Securitisation of
Distressed Consumer Loan Portfolios
By:
Denis Petkovic and Paul
Jorissen, Mayer Brown & Platt
- Introduction
As the basis for the extension of consumer loan finance has shifted from an assessment of
the value of collateral offered by a borrower to analyses of a borrower’s future
income potential, consumer debt has exponentially increased. Moreover, this trend shows no
sign of being arrested given that the credit granting community continues to identify new
types of consumer loan opportunities on which to concentrate, (hence the growth in credit
card lending, auto loans, students loans and the like) and saturates consumers with more
familiar credit opportunities (as underscored by record levels of credit card applications
being mailed to consumers and increases in consumer debt as a percentage of household
income).
As consumer debt spirals so too does the rate of default on that consumer debt. Higher
default rates on larger debt balances have resulted in unprecedented levels of
nonperforming consumer debt. In the United States non-performing consumer loans have been
recognised as a valuable new asset class condusive to
securitisation. The securitisation
of distressed consumer loans raises specific issues some of which are common to other
financial assets but many of which are not. In addition, the recent Chapter 11 bankruptcy
filing by Commercial Financial Services Inc., the largest issuer in the United States of
securitised certificates and notes backed by assets pools comprising distressed loans,
raises specific issues about future securitisation transactions for this asset class.
This chapter considers structuring issues associated with securitisation of distressed
consumer loan portfolios in the United Kingdom having regard to the United Sates
experience and the uncertainty raised by the bankruptcy of Commercial Financial Services
Inc. The chapter concentrates on issues which are peculiar to this asset class and, where
there is overlap between this asset class and general issues relevant to other
securitizations (e.g. “true sale issues”), discussion of these general issues
has been omitted.
- Background
Growth in the distressed consumer loan market primarily developed in the United States
following the savings and loan crisis of the 1980s. During the 1980s agencies such as the
Federal Deposit Insurance Corporation took over failed savings and loans institutions and
realised the assets of those institutions - including their bad loans. Such agencies
adopted a three pronged strategy to handling bad loan portfolios. First, they attempted to
collect bad loans. Second, they sent bad loans to a third party for collection. Thirdly,
they packaged the loans and sold them at auction to third parties, usually at deep
discounts. The highest bidder at an auction for a portfolio would acquire the applicable
package of loans the subject of bidding. It was during the auction process that buyers of
bad debt learned how to value or establish a bid price for a distressed asset pool having
regard to information such as the date of the last payment of the loan, the amount and
quality of information concerning the loan and the obligor (e.g. address and contact
information) and whether the information was current or out of date.
After the savings and loan crisis subsided, other developments made the sale of
non-performing loan portfolios attractive. For example, financial institutions with low
capital ratios were confronted with the need to comply with capital adequacy guidelines
pursuant to the Basle accords and started disposing of non-performing loans to free up
capital required to be committed to such liabilities. Financial institutions discovered
that disposing of financial assets was an easier way to achieve Basle compliance than was
raising new capital.
In due course, financial institutions without capital adequacy concerns began to see the
benefits of adopting sophisticated strategies with respect to maximising their return on
non-performing loans. In the United States individual distressed portfolio buyers and
financial institutions have forged a variety of relationships. In recent years, many of
the largest financial institutions in the United States have begun to sell a substantial
portion of their charged off credit card debt and other consumer loans. Many financial
institutions now make decisions regarding whether to sell their nonperforming debt
portfolios based upon a concept commonly referred to as “indifference pricing.”
The indifference price for a consumer loan is simply the sale price at which the
institution would be indifferent between the option of selling the loan and collecting it
for its own account. The calculation of an indifference price is essentially an estimate
of the discounted present value of collections expected net of related costs to be
incurred. Principal costs include salaries paid to bank collection units, fees paid to
collection agencies, maintenance of substantial informational processing capabilities,
holding bad debt reserves against the defaulted obligation and incurring the related
capital charge.
Based upon an indifference price, an institution can readily assess the relative merit of
its alternatives: in house collection, collection by an agency (that will typically
receive a fee based upon its collections) and sale of the loan. The strategy of many large
institutions has evolved to include all three options. The advantages of such a strategy
are several. First, by maintaining flexibility, the institution avoids becoming overly
reliant upon collection agencies and purchasers. Second, internal collection rates and
collections achieved by agencies provide a continual source of valuable data available to
continually revise the calculation of the indifference price. Having first-hand knowledge
of how its nonperforming loans collected is particularly useful in the context of
negotiations with buyers of the loans. Finally, pursuing all three options simultaneously
expands the institution’s agency and buyer relationships and ability to compete in
those competitive markets.
In the United States companies which specialise in purchasing and collecting
non-performing loans are also increasingly entering into exclusive arrangements known as
“forward flow agreements” with financial institutions under which the financial
institution is obliged to sell to the third party all of its defaulted loans conforming to
specified criteria for pre-agreed fees. For the purchaser of the distressed loan asset
pool a certain stream of non-performing assets is guaranteed which the purchaser can work.
Such an arrangement also removes bad loans from the books of the financial institution
thereby improving immediately its capital adequacy without the uncertainty of having to
obtain a bid for the asset pool. Moreover, the financial institution can become very
familiar with the collection practices of a purchaser thereby reducing any reputational
risk, perceived or real, which the financial institution could suffer in connection with
the purchaser’s collection practices. Buyers, of course, need to carefully document
the specified criteria and include contractual provisions that minimize the risk that the
seller will alter its existing collection practices to the detriment of the buyer.
Any purchaser of distressed loan pools will, of course, wish to finance its acquisition
with the lowest all-in cost of funds available. Securitisation facilitates this result
because by isolating the financial assets acquired by the purchaser from its own
bankruptcy risk and by credit enhancing those acquired assets, the purchaser may originate
financial assets which are more highly rated than the purchaser’s own rating and
achieve a lower cost of funding without, of course, needing to allocate capital on its
balance sheet to those assets.
- Securitisation Structuring Issues- The United States Experience
Securitisations of non-performing loan portfolios raise a number of asset-specific
structuring issues which have been borne out in the United States experience.
- Payment from the Asset Pool
In most securitisations the asset pool should generate a stable and predictable cashflow
because that cashflow that will be used to service scheduled interest payment obligations
and principal repayments to be made under the marketable securities issued under the
securitisation. In the case of traditional pools of assets, such as credit card and auto
loans, financial information on the performance of the pool has been readily available
pursuant to which ratings agencies could rate the securities issued to purchase the pool.
In relative terms data on non-performing loans is less extensive than performing loans
(although the situation is continuously improving).
Moreover, unlike credit card or auto loan receivables, payments on nonperforming debt are
often not readily divisible into principal and interest components that would be applied
to interest and principal respectively, on the securities. Instead, non-performing loan
collections are typically applied first, to trustee and servicing fees and related
expenses, next to reserve account replenishment, then to pay interest on the securities,
and finally, to the extent of any remaining collections, to reduce principal on the
securities.
- Due Diligence
Another unusual feature of distressed credit card loans is the due diligence characterises
of the asset acquisition process. Seldom is documentation evidencing a distressed credit
card loan provided by the seller to the purchaser because such documents either do not
exist or are not available. Instead what is typically provided is data down loaded from
the computer system of the seller and, possibly, a form of the agreement under which the
account was established. A representation and warranty will be made at the time of the
sale by the seller, to the purchaser, stating that the credit card loan represents the
genuine legal, valid and binding payment obligations of each underlying obligor
enforceable in accordance with its terms except as to standard general exceptions such as
bankruptcy, insolvency, reorganisation, statute of limitations or similar laws affecting
the enforcement of creditors’ rights in general and by equity, and that there is no
litigation proceeding or governmental investigation relating to the loan.
As mentioned above, other consumer loans typically do have loan documents that would be
reviewed by the buyer prior to acquisition of the distressed portfolio. Packages of
destressed consumer loans are typically purchased via auction or under forward flow
arrangements.
- Purchase Price
The price paid by a purchaser for non-performing assets will be substantially less than
the gross amount of collections that the servicer expects to receive from such assets.
Buyers of non-performing loans have computer collection models that assess the
collectibility of a loan based on certain criteria (e.g. time elapsed since charge off,
quality of other contact information, number of outside collection firms that have
attempted to collect the debt). Typically the servicer will evaluate a receivable and
assign an estimated cash recovery amount to that receivable having regard to the
servicer’s evaluation of loans under its own credit card grading model and other
considerations including its personnel and systems, its credit and collection policy and
its historical collection experience with respect to non-performing assets of the same
type and having the same location. As the estimated cash recovery amount assigned by a
servicer to loans is heavily dependant upon the servicer’s own capabilities, one
servicer’s estimate of the collectability assigned to certain loans may be different
than that of other servicers. Under forward flow arrangements the price is typically fixed
for credit card charge offers that meet certain pre-established criteria.
Buyers seeking to securitise nonperforming credit card debt need to establish the validity
of their pricing model to the rating agencies and potential investors. An issuer typically
will seek to demonstrate that the historical collections realised on a given pool of debt
exceeded the purchase price and cost to service that pool. A favourable “track
record” of collections performance on similar assets is a prerequisite to
securitisation of a pool of nonperforming loans.
- Credit Enhancement and Liquidity Enhancement
A feature of most conventional securitisation transactions is credit and liquidity
enhancement. Nonperforming loan securitisation transactions have not required specific
liquidity enhancement (other than as provided by reserve accounts) because the securities
are only entitled to receive interest on each distribution date and principal to the
extent of available collections in excess of amounts necessary to pay interest, servicing
fees and certain other amounts. Credit enhancement addresses the risk of uncollectibility
of the non-performing loans whereas liquidity enhancement addresses the risk of payment at
the wrong time of underlying loans. Non-performing consumer loans, by definition, are an
asset class demanding of credit enhancement. In non-performing loan securitisations credit
enhancement is typically in the form of “seller support” or
overcollateralisation and establishment of reserve accounts of approximately 8% of the
principal amount of the issued securities. Third party credit enhancement was not typical
in early distressed loan securitisations but is becoming increasingly common following the
bankruptcy of Consumer Financial Services Inc. with surety bonds being issued by insurance
companies to support the issuer’s obligations and a rating of “A” on the
senior tranche of issued securities.
The starting point in assessing the amount of overcollateralisation required to credit
enhance a nonperforming loan transaction is an analysis of the value of the related pool.
The issuer’s credit card grading model, once tested and reviewed by the rating
agencies, is the principal basis of this valuation. Consequently, it is critical that an
issuer be able to demonstrate the accuracy of the predictive power of its model in order
to justify reliance upon its model as a basis for establishing levels of credit
enhancement. The credit enhancement consisting of overcollateralisation is typically
expressed as a function of the amount of collections that the issuer’s grading model
predicts will be collected on the securitised pool. “Payoff balance” or the
gross amount due from the underlying obligor often bears little relationship to the value
on likely collections to be realised and, consequently, is not an important element
establishing credit enhancement levels. In early transactions, the collections (net of
servicing fees) expected on a pool would approximate 150% of the principal amount of
issued securities. Over time, as rating agencies became more conservative, this percentage
increased to almost 200%; equating to an “advance rate” of 50% of the
issuer’s projected collections on the nonperforming assets.
Such levels and form of credit enhancement have generally been considered to be wide
enough to cope with poor collection performance and shrinkage in case obligors raise
set-off or other claims against the loan originator. It must be
emphasised, however, that
any financial ratio imposed by rating agencies for appropriate levels of credit
enhancement depend upon the nature of the servicer and the applicable assets.
Covenant Protection
Under a distressed loan securitisation the key covenant protections afforded to investors
derive from the Servicer. The Servicer will be required to service the distressed loan
pool with reasonable care, prudence skill and diligence to maximise the expected present
value of the pool. In so doing the Servicer will be required to comply with applicable
law, the securitisation documentation, procedures it establishes with respect to
comparable loans and the credit and collection policy agreed with the ratings agencies.
All payments from obligors will be required to be paid into a specified account usually
within one day of receipt thereof by the Servicer. The Servicer will also be precluded
from freely resigning from its responsibilities as servicer.
The Servicer’s appointment may be terminated upon the occurrence of a servicer
default which will usually include any of the following:
- failure to deliver any required amount to the collection or other specified account;
- failure to perform other covenants or agreements in the securitisation documentation;
- insolvency of the Servicer or other material parties;
- breach of net worth covenants;
- unauthorised changes in control of the Servicer; and
- breach of financial covenants such as minimum monthly collections and cumulative
collections.
- Ratings
The purchase price paid for distressed loan portfolios is carefully scrutinised by the
ratings agencies for three reasons. First at any time the securitised assets may need to
be liquidated and the proceeds of liquidation should be sufficient to equal the unpaid
principal amount of the securities issued plus accrued interest and discount. If the
purchase price is too high it is unlikely that principal will be repaid in such
circumstances. Secondly, since the bankruptcy of Commercial Financial Services Inc.
issuers have only been permitted to issue securities by reference to the purchase price of
the asset pool. Thirdly, reserve account levels and credit enhancement will be set having
regard to the purchase price.
Although each rating agency has its own approach to rating nonperforming loan
securitisations, each share several features in common.
The ratings process is principally focused upon the collectability of the loans and the
capabilities of the servicer. Over the past few years, rating agencies have developed a
significant amount of collection data on a number of nonperforming loan pools that is
useful in predicting the collection performance evaluating the issuer’s pool. The
rating agencies, however, still rely to a significant extent upon the collection
predictions generated by the issuer’s grading model. These valuations are typically
“inputs” in a cash flow model that projects the stream of collections over the
life of the pool. The collection stream (often referred to as a “collection
curve”) forms the basis of making a judgment about the ability of a given pool of
loans to service payments on securities issued by those loans. The collection curve is
typically recalculated under various “stress” scenarios to achieve the level of
payment certainty required by the level of rating to be assigned to the securities.
In negotiations with the rating agencies one concern that has been expressed by the
agencies with distressed loan securitisations is that issuers run the risk of bidding too
high and valuing portfolios too highly as they continually securitise portfolios with the
intention of buying other portfolios. Moreover the price of new portfolios has gradually
increased and spreads reduced; such factors compel rating agencies to focus ever more
closely on portfolio pricing. In recent transactions, as mentioned above, rating agencies
have taken action to address concerns about buyers overpaying for portfolios and have
limited the principal amount of securities issued to an amount calculated with reference
to the buyer’s actual purchase price of the related loans. Before this limit was
imposed, an issuer could raise proceeds from sale in a securitisation substantially in
excess of the purchase price paid to the related securitised assets. Again, this treatment
reflects a more conservative approach adopted by the rating agencies in response to the
difficulties experienced by Commercial Financial Services, Inc.
In assessing collectability of distressed loans rating agencies focus heavily upon the
staffing and resources of the servicer. Rating agencies have understood that a
portfolio’s yield is highly dependent upon the staffing and systems support employed
by the servicer. Several rating agencies can also be engaged to assign a separate rating
to the servicer after reviewing its capabilities.
In the event that the servicer defaults or enters into insolvency rating agencies
typically insist upon a “backup servicer” to step in as servicing must run
smoothly at all times to repay principal interest on securitised notes. As the servicing
skills required for the distressed loans industry are unusual and standard industry
practices have not emerged, backup servicers are required fully to understand the former
servicer’s systems and methods of collection. Accordingly, before a rating will be
obtained a backup servicer experienced in collection of non-performing loans will need to
be identified and a transfer plan specified before the transaction closes. Given the
importance of backup servicers (and the initial servicer) rating agencies need to be
satisfied that the servicing fees charged provide adequate compensation to service the
portfolio for both the servicer and the backup servicer. In this regard large upfront
servicing fees which create financial incentives for the initial servicer are not favoured
by the ratings agencies. The preference of ratings agencies is for on-going servicing to
be incentivised by way of a residual profit at the backend of the transaction.
In the United States legislation governing debt collection practices, notably the Federal
Fair Debt Collection Practices Act (“FDCPA”), restricts the methods which may be
used by third party collection agencies to collection consumer debt. Rating agencies in
the United States will not rate any securitisation involving a company that is accused of
unlawful business practices under the FDCPA. In addition, rating agencies have insisted
upon the servicer carrying appropriate fidelity bond and errors and omissions coverage.
Any discussion of ratings for notes backed by distressed consumer loans requires a
consideration of the present crisis affecting this asset class, namely the Chapter 11
Bankruptcy filing in the United States by Commercial Financial Services Inc.
Commercial Financial Services Inc. was an Oklahoma based company and the largest issuer of
marketable securities backed by non-performing loans. Commercial Financial Services Inc.
raised money to buy pools of non-performing credit card and other loans by using the
non-performing loans to collateralize limited recourse backed certificates which passed
through some of the return from its collection activities. The pricing for the
certificates invariably exceeded the purchase price of underlying pools of non-performing
loans and Commercial Financial Services Inc., as is customary, derived servicing fees by
taking between 20% and 25% of collections “off the top”. In September 1998 an
anonymous letter was sent to ratings agencies which accused Commercial Financial Services
Inc. of inflating its rate of collections by selling large numbers of uncollected accounts
to a company linked to one of its major shareholders. In October 1988 Moody Investor
Services, Standard & Poor’s and Duff & Phelps down-graded or suspended their
ratings of the securitized securities. On December 11, after an investor in Commercial
Financial Services Inc.’s securities issued legal proceedings against Commercial
Financial Services Inc., the company filed for Chapter 11 Bankruptcy protection claiming
$415 million in total assets and $208 million in debts excluding potential liability from
law suits. It is estimated that about $1.6 billion of securitised certificates were
outstanding at the time of Commercial Financial Services Inc.’s bankruptcy filing.
It is essential for the projected cashflow from a non-performing loan asset pool to meet
standard of predictive reliability commensurate with the ratings that are ultimately
applied to the securities issued. In the Commercial Financial Services Inc. case, the
ratings agencies had practically no choice but to downgrade or suspend their ratings if
they considered that the reliability of cashflows from the pools of collateral backing
Commercial Financial Services Inc.’s asset backed securities were no longer
consistent with their initial ratings. It remains to be seen what impact will arise from
this present crisis. however, other United States purchasers have securitised
non-performing loans in any event and further transactions, which seem to be more
conservatively structured than prior to the Commercial Financial Services Inc. bankruptcy,
are in the pipeline.
- Structure of Securitisation Distress Loan Portfolio
A structure for a potential transaction for distressed consumer loans in the United
Kingdom is set out in Diagram 1. Differing factors in particular cases (e.g. impact of
applicable capital adequacy rules on an institution) may require modification of this
structure.
- Outline.
The structure envisages the establishment of an issuer which will be a special purpose
vehicle most probably established in a tax haven. The issuer will be off balance sheet to
the original seller or servicer of the non-performing loans.
The seller will select the portfolio of assets to be securitised; the aggregate principal
amount outstanding of underlying loans will be set in part with discussions with the
rating agencies to agree the appropriate levels of overcollateralisation. The originator
will then sell the non-performing loans to the issuer with the purchase price representing
a percentage of the aggregate outstanding principal amount of the non-performing loans or
their estimated cash recovery amount.
The Issuer will, of course, need to raise funds to pay the originator for the
non-performing loans acquired and will do this through issuing marketable securities such
as pass through notes or euro commercial paper. As mentioned above, the seller will need
to arrange for the transaction to be structured so that the securities issued received a
credit rating from a major ratings agency. The issuer will charge the portfolio and
non-performing loans in favour of a trustee for investors to secure its obligations to
repay the monies borrowed. In addition, the originator will be appointed as servicer to
administer the loan portfolio on behalf of the Issuer under a servicing agreement for a
fee calculated by reference to the size of the portfolio. A back-up servicer will also
need to be appointed.
The Issuer will be obliged to charge a rate of interest on its portfolio of loans
sufficient to cover its interest obligations under the marketable securities that it
issues and sufficient also to cover other expenses. This may result in a mismatch between
the two rates and to this end the SPV will need to be provided with a fund or some other
mechanism which can be used to subsidise such costs. This could be achieved through the
Issuer issuing subordinated notes to the seller to cover any such mismatch. Likewise the
same notes could constitute credit enhancement for other obligations of the issuer to
certificate holders in case the loan portfolio generates insufficient cash flow towards to
satisfying indebtedness in respect of senior notes. One feature of asset backed
securitisations in Europe is that the Issuer will not, at present, be required to gross-up
interest payment for withholding taxes (at the insistence of ratings agencies). If the
Issuer is incorporated in a tax haven jurisdiction no withholding tax will arise in any
event.
As indicated by the Commercial Financial Services Inc. experience, the originator will
generally extract profit through charging servicing fees. In this regard consideration
must be paid in the context of European transactions to the impact of VAT which in the
United Kingdom is imposed at a rate of 17.5% on the supply of goods and services.
Repayments of principal and interest are exempt supplies for United Kingdom VAT purposes.
- Stamp Duty
Regard must also be paid in the United Kingdom to stamp duty concerns which potentially
imposes 3.5% tax on the consideration paid for a distressed loan pool. To alleviate stamp
duty the original transfer from the originator to the Issuer will be structured as a
written offer which will be accepted by conduct (such as transfer of monies from the
purchaser to an offshore account of the seller). Such an equitable assignment need not be
perfected by notice to the borrower until such time as it becomes necessary to commence
legal proceedings when stamp duty liability may be crystallised and minimised on the
assignment of an individual loan rather than the entire pool the subject of the
securitisation.
- Other Tax Structuring
- United Kingdom Corporation Tax is imposed for larger companies at the
rate of 31% and for smaller companies at 21%. The extent to which a company is subject to
United Kingdom corporation tax is determined by whether or not the company is resident in
the United Kingdom for United Kingdom corporation tax purposes. A company is resident in
the United Kingdom if it is incorporated in the United Kingdom and if it is incorporated
overseas then it is resident in the United Kingdom if it is managed and controlled in the
United Kingdom
Any companies incorporated outside the United Kingdom and involved in the securitisation
will not be resident in the United Kingdom for United Kingdom corporation tax purposes
unless they are managed and controlled the United Kingdom. For this purpose management and
control is located at the place where the highest level of control (as opposed to the day
to day operational control) is to be found.
Care will therefore need to be taken to ensure that the Issuer and any other offshore
companies are not inadvertently located in the United Kingdom by ensuring, inter alia,
that all decisions of the board of directors and board meetings take place offshore and
are not delegated to any director or employee located in the United Kingdom
It should also be noted that a company which is not resident in the United Kingdom, may
still be within the charge to United Kingdom corporation tax if it carries on a trade or
business in the United Kingdom through a permanent establishment (which would include a
branch or agency) located in the United Kingdom
It is also necessary for any non resident company to be trading in the United Kingdom,
before a charge to United Kingdom corporation tax can arise. Whether or not a non resident
company is trading in the United Kingdom depends upon the extent to which it enters into
contracts in the United Kingdom or if those contracts are entered into outside the United
Kingdom, the extent to which the substance of those contracts is in the United Kingdom
Distressed debt collection may not be regarded as a trading activity, although the
acquisition and disposal of portfolios of debt could be regarded as a trading activity if
undertaken on a regular basis.
- United Kingdom Income Tax. Interest paid on United Kingdom credit card
debt will have a United Kingdom source for United Kingdom tax purposes and therefore if
the maturity date of the debt is capable of exceeding one year it will prima facie be
subject to United Kingdom withholding tax at the rate of 20%, although this would be
reduced if an appropriate claim was made under any applicable double tax treaties.
Interest on debt which is not capable of exceeding one year, and discount, irrespective of
whether or not it is primary or secondary market discount, is not subject to United
Kingdom withholding tax.
- Consumer Credit Act 1974.
The Consumer Credit Act 1974 regulates the making of loans and provision of other credit
primarily to individuals. Regulated loans may only be made by licenced persons under the
Act and the loan must comply with detailed requirements contained in regulations regarding
the conduct of regulated loan business, the format and content of documentation and
advertising and publicity material. A failure to comply with such requirements will result
in the loan being unenforceable without a court order. Clearly, credit cards and other
consumer loans will be covered by the Act and many of the customs and practices that have
arisen in connection with securitisations of performing consumer assets such as credit
card transactions will be featured in non-performing transactions undertaken in the United
Kingdom and Europe. Thus the originator will be required to warrant compliance with the
requirements of the Consumer Credit Act and will repurchase receivables which do not
comply with those requirements. By comparison the regulation of distressed loan purchasers
under the Consumer Credit Act is not as intrusive as under the FDCPA in the United States.
In addition, the purchaser and security trustee will probably require a licence under the
Consumer Credit Act.
Another related consideration will be the impact of the Unfair Terms and Consumer Contract
Regulations 1994 which apply, inter alia, to consumer loan transactions entered into after
1st July 1995 and which have not been individually negotiated. In short, an
“unfair” term in a consumer loan transaction within meaning of the regulations
will be not be binding on a consumer. It is highly unlikely that clauses which define the
price of lending services supplied could be rendered unfair if plain intelligible language
is used in the applicable contract and therefore the impact of this legislation is not
likely to be too onerous in practice. Nevertheless, a review of the applicable law is
required in each case together with an examination of relevant underlying contracts to
ascertain if indeed they are unfair or not.
- Data Protection Act 1984
Another United Kingdom concern is data protection. It will be necessary that the
originator should have made appropriate registrations under the Data Protection Act 1984
as a data user in respect of information held by it for loan transactions it has made or
acquired. After the asset pool has been sold to the issuer the seller will as servicer, be
processing data held by another person and accordingly will also require registration as a
computer bureau under the Act. The issuer and possibly the security trustee will also
require registration as data users under the legislation.
- Conclusion
The impact of the bankruptcy of Commercial Financial Services Inc. on non-performing
consumer loan securitisations is still to be fully assessed in the United States and
concerns over Commercial Financial Services Inc. will have some effect on the development
of securitisations of distressed consumer loans in the United Kingdom and Europe.
Nevertheless, it is unlikely that the market will stay static or fail to adopt safeguards
to allow expansion of non-performing consumer loans securitisations. Transactions are
already in the pipeline in the United States which are structured on a more conservative
basis than prior to the Commercial Financial Services Inc. bankruptcy, moreover in the
United Kingdom no fundamental legal impediments exist to securitisation of this asset
class. Such factors suggest that the future landscape is not entirely bleak and that
transactions similar to those seen in the United States should feature in the United
Kingdom and European market place in the relative near future.
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