A Special Purpose Trust (SPT) is an entity used in asset-backed securitization wherein an institution (the originator) is able to access alternative financing by selling its assets or cash flows coming from its receivables to the SPT through a true sale and without recourse basis. The asset pool that can be securitized are typically receivables such as housing loans, auto loans, credit card receivables, lease payments, trade receivables, provided such receivables have an expected cash payment stream. The SPT issues asset-backed securities(ABS) evidencing claims to the cash flows and shall be the owner of the asset pool backing the ABS. Proceeds from the ABS is used by the SPT to finance the purchase of the asset pool.
The SPT holds the cash flows of the asset pool including the underlying right to collect, and uses these cash flows to pay the holders of the ABS the coupon and principal of the ABS as they fall due. The SPT, through an entity authorized to perform trust functions (other than the SPT administrator), manages the cash flows as well as monitors compliance to the underwriting features of the securitization, for the benefit of the ABS holders. Although control over the asset pool is removed from the originator, the originator is allowed to service the asset pool, and act as servicer for this purpose.
This specialized trust service supports capital market development and financing as provided under “The Securitization Act of 2004”.