In a previous post, we laid out a hypothetical asset-backed security (ABS) structure, a widget loan securitization, and outlined how UMB’s role as indenture trustee fits into the deal overall. Now, we’ll touch on the other main trustee role in a typical ABS structure: that of underlying (or owner) trustee and the closely related Delaware trustee services.
In our widget securitization example, a non-bank lender works with an underwriter to determine a pool of loans to securitize. Then, the underwriter brings the newly created securities to market. Investors (noteholders) purchase interest in the securities and receive payments as borrowers repay their loans.
Why Delaware statutory trust?
The underlying trustee function is to hold the loans on behalf of the securities owners. Securitizations are often conducted under Delaware law, which requires an owner entity to make certain representations and warranties about the loans. To do so means the owner must be a Delaware statutory trust—that is, a trust registered in Delaware and created according to its long-established business law.
My colleague, Kristin Moore, has worked in Delaware her entire career. She is president of UMB Delaware Inc., our office in Wilmington, Delaware, where we are registered with the state to provide Delaware statutory trust services. Therefore, we can work directly with underwriters and lenders to create the necessary special purpose vehicle (the trust) to own the loans, make representations and warranties required in a securitization and provide transfer and paying agent services on the certificates.
Owner trustee services
In addition to creating the trust, UMB can serve as its trustee—this is now the underlying/owner trustee function. As a federally regulated bank, UMB Bank, n.a. is exempt from local and state jurisdictional requirements. That’s essential in a securitization deal because registering in cities and counties across the country is impractical. Therefore, only a federally regulated bank—and one that meets capital requirements—can effectively serve as underlying trustee.
Investors rely on the fact that the assets—that is, the securitized loans—are segregated (via the trust) from all other assets of the issuer/originator. The assets do not belong to UMB. Rather, UMB, serving as trustee, holds them on behalf of the noteholders who purchase securities.
The owner trustee undertakes to perform such duties, and only such duties, as are specifically set forth in the trust agreement and the other transaction documents. That includes administration of the trust in the interest of the security holders.
Our work as underlying trustee is part of a menu-of-services approach. The following list outlines other trust and agency services commonly needed in an ABS transaction.
- Indenture trustee – Ensure transactions are processed correctly and noteholders receive payments on the due dates, enforces representations and warranties, etc.
- Owner trustee services – Hold title to loans, process waterfall payments, etc.
- DTC settlement agent – Settles the notes on behalf of a placement agent with DTC
- Collateral agent – Safeguards and processes borrower’s funds held as collateral
- Escrow agent – Safeguards and processes funds held in escrow until a closing occurs
- Verification agent – Verifies certain items on an electronic loan file
- Document custody – Holds custody of an electronic loan file
- Paying agent and registrar – Pays the investors or lenders (paying agent) and holds a list of the investors or lenders (registrar)
- Account bank – Opens and holds the trust account on behalf of the borrower
- Cash management – Moves the funds received and investing the funds on behalf of the borrower
- Calculation and tax agent – If needed, prepares the waterfall on behalf of the servicer
- Backup servicer – If needed, recalculates the servicer report and is prepared to step in for the primary servicer if needed
Learn more about our specialty trust and agency solutions , including a full-range of trust services, escrow and agency assignments for large-scale and uniquely-structured transportation, infrastructure, real estate, ABS and other structured-financing projects.