Can a sale with recourse, or substantial credit enhancement by the transferor, be regarded as a “true sale”?
Mere recourse is not destructive to a sale in law, but substantial dependance of the transferee on the transferor for payments might reflect an intention of funding. See caselaw cited on our page on true sale. However, credit enhancements are required as a matter of market practice. The US market has mostly adopted a “two tier structure” to avoid any repercussion on true sale due to credit enhancements. What is a qualifying SPV? Clear of the verbosity of the standards, a qualifying SPV is an independent legal entity, independent in the sense that it does its own decision-making (“auto pilot”, as they say). And it must be a “special purpose” entity, with limitation on its business, assets that it can hold and the transactions it can enter into. The assets as well as the transactions are related to the business of securitization. The above is an over-simplification. FAS 140 gives details of what the QSPV do, what derivatives it can enter into, etc. Is an SPV or qualifying SPV a must? No.
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