece is still Rs 60 crore, and the Rs 240 crore of subordinationMoney that has agreed to take a hit before the money above it does. When a piece is described as having something standing beneath it, that something is what has to be used up first. beneath the senior piece is exactly the Rs 240 crore it was.

The work changes. Somebody has to start collecting, and quickly, and whatever was in transit on the day the servicing stopped has to be found and directed where it belongs. The work is real and it is urgent. A stopped servicer is an operational break rather than a loss. The two arrive in the same monthly report and look alike in print, so holding them apart is one of the more useful habits in this subject.

Think of a milk round again. If the delivery man walks away, forty households still owe for the month, and the value of the round has not fallen by a rupee. Somebody has to walk the round tomorrow, and any cash he had in his bag on the day he stopped has to be recovered. Two separate problems: one is who walks the round tomorrow, the other is recovering what was in the bag.

The geometry is the argument, so Rs 240 crore is worth one more sentence. The bracket runs from the end of the senior block to the end of the bar: 112 of the 560 units the whole pool is drawn across. Taking the pool as the base, Rs 240 crore over Rs 1,200 crore is 20.0 per cent of the pool. Taking the senior piece it protects as the base instead, the identical Rs 240 crore reads 25.0 per cent of the senior piece. Same rupees, two different bases, two different percentages, and naming the base every time is what keeps them from being confused for each other.

What does none of the three parties change?

Three parties have now been met, along with what each does, the fact that two of them are commonly one firm, and the fact that one of them can be swapped out. A reader could easily finish all that with the impression that the parties are where the protection lives.

The parties are not. Replace the servicer. Replace the trustee. Suppose even that the originator itself is gone from the picture entirely. The equity piece is still first to absorb. The mezzanine piece is still second. The senior piece is still last, and Rs 240 crore of other money still has to be used up before a single rupee of it goes. The order is written into the documents of the structure, not into the identity of any party, so changing every party leaves the order exactly where it was.

The two halves are genuinely separate, so say them separately. The roles decide who does the work and who is answerable for doing it. The order decides who absorbs before whom. Set that Rs 240 crore against the pool and the answer comes to 20.0 per cent of the pool; set it against what it protects and the identical rupees come to 25.0 per cent of the senior piece; and no party's name appears inside either reading. The senior piece is sixteen times the equity piece and would still be sixteen times the equity piece with three completely different firms doing the three jobs.

Which leaves one thing that has to be said plainly. The order fixes the sequence in which money is absorbed. The order does not fix how often anything is absorbed, and no fact about who does which job would let anybody work that out.

What does this look like without any of the words?

Strip out every term and here is the same arrangement, entire. A landlord has ten flats. He sells the next year of rent from those flats to three buyers, who are to be paid out of that rent in a written order: one of them last in the queue, one in the middle, one first. The caretaker who has always collected the rent on the fifth keeps doing exactly that, hands the money over, and the tenants notice nothing whatsoever. A third person holds the written agreement, is the one the caretaker answers to, and is the one who finds a new caretaker if the caretaker walks off.

Every part of this guide is in that paragraph. The landlord is the originator and his selling was a single completed act. The caretaker is the servicer, doing continuing work, holding money for a few days each month that is not his. The person holding the agreement is the trustee, who touches no rent in a normal month and exists entirely for the abnormal one. The written order among the three buyers is the order, and no change of caretaker rearranges it.

The one confusion this whole arrangement generates is that the caretaker still turning up at the door does not mean the landlord still holds next year's rent, and every mistake made about securitisation roles is a version of that single sentence. The tenants see the caretaker. The tenants do not see the sale, do not see the three buyers, and nothing about their monthly experience would tell them any of it happened.

Placing an unfamiliar party

Three jobs are three replies to three separate questions. None of the three roles is a quantity that moves in answer to another. A party either holds a role or it does not, so the three cannot be varied against one another the way an amount can.

A question does that work instead. An unfamiliar party arrives described by nothing but its answers to the five tests, and the reader places it.

Who sets the rules on all of this?

Almost everything a reader will want to know next about these three parties is a requirement somebody else maintains. Eight separate items sit behind these three parties, and the current wording of each is held by the body that maintains it.

The list shows why. What form a special purpose vehicleA structure set up to hold one thing and do one job, with no other business, no other assets and no other debts of its own. It exists so that what it holds cannot be mixed up with anything else. must take. What a trustee must do. What a servicer must do and what happens to money in transit when a servicer is replaced. What an originator must disclose before an issue and report afterwards. Where the chargeA recorded claim over something, registered so that anybody checking can see who has a prior right to it. Registration is what makes the claim visible to strangers rather than only to the two parties. over the receivables is registered. When an originator may support a structure after issue. Where the receivables stand if the originator itself goes into insolvencyThe formal process that starts when a party cannot meet what it owes, in which a set order decides who is paid from whatever is left. It is a legal proceeding rather than a description of a bad year..

Every one of those eight is a place where a written-down answer could quietly stop being true, so all eight are named together with the address at which the current wording is kept. The trade is real and it runs both ways: less is printed here, and what is printed keeps working. A remembered requirement is convincing right up to the day it changed, and nothing in print marks that day.

What do the three roles not establish?

No arrangement of the three roles makes any outcome more or less probable. The roles fix who handles the money and in what sequence, and a sequence of hands has no frequency inside it. A chance of loss would need a loss record, a statement of how the receivables move together and a calendar of periods, and roles supply none of the three.

So no likelihood is attached to any piece, to any party or to the pool, and none is available to be attached. The senior piece sits last in the order, and last is the whole of what the order says about it. Last is a fact about sequence. Sequence to safety is a further step, and the step needs a loss record that no description of the three jobs contains.