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This definition is broad enough to encompass some securities that may not have traditionally been considered asset-backed, but narrow enough to exclude certain types of securitization transactions, such as intellectual property securitizations, that rely on future revenue streams.
It also would exclude loans made to a borrower that are secured by a pool of assets but where a security is not being issued to the lender.
An eligible horizontal cash reserve account held by a trustee in cash and cash equivalents also can be utilized.
The rules include special risk retention alternatives for revolving-pool securitizations, asset-backed commercial paper conduits, CMBS, government-sponsored enterprises, open market collateralized loan obligations and qualified tender option bonds.
Former Congressman Barney Frank, who co-sponsored the act, told this requirement is the “single most important part of the bill.” It is intended to be a fix for the flaws in the “originate-to-distribute” paradigm under which bad assets were originated and then sold into mortgage-backed securities transactions prior to the financial crisis.
Instead, banks decide upon your borrowing strength by considering your reason for the loan, the effectiveness of your strategy in the long run, your ability to pay back duly etc.
Options for sponsors to meet these requirements include an “eligible horizontal residual interest” and an “eligible vertical interest.” An eligible horizontal residual interest is the most subordinate claim with regard to payments of principal and interest.
It should absorb any shortfalls in payments prior to any other interest.
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Your business may have specific loan requirements, as such, we will discuss the different types of loans that exist.